Expansion woes for Retailers

I have admired the way Mahindra Retail has built a respectable business over the past few years, ever since the launch of “Mom & Me” Stores in 2009 which sell mothercare and babycare products. In a short period of time, the company had built a massive network of 115 stores ( as on this date) spread over 10,000 – 15000 sft. primarily at residential locations in metros and mini-metro cities. The Brand has earned the respect and spending of thousands of customers for their friendly staff, wide assortment and excellent service at their stores. The market size for this category is about INR 40,000 crores and the organized segment accounts for less than 5% with small mom-and-pop stores taking away most of the business. Apart from Mom & Me, there is no other respectable national chain of repute in India other than Mothercare, which is operated in India by Shoppers Stop and kids wear sections of reputed Retail Brands such as United Colors of Benetton, Tommy Hilfiger, Zara, to name a few. Therefore, they had a massive opportunity to quickly garner market share within the organized space. Just when things were going good, they launched a new division in the name and style of “Beanstalk” which focused on Toys, Puzzles, Games, etc. While many of the Beanstalk showrooms were part of the Mom & Me stores or located adjacent to them, many were standalone locations in pitiable environments. While Hamleys caters to the upper end of this market, Beanstalk tried to bridge the gap competing with the neighbourhood stores.

Although scaling up evens out Fixed costs in the Retail business in the long term, it also proves to be a massive cost burden in the short-medium term. I guess, that’s exactly what happened to Mahindra Retail. Their swanky office in South Bangalore is spread over three floors, houses hundreds of employees and over a dozen senior recruits – from merchandising to operations to marketing and business development. While there were plans to reach a billion dollars in sales, the company could manage not more than 20% of that figure in the fourth year of its operation and was losing over INR 50 Crores every year. Obviously, the plot was lost somewhere and half a dozen senior guys moved out of the company over the past few months. The company also plans to shut atleast 10 stores in the near short term which are making heavy loses. As reported in The Mint newspaper, Mahindra Retail declined to comment on the specifics of the store closures but chief executive K. Venkataraman said in an emailed statement, “Retail Industry is cutting costs as a rule everywhere, and Mahindra Retail too does where we deem fit. Closure of non-performing stores, and some churn in management are unavoidable realities of the business, much as new stores and new management replace the lost ones.”

The biggest bane of Retailing in India is the Real Estate and Manpower costs which is what plaguing most of the Retailers. Ideally, the Rent to Sales ratio should be not more than 15-18% in the second year of operation but that is not to be. Manpower costs are enormous in the beginning of the business as most Retail companies believe in showing off a massive strength of show in its teams. I am aware of so many case studies from the west where frugal HR costs are the norm. But in India, we have cultivated a culture of large teams, each level overseeing the other and hence so many layers and levels. While Mom & Me is essentially present only on High Streets, a very smart strategy I would say (to keep Maintenance and allied costs lower which are a big takeaway in Malls and Shopping Centres), the unrealistic High Street Rentals are not helping Retailers much.

Mom & Me is not just a retail store – it has already cultivated a calibrated relationship with its customers during its short tenure and I am sure the company would tide over the current circumstances quite well. The challenge is whether to expand further to leverage fixed costs or to build efficiency with the current set-up. Would make for a great case study in years to come.

Car Care at its best

I pass through this outlet almost everyday but have always been on a rush. This time around, I stopped by and experienced first hand what they have to offer. I am referring to the 3M Car Care outlets which have sprung up across the country quietly but drawing attention from car enthusiasts and those who love to maintain their cars spic and span. These outlets are franchised and are managed by capable entrepreneurs who have an inclination towards the automotive business and customer service. Spread between 1,500 sft – 4,000 sft covering three different business models, these stores provide complete car care which include the following;

• Car Detailing
• Interiors / Exteriors
• Corrosion Treatment
• Films for sun protection
• Car Care products Retailing
• Car Graphics
• Customer Engagement
• DIY Bays

I was warmly welcomed by a service staff who knew his subject well – he explained the different packages they offered and justified why they were expensive. There were already two vehicles which were undergoing treatment – a Mercedes S Class and a Renault Duster. I asked him how is the business doing and he gave a smile, meaning things were doing quite well. Location was not totally a disaster though. It is located on the Beach Road, close to the iconic Light House (in Chennai). Although I felt it could have been located more strategically. Another gentleman walked over to me shortly and started interacting. Introducing himself as Vijay, he informed that he was the Franchisee Owner of the store. He explained in great depth his interest in automobiles, cars and bikes alike and his love for taking good care of them. According to him, the investment on the store including security deposit is around a crore (though I felt it was quite high) and the monthly business was about 15 lakhs with a margin of 35% on Sales.

