Page 292 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Unit 14: A Review of Retailing: Environment and Operations

 They entered the race of adding retail space without proper due diligence. Notes
Race for increasing retail space resulting in haphazard growth- Organized retailers entered
the race of adding retail space without proper due diligence on the catchment area, mall
density and acceptability of organized retail. Retail space addition was looked upon as a
key success factor and was a key market cap driver. This resulted in haphazard growth,
with several malls coming up with in a square km in places like Gurgaon and Ahmadabad,
which impacted foot, falls and store viability.

 Large players entered numerous formats, some of which proved to be unviable.
Unviable formats-Various formats mushroomed during the hyper growth phase. Retailers
were looking to create some niche positioning for which they were ready to experiment.
Large retailers expanded into numerous specialty formats ranging from mobile phones,
beauty, health, wellness, media, entertainment, catalogue retailing, tea and snacks kiosks,
etc. Some of these ideas were ahead of their time, as the modern Indian shopper had just
begun emerging. In their attempt to get a higher share of the consumer wallet, retailers
ignored the value proposition for the consumer.
 In the race to acquire real estate for their stores, retailers pushed up lease rentals
High lease rentals-Retail is a tough business to operate; PAT margins are also was 2-3 %.
Indian organized retail follows the lease rental model due to high real estate costs and
paucity of quality malls. Lease rentals should ideally be 3-6 % of sales depending upon the
format. However, rentals in a few specialty stores touched ` 300/sf/month during the hey
days-in a period of two years, lease rentals in general increased 50-70%. The increase was
more evident in FY08 and FY09 due to decline in same store sales growth.

Figure 14.1: Lease Rentals (% of sales) have been inching up

Source: company financials
As trained manpower was scarce, salaries of experienced retailing professionals went
through the roof.
 Manpower costs and productivity issues: Aggressive store opening plans resulted in
retailers keeping a bench of new recruits. Trained man power was scarce, which resulted
in salaries of experienced professionals going through the roof. However, lack of properly
trained manpower and people with sales and retail mind set resulted in poor productivity
for the industry and impacted performance.
Retailers focused all their energies on store openings and neglected the backend.

 Poor Back end infrastructure- Focus of organized retail during 2005–2008 was faster store
openings, with little focus on strengthening backend activities like vendor development,
supply chain management, inventory management, logistics and reducing wastage. This
resulted in companies having high cost of logistics, poor fill rates (70% of the required

LOVELY PROFESSIONAL UNIVERSITY 287