Is there a viable business model for multi-brand retail in India?

Our discussions with several industry experts point to a range of fundamental challenges for multi-brand retailers in India. Only a small subset of these challenges pertain to access to capital.

1. Costs associated with real estate: Industry experts suggest that the cost of real estate as a proportion of sales in India is at least 2-3x higher in India than internationally (see table below). This, combined with high corporate costs including marketing expenses and HQ-related spend, makes it difficult for a nation-wide multi-brand retailer to operate profitably in India.

Exhibit 1: Real estate companies for Indian Vs Intl retailers

Source: Company, Ambit Capital research

2. Optimising store size, format & locations takes time: Whilst it is highly capital intensive to expand a retail franchise across geographies, our discussions with industry experts suggest that not too many businesses in India with large balance sheets have historically been successful at expanding across the country. This is mainly because each retail format has to go through its own learning curve to optimise in areas such as store size, location, format, etc. Consequently, there is a need for: (a) More gradual rather than rapid store expansion; and (b) Patient deployment of capital since it takes as long as 5-8 years before the economics of a retail franchise are optimised.

3. Supply chain related challenges: The lack of an efficient road and transport infrastructure in India makes it difficult for a nation-wide retailer to build an efficient supply chain (especially cold chains for fresh produce) across the country. Consequently, whilst there have been regionally focussed players such as Viveks in South India and D-Mart in West India which have built regional strengths, it has been particularly difficult for nation-wide players to build an supply chain across the country. The second challenge with supply chains is that it is not obvious that politicians will allow retailers extend their supply chains into the villages or even the district town mandis as this would cut out middlemen who are critical grassroots supporters of political parties. Thirdly, most nation-wide players do not have the necessary data or the IT systems to set up internal systems and processes which can better forecast merchandise demand and hence improve the management of inventory levels. As a result of these factors, the working capital costs of an Indian multi-brand retailer are much higher than those of a Western counterpart.

4. Scarcity of talent: Retail industry experts say that there is a distinct lack of good quality talent especially at the store level in the Indian retail sector due to: (a) Low retailer margins on product distribution in the Indian consumer sector along with high cost of real estate reduces the ability of retailer to pay decent salaries to store level employees; (b) It is difficult to find senior management talent for business development given that the concept of modern trade/multi brand retail in India is not more than two decades old; and (c) it has not been possible for Indian retailers to hire experienced talent from abroad both due to the high costs attached, and also since Indian consumption patterns and supply chain management processes are very different from those prevalent internationally.

Who is the best placed retailer in India?

Based on our discussions with industry experts, we believe that the few successful retail operations in India have been able to address these challenges to varying degrees (as highlighted in the table below) through a range of strategies/initiatives.

Source: Company, Ambit Capital research

(Rakshit Ranjan and Shariq Merchant are retail analysts with Ambit capital.)

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