Indian Retailers Revise Grand Expansion Plans

Despite growing demand for modern outlets in India, retailers are beginning to see that rapid expansion does not always pay off. Higher operating costs, resulting from rising property prices and food-price inflation, are impacting retailers’ expansion plans. Market conditions are, therefore, forcing companies to look long and hard at their expansion to stay in shape for the future.

Small formats first to slow expansion
With urban property prices at all-time highs, retailers are finding it difficult to open new stores. This, combined with high levels of inflation and a nascent infrastructural network, has meant that Indian retailers are finding it difficult to maintain profitability and stock their shelves. Operators of neighborhood formats like Spinach are subsequently slowing the pace of store openings.

While Spinach had originally aimed to have 250 stores in operation by March 2008, the company has just 58 outlets to date. To rescue themselves from possible bankruptcy, some neighborhood store operators are looking to discontinue unviable operations so that they are able to break even in the long term.

Larger retailers capitalize on misfortunes
Despite these difficulties, the retail market in India is still potentially lucrative. Bharti Enterprises, one of India’s leading conglomerates, operates seven EasyDay grocery stores across the north of the country and has plans to open 20 more outlets by the end of its fiscal year. This is an optimistic-but-achievable target due to the company’s strong financial footing.

Even Bharti is not immune to market conditions, however. In an environment where replenishment costs are increasing and revenues are on the decline, the company is finding it much harder to retain profit margins and is beginning to report a loss — a factor that may prompt the retailer to rethink its longer-term strategy.

It also is worth noting that it has been nearly two years since Bharti announced it would be joining forces with Wal-Mart to develop cash & carry outlets, and the first store has yet to open. Nevertheless, it remains likely that the Bharti/Wal-Mart joint venture will launch its much-anticipated format this year.

Reliance rethinks bullish strategy
Prior to 2008, rapid outlet expansion was the retail norm in India. Over the previous five years, most of the country’s well-established conglomerates made their first forays into the retail sector and, in 2007 alone, the number of outlets increased by more than 70 percent.

Retailers like Reliance quickly ran into problems, however, and the company’s Reliance Fresh banner failed to reach targets. When the retailer launched its first Fresh store late last year, the group was still optimistic about its plans to operate 4,000 stores by 2010 and 5,000 by 2012.

Such targets now seem overly ambitious, and the retailer has been forced to scale back expansion plans and to close some stores. The format has not only had to battle its way through high-profile opposition from traders and politicians, it also has struggled with issues related to stock availability, produce quality and price.

With the world’s top four retailers planning to enter the fragmented Indian retail market fairly soon, local players will have to rework and rationalize their operations — focusing on efficiency over near-term expansion — to better prepare themselves for the increased competition.

Learning from mistakes
Retailers operating in India are learning from their past mistakes and are pulling together a strategy that is more suitable to the current economic climate and market conditions. This means that many companies will be forced to turn around their strategy and focus on profitability rather than relentless expansion so that they can hold onto their key positions for some time to come.