Page 297 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Retail Business Environment

Notes
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Case Study Vishal Retail

Performance till FY08
Vishal Retail was one of the most profitable hypermart retailer still FY08. Private labels
were a big focus area and a key growth driver
 In FY 08, its EBITDA margin was 12.7% (highest in the industry) and PAT margin
was 4.1% on sales of `10. 1b

 Vishal Retail had increased its store count from 49 to 100 in one year. Its retail space
increased from 1.3 msf to 2.1 msf
 74% of its stores were in tier-III cities
 Apparel contributed 62% of sales and FMCG contributed 18.5%; the rest came from
general merchandise
Future Plans in FY10
 Vishal Retail had planned to increase the number of stores to 190 by FY 09 and to 500
by FY 11. The estimated retail space was 3.7 msf as at end –FY 09, which it had
intended to expand to 10 msf by FY 11. The company was targeting 45% of sales from
apparel, 30% from general merchandise, and 25% from FMCG
 It had plans to increase the proportion of private labels (excluding own brand of
apparel) from 13% to 50%
Current situation

 Vishal Retail is under a corporate debt restructuring program, with numerous cases
in the courts
 It reported a loss of ` 916 min FY 09 and ` 2.8 bin 9M FY 10 as against a profit of
` 403 m in FY 08
What went wrong Expansion was debt funded
 Vishal Retail’s growth was primarily funded by debt, with the hope of raising cheap
equity during the pre-melt down boom in the retail sector. To chase high growth, it
continued to expand using debt. Its debt-equity ratio increased from 0.7x to 1.9x in
FY 08

 Deterioration in inventory turnover-Controlling inventory is one of the golden
rules in retail. Vishal Retail’s inventory turnover declined from 5x in FY 06 to 2.5x in
FY 08. Even though EBITDA margins expanded, lower inventory lowered ROCE by
6.5 % and ROE by 5%. The reasons for higher inventory could have been too fast an
expansion, stocking goods in an inflationary environment and new private labels

 Small town strategy back fired: Vishal’s growth was propelled by tier-III cities,
where it was the first retailer to enter. It tried to replicate the same model in smaller
cities that were not open to organized retail at that time. Consequently, it faced
head-on competition from small kirana stores; Vishal had increased focus on FMCG
significantly. It continued to invest in smaller cities where footfalls and sales per
square foot were much lower, and competition from small stores was higher
Question:
Discuss the strategy Vishal Retailers should have chosen for maximum growth.

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