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19 June 2008

Pantaloon Retail : A Wholesome Meal

Though Pantaloons is the flagship of the Future Groups's Pantaloon Retail, the overwhelming presence of Big Bazaar compels us to have a 'dekho' there first.


Big Bazaar : The Fundamentals
Out of India's GDP of $1 Trillion, retail consumption accounts for 30% or $ 300 Billion. With organised retail getting a conservative 4.8% of this pie, the current market size is $1.5 Billion or Rs 6000 Cr.In China, organised retail is 20% of the total market. To reach that figure in 10 years and assuming an 8% growth rate of GDP, indian organised retail would have to grow at 15 % per annum. This does not seem out of reach, considering the current rates of growth of over 30 %, low penetration and favourable demographics.
Big Bazaar, the largest constituent of Pantaloon Retail has been able to capture nearly 40 % of this total pie. So if you want to bet on organised retail, its single largest player may be of interest.
An oft repeated refrain against organised retail is the close and personalised relationship enjoyed by the customers and their neighbouring mom-and-pop stores. While these small stores outclass the Big-Berthas of retail in customer service, attention and proximity, they would be unable to compete on a sustained basis with the huge structural strength and sheer endurance of organised retail. Pockets of resistance may survive in all neighbourhoods but the day will be carried by the competitive pricing, range and depth of inventory and the promise of a family shopping experiance offered by organised retail. It would only be a matter of time before consumer preferences shift to organised retail. Another intersting statistic reveals the weakness of small retail shops. Pantaloon Retail as a group, averages sales of over Rs 8000 per square foot per annum. Big Bazaar does an estimated Rs 14000 per sq ft Per Annum implying that a 300 sq ft shop would have to manage sales of over Rs 42 Lakh per annum to compete. I dont see how my neighbourhood grocer can do that.
(To be continued)

17 June 2008

DOMESTIC RETAIL : TAKE A BITE

Shopping in India has lots of menus and flavours. As an event, it could be a one stop bhaji-subzi deal or a protracted family outing culminating in one sunday's worth of time sacrificed at its alter. As a dish, there are the food-chain guys, the clothing lines, personal accessories, electronics, home-improvement items and jewellery. These could be served in different formats like the speciality store(a thai restaurant), discount store (the thali), cash and carry business or a supermarket/hypermarket (a buffet meal). All permutations and combinations have their own dynamics.
However I am swayed by C K Prahalad in looking for fortune at the bottom of the pyramid. With a small modification - the bottom to be an Above Poverty Line. And any retailer in India who is successful in targeting this strata will in the long run make money. The thali caters for this segment. It signifies a wholesome, value-for-money and affordable meal, catering to a large cross-section of tastes.

The Discount Store : Thali
Subiksha, Vishal Mega Mart and Big Bazaar spring to mind. The first two though efficient, are one-trick-ponies. However Big Bazaar (though technically a hypermart is treated as a discount store due to its pure value-for-money proposition), being a part of a larger bouquet of offerings by Pantaloon Retail, looks more promising.

Big Bazaar : The Business
It offers some discount on the MRP or clubs items together as a 'deal'. Usually this is a practice followed by the general retailers to attract consumers and increase sales volume. It offers a broad variety of merchandise, limited service and low prices. It uses strategic pricing to entice consumers to shop more frequently and to increase their purchase quantity during each visit. Encouraging shoppers to make more frequent visits to the store is critical, because it increases the likelihood of unplanned purchases. Also, its stores emphasise the self-service format and employ minimal employees per square foot keeping operating expenses at the minimum.
Big Bazaar stores generally buy their merchandise in very large quantities, thereby getting the advantage of reduced prices. Part of this benefit of reduced prices is passed on to the consumers by employing various pricing strategies. It is a full line discounter offering a wide assortment ofmerchandise including apparel, home accessories, consumer electronics, house-ware, health and beauty products and children goods. It keeps private label brands along with branded merchandise to increase variety.
So in essence, Big Bazaar looks to make money by selling large number of merchandise at low profit margins. Hence the key determinants for its profitability are accessibility, a large range of inventory and low prices. It can achieve that by a combination of a good location, efficient supply chain management and low overheads.

15 June 2008

RECESSION : WITHER THOU ART?

I have heard that there is a Recession doing the rounds of the world of economics .
I went to Select City Walk to meet him but was informed that he wasnt around. Nor was he visible in CP, South Extension, Subhiksha, Big Bazaar or any of the Nokia or Reliance stores. Ditto for Gurgaon, Noida, Chandigarh, Mumbai or Bangalore. Maybe he gave me the slip and went to the countryside - for recuperation.
Why do I go out and look for the biggest enemy of growth? For many reasons. If he is around, then I have safety in Value, fixed-income and in defensives but primarily I look because negation of an antipode is perhaps the easiest way to prove a theory - mine being that the current 'recession' in US and western economies has little negative impact on indian stock markets.
If there were a recession, oil and other commodities wouldnt be at such commanding heights. Prices of real estate and commercial rental rates in India would not be matching those of Tokyo, New York and Hong Kong. Daiichi Sankyo wouldnt be buying Ranbaxy, Tata's the JLR and art collectors wouldnt be paying Rs 2.3 Cr for an unknown painting by a relatively unknown indian painter.Yes people in the US have lost jobs and money in the sub-prime crash and companies have gone near-bankrupt in an attempt to keep their nose above the waterline. Yes SUV sales in the US are at an all time low and people in urban Louisiana are buying bicycles by the gross. And Yes it does adversely effect a whole host of indian companies - auto ancillaries, IT, textiles - to name a few.
But that also leaves a vast universe of companies not directly linked with the US economy and a smaller subset which actually gains from this recession!You should try some for hors d'oeuvre - Domestic Retail, Telecom, food and agro processing. Bon Appetit!

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This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.