Retail chains: Shape up or ship out

Five years later,last Monday,PRIL agreed to sell its high-margin fashion and apparel business to Aditya Birla Nuvo,part of the $35-billion Aditya Birla Group,a move to cut down its debt by R1,600 crore. Three days later,Biyani raised another R200 crore by issuing shares of his parent company to Bennett Coleman & Company,the publishers of The Times of India daily. PRIL had heavy debt of R7,846 crore on its books and its market cap fell 32.5% in the last one year.

Pantaloon,like other retail chains,is a victim of a strategy of expanding the business by debt with a hope that future cash flows will repay it. Unlike the diversified Tata Group,Reliance Industries or Aditya Birla Group,which can plough cash flows from other businesses into retail,Biyani had no such businesses to fall back on. For smaller retail chains,which availed debt to grow,the sale of a high-margin business by Biyani is a wake-up call: Shape up or ship out.

Signs of stress in some of the retail chains are visible. Egged by private equity investors,kidswear makers Gini and Jony and Lilliput Kids have appointed investment bankers to raise money as lenders are cutting down loans to the retail sector.

“PRIL was in desperate need of a rejig and strategic investors weren’t interested in his non-core assets,” says Nikhil Vora,managing director,IDFC Securities. “Hence,Biyani had no option but to sell his profitable fashion venture. Once FDI in multi-brand retail is opened up,PRIL’s wholesale business is also up for grabs,” he adds.

A pile of debt and unsold goods stared at PRIL,while a R12,000-crore turnover failed to generate enough cash for Biyani to service the loans that he availed to grow. He took risks to scale up his business and tried multiple retail formats (Pantaloons,Big Bazaar,Central,HomeTown,Brand Factory,eZone) even as signs of a slowdown were setting in.

“Biyani pre-empted competition and that did him in,” says an industry observer. “His huge expansion drive came at a wrong time; the economic downturn had just started,consumption had slowed down and there were limited cash flows.”

In one year,between April 2007 and March 2008,he added 4 million square feet and opened 40 large Big Bazaar stores. An economic slowdown in the wake of a global financial crisis plagued him. PRIL reported a loss of R7 crore in 2009-10 and Biyani’s debt shot up more than 10 times to R7,656 crore by 2010 from R700 crore in 2006.

Worried over heavy debt,investors started fleeing the counter. Within a year,PRIL shares lost 63% of their value to close at R185 from R505 in June 2010. “Most retailers realised their mistakes during the downturn and shut down loss-making stores,but Biyani carried on uninhibited and is now learning his lessons the hard way,” says IDFC’s Vora.

Can fresh money end Biyani’s woes? “With negative cash flows,reduced working capital and high interest costs eating into PRIL’s profits,Biyani has to strike many such deals,” says a retail analyst at a foreign brokerage. “The next to go would be his cash-guzzling consumer durables and electronics business,eZone,and the home retailing chain HomeTown,” he says.

Consultants say retail companies,like in many developed markets,at early stages expand faster,but consolidate later. “Even in the West,retail sees aggressive expansion followed by some consolidation and once consumer sentiments improve,the expansion and experimentation with formats is back to be followed by another phase of consolidation,” says Abheek Singhi,partner (retail and FMCG),Boston Consulting Group (BCG). “It may not be a massive shakeout with high-value sell-offs,but we’re in for some activity in select formats of retail.”

A consolidation will be driven by domestic players as the government’s policy doesn’t allow foreign direct investment in multi-brand retail chains. “No foreign company is interested in Indian retail until FDI norms are relaxed,” says Anil Talreja,partner at consulting firm Deloitte.

Some say a retail consolidation may be a far-fetched idea as there aren’t enough companies with high profits and scale,but private equity funds may purchase a slice of the India consumption story. “Though Future Group will see some consolidation in the coming months,the industry may not be in for any massive rejig,” says IDFC’s Vora. “There aren’t too many potential buyers in retail as scalability and profitability are big challenges.”

He adds: “A shakeout in the lower level,the likes of Subhiksha and Vishal Retail,may happen,but nothing major.”

Private equity funds’ interest may heat up in the sector,primarily in high-margin categories like apparel. “There’s a lot of buzz in the domestic market with many firms conducting due diligence,but there won’t be any big-bang partnerships,” says Deloitte’s Talreja. “Deals may be high in volume but low in value.”

So far,one retail chain has gone under the hammer. Last year,PE funds TPG Capital and the Shriram Group purchased Vishal Retail for R70 crore after it was put on the block by lenders. “Vishal is a standalone case where a retailer was under great pressure,” says Purnendu Kumar,vice-president (retail) at Technopak Advisors. “A complete sellout may not be on the cards for other companies.”

Many retail chains are restructuring their businesses. Some have cut down expansion,while others have shut down loss-making stores,and many others plan to exit. Lilliput is looking to exit the retail business altogether. “They just couldn’t get the business model right and no one wants to touch Lilliput now,” says BCG’s Singhi.

“The Tatas and Reliance will keep pumping money into their businesses and are not looking for any stake sales,” says Technopak’s Kumar. “Spencer’s may look for some strategic investor as it is running into losses and is yet to achieve scale.”

Cash-rich groups Aditya Birla and Reliance are experimenting with different formats to get the right one. Birla’s food and grocery chain More plans to go slow in expansion and focus on profit-making.

Mukesh Ambani’s Reliance Retail is foraying into newer retail segments and experimenting with big-box stores. “Reliance has the balance sheet to support a cash-guzzling retail business,” says IDFC’s Vora.

On the other hand,Hypercity,the loss-making hypermarket arm of Shoppers Stop,is downsizing its stores to increase sales per square foot and achieve break-even. “Every business is at a separate stage and the requirements are different for each company,” says Singhi of BCG.

Indian retail chains are yet to find the right model to grow as cyclical ups and downs hit them. One lesson learnt is they have to live with a tight balance sheet and a pile of ready cash. “Retailers will operate in very tight balance sheets; there are no cashflows and we may see very limited new store openings,” says Vora of IDFC.