An economic slowdown is prompting India's retailers to sharpen their focus, while foreign firms are pausing after scrambling to enter a market named most attractive retail destination three years running.
As economic growth picked up to more than 9 percent in recent years, a swelling middle class attracted big Indian corporates such as Reliance, Tata Group, Aditya Birla group and Bharti Enterprises to the retail sector.
Global retailers Wal-Mart, Tesco and Germany's Metro AG also felt the pull. But the lure has dimmed as economic growth has slowed to below 7 percent and spending has tightened.
Retailers are closing stores, curbing spending and repositioning themselves to ride out the tough times. But the shake-out should leave the sector in a stronger position to take advantage of any rebound in growth, analysts say. Brokerage Edelweiss Securities expects the upheaval to last 12-18 months.
"This will test the resilience of business models and operational efficiencies. Players who can continue to attract consumers with attractive discounts and maintain efficiencies in the system will emerge winners," Edelweiss analyst Priya Ayyar said in a report. "We expect value retailers like Pantaloon Retail to fare better."
A.T. Kearney, which ranked India the most attractive retail destination from 2006 to 2008 in its annual Global Retail Development Index, last year valued the Indian retail market at $511 billion.
It sees this rising to $833 billion by 2013. But in a market dominated by small-scale owner-operators, often using basic and temporary premises, organised retail is estimated at less than 5 percent, offering huge potential for growth.
Subhiksha Trading Services, which operated about 1,600 discount stores across India, ran out of cash last October. The unlisted company's operations are nearly at a standstill and it is undergoing a "debt restructuring exercise."
The setback for retailers in India is seen as a necessary one after companies opened outlets at a furious pace in unviable locations at exorbitant rents, charting out ambitious expansion plans relying on debt.
"They will now look at how to run a fundamentally sound business with a proper store format, proper location and headquarter support," said Anand Raghuraman, partner and director at Boston Consulting Group (BCG).
Retailers are starting to put their houses in order.
India's largest listed retailer, Pantaloon Retail, faced with falling sales in various products and high inventory costs, is reworking its strategy. It is focusing on cost and supply chain efficiencies, high-margin private labels, better credit terms and prices from vendors and re-negotiating lease rental agreements, Fitch Ratings said.
Pantaloon sales, which dipped in February from the previous month, saw an uptrend in March due to aggressive discounts and promotions. Its shares have risen some 60 percent from a record low hit on March 9. Despite slowing sales Pantaloon Retail still figures in buy recommendations by brokerages.
Cash-strapped Vishal Retail is closing stores and has no plans to open more next year, but will expand through the franchisee route, says Manmohan Agarwal, Chief Executive, Corporate Affairs.
British retailer Marks and Spencer, facing falling sales at home, is repositioning itself in India, and is looking at larger format stores to attract more people.
"We have not been able to take advantage of the opportunities we had so far," said Nandini Sethuraman, head of marketing at Marks and Spencer, India.
Bigger stores with a good catchment area are seen attracting more customers, she said. "Lower rentals help us identify more viable properties."
Others are more cautious -- Britian's Home Retail pulled out of an Indian mail-order catalogue venture in January because its expectations had not been met.
French retailer Carrefour, which, media reports say is searching for a joint venture partner for its India retail operations, plans to open its wholesale outlets in the country by the end of 2009 or early 2010.
India's retail sector has been growing at 30-40 percent annually over the past decade, according to KPMG. It is now expected to grow at a more sedate 15-20 percent for the next 2-3 years, but the India retail story is still intact.
Real estate rentals, a high component of cost, have fallen by up to a quarter from their peaks in November 2007, which will work in the retailers' favour, analysts said. Consumer spending meanwhile is expected to pick up later in the year.
Analysts say the economic slowdown is likely to lead to more focus on value-retailing in clothing and food in coming months and a shift away from lifestyle retailing, a strategy that should benefit local retailers.
"Value-retailing players like Pantaloon, Reliance, etc, are more likely to benefit in the current scenario than lifestyle players like Shoppers Stop," Angel Broking said in a report.
Reliance Retail, a subsidiary of top conglomerate Reliance Industries Ltd, had announced plans in recent years to spend more than $5 billion to roll out hundreds of supermarkets across India.
Though a thin margin business, the food and beverages sector is seen doing well, BCG's Raghuraman said.
Nestle, with its wide portfolio of products including the popular Maggie noodles, is seen enjoying brand preference.
"The segment which Nestle caters to is unlikely to see any downtrading," broker K.R. Choksey said in a report.
Overseas retailers are still keen on India but prefer to wait for a year or more.
Restricted foreign investment in Indian retail puts off overseas firms, who prefer coming in on their own. Single brand foreign retailers are allowed to take up to 51 percent in a venture with a local firm, while multi-brand retailers are limited to franchise or license operations.
"The demographics ... are there, there is still opportunity," said Anshuman Magazine, Chairman and MD, CB Richard Ellis, South Asia Pvt Ltd.