The customer lounge is powered by lighting wifi and one can use the facility while the car is being spruced up. Customers have written their compliments and feedback on Post-Its, which is incidentally one of the most iconic products of 3M.

The company has taken up print advertisements recently which has helped increase walk-ins but what they actually need to do is much more – own the category and grow it too. The market size for Car Accessories in India is estimated to be over Rs. 1,000 crore, most of which is unorganized. Car Dealerships and private players like Carnation,3M, etc. have a huge potential, given the shoddy ways of getting your car done up at busy street-side shops. If marketed well, this could be a viable Retail model and is easily scalable. Like in many other cases, I see a bigger opportunity in smaller towns across the country where people take good care of their possessions.

For me, its about making up my mind for a 20K bill – sooner than later, I would be there!

Why Flipkart is not Amazon's competition

My former boss and CEO of indiaplaza.com K. Vaitheeswaran always used to say that the best business model on the internet retail space is perhaps without stocking inventory. In my short stint at this web company, which was also the pioneer of India's ecommerce business with the same name set shop in 1999, I added around 60 vendors in just 6 months who would list their wares-from designer clothing to everyday wear, from watches to wallets and so on. During the late 90s, internet cafes were coming up all around the country. To browse the internet on bulky 17" screens with a dial up connection that would take five minutes or more to connect would cost around Rs. 100/- an hour (and the prices subsequently came down due to increased competition and lower internet rates). Shopping online those days was a novelty - well it continues to remain so still I guess. The early 2000s saw a slew of players come and go and during the last part of the decade saw the emergence of the likes of flipkart.com, myntra.com and many others. These ecommerce companies or etailers stocked merchandise-large warehouses were set-up in the suburbs of cities and mostly internal logistics teams ensured last mile delivery. Most of them were venture funded and blew their investors money on advertising, PR and promotions. Some companies were spending as much as Rs. 1,500 for acquiring a new customer - while there is no global benchmark as such for this purpose, the sum would be recovered from the same customer when he/she spends atleast Rs.6,000/- over time assuming 25% Gross margins. Not an impossible task once the customer is habituated to the internet way of shopping. Sadly, of the 25% Gross margins, what remains is less than 1-2% and that too for smart and successful companies. Most of them, even today are reporting negative margins. Well, for any business it takes time to stabilise. Typically for product retailers, break-even happens between 15-18 months and much earlier for F&B retailers. None of the ecommerce companies in India of sizeable scale and repute are profitable as I write this article. And many of them are on the path to profitability. After burning millions of dollars. The good part is customers have taken up to e-shopping faster than they have taken to Organised Retailing. Retail Industry in India is about Rs. 400,000 crores approximately and less than 10% is fom the Organised Retailers. Led by apparel and fashion, the organised industry is seeing massive growth, at a CAGR of over 15% over the past 6-8 years. Not bad, while global retailers are seeing negative growth on same store growth year onyear. Amidst all this, the $61 Billion Amazon launched its India site in June 2013. Not much different than its previous avatar, Junglee.com which was launched with much fanfare in early 2012. Amazon.in is a marketplace, a business model where retailers, small or big can list their products and Amazon attracts potential customers to shop on its site with secure payment gateways and millions of items listed across its pages. The Amazon trust is expected to attract many more customers and in the short term, Amazon may also build large warehouses and extend direct sales to its customers, subject to Retail FDI regulations. And there has been speculation that sooner than later, Amazon would compete heavily with the likes of Flipkart. Within the online space, perhaps yes but not in the consumption space. The e-tailers have to compete directly with the physical Retailers, both Organized and Unorganized. They are the main competition for the ecommerce companies. Together, Amazon, Fipkart and hundreds of other sites would fuel up consumption using the internet. However, with low penetration of Broadband Internet and 3G on mobile phones, it is unlikely that this retail landscape would change drastically over the next five years. Afterall, half a decade is a long time in business...