Detail in Retailt

8/2/2019 Detail in Retailt

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The Real Estate Promise

The Indian economy is now facing the reality of a significant moderation in growth partly

due to the prolonged weakness in the global economy coupled with structural imbalances in

the Indian economy. One sector, in particular, that continues to be buffeted by bad newsand has few sympathizers is the real estate industry. Of the many charges made against the

industry, exorbitant or unrealistic pricing leading to profiteering is often the maincomplaint. But is that true? In a fragmented industry such as this, how can developers

dictate pricing? Led by a chorus of influential voices and supported by the ridiculous levelsof prices in Mumbai, it was easy for policymakers, regulators and financiers to clamp down

on the industry. Monetary policy on the industry has been tight since 2007 with periodicfurther tightening thereafter.

However, given the slowdown in the macro economy, it is essential to consider someimportant facts about this industry and the critical role it plays in the economy. The real

estate and construction industry accounts for 19.5% of GDP and 20.6% of gross

capital formation in the economy. The industry arguably provides employment to thelargest number of skilled and unskilled workers. By various estimates, 33 million people

are employed in the industry. This sector also drives core industries like cement

and steel.In this writers view, high real estate prices will remain a reality for some time inIndia due to three key factors:

Huge pent-up demand with the supply side artificially constrained by a set of archaic stateand central laws.

Opaque functioning of the planning and approving authorities who are vested with a

disproportionate level of discretionary powers.

Weak machinery for enforcement of consumer rights due to an overburdened judiciary.

On the first point, consider a simple statistic. India accounts for ~17.8% of the worldspopulation (behind only China, ~19.5%), but accounts for a relatively smaller

share (2.4%) of the worlds surface area. This disproportionate share of theworlds population makes India one of the more densely-populated countries in

the world. Indias population density at 373 per sq km is 7.4x of the worlds and2.7x of Chinas population density.

Under the circumstances, we have no choice but to go in for more dense developments

which means higher FSI. However, this cannot be achieved without significant planning ofsupporting infrastructure and overhauling of existing rules for development. Supporters ofthe affordable housing theme may baulk at the suggestion as it seems to enrich developers.

But India does have a micro-level successful experiment in Noida.

Several things are notable about the explosion of housing in Noida. First, the governmentbuilt fantastic road infrastructure. Second, the density norms and FSI of residential

development is the highest in the national capital region (NCR). Third, on an average, a

developer can get plan sanctions and approvals in a single window in 6-8 weeks.These steps have led to a flood of supply backed by topclass infrastructure. The resultingnumbers are breathtaking. During the two-year period 2009-11, Noida (including

Greater Noida) witnessed sales of around 283 million sq ft of residential space:

2.83 lakh units at an average price of. 2,800 per sq ft and an average home priceof. 28 lakh. In terms of area sold, Noida accounted for nearly 54% of NCR homesales and 18% of cumulative home sales in NCR, Mumbai, Pune, Hyderabad,

Chennai and Bangalore combined.


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High density norms enabled smaller apartments, bringing down ticket sizes to the.

25 lakh and below range. During the four-year period 2007-11, the weighted

average selling price in Noida rose at a CAGR of just 1%. Adjusted for inflation, pricesactually declined over this period!There will be instances of developers not delivering on promises in Noida too, and naysayers

will question the land acquisition policy. While the policy needs to be transparent and

equitable for all, let us not disregard the lessons to be learnt from Noida. Plannedinfrastructure investment ahead of time, uniform FSI and building plan norms (limiteddiscretion), higher density and quick approvals kept prices in check and the supply kept

building. The government must realise that enabling adequate supply at affordable prices

needs reforms at the townplanning stage and quicker approvals as well. Tightening thescrews on developers and squeezing capital flows are not having the desired impact. At a

time when the economy is staring at a slowdown, the real estate industry can give an

impetus to growth.I would, therefore, argue that while developers need to get their act together, reforms arealso sorely required at the municipality and town-planning level if the aam aadmi is to have

a quality makaan in addition to his rotiand kapda.


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How big is organised retail today?

Between the dozen or so big chains including Pantaloon and Reliance Retail and all outlets that do a VAT billing,organised retail is estimated to be around $22 billion, a figure thats around 5-6% of the total retail market of close to$400 billion in the country today. In August 2008, McKinsey had estimated that by 2015, India would become a $450billion retail market, comparable in size to Italy ($462 billion). The total retail market is estimated to be growing at 7-

8% and the share of organised retail is projected to touch 15% by 2015, from 2% in 2006 when the market wasestimated at $250 billion.

Is this in keeping with the projections for retail sales?

The organised retail space is estimated to have scaled up 3 times in 3 years, or at a compounded 40% to $18 billion

by March 2009, although growth... was a very slow 4-5% in 2008-09, following the economic downturn. About 50

million sq ft of space was added during this period. In 2009-10, the organised retail sector is estimated to have grown

at 25% or thereabouts, a growth rate that could sustain over the next few years and help revenues hit $35 billion by

March 2012 and $75 billion by 2015, according to IDFC Capital.

Is Big Retail making money?

Not too much. The casualties have been several: Subhiksha, Indiabulls Retail, RK Foodland and Vishal Retail. Others

like Koutons and Spinach are in trouble. Vishal Retail lost Rs 414 crore in 2009-10; it had piled up a debt of Rs 700

crore and written off Rs 350 crore of inventory before it went bankrupt. Many retailers were in the red between 2006-

09 and Spencers, amongst the first to get off the ground, posted a loss of Rs 300 crore... in 2008-09. It is still

unprofitable, losing an estimated Rs 12-13 crore a month.

Reliance Retail, which runs 667 stores across 80+ cities, reported a loss of Rs 450 crore in 2009-10, down from Rs700 crore in the previous year.

Shoppers Stops losses in 2008-09 were Rs 64 crore but the company turned the corner in 2009-10. The Aditya BirlaGroups more. chain, which kicked off business in 2007 after buying out the Trinethra chain, hopes to become ebitdapositive in 2012-13; it reported revenues of close to Rs 1,500 crore for 2009-10. Players like Pantaloon, with close toRs 4,000 crore of debt, are highly leveraged.

Others like Spencers, which now has less than a million sq ft after closing down 150 outlets, are downsizing. Reliancenow operates 667 stores in total, down from the peak of around 900 in the September 2009 quarter. well?

In the June 2010 quarter, same-store sales (SSS) for lifestyle retailing at Pantaloon were 19% year-on year, while thefigure was11.5% for value retailing . During the same time, lifestyle SSS for Shoppers Stop was 21%, though thatcame off a very low base of minus 6%.

Has Big Retail finally got the mantra worked out?

Retailers have been looking to straddle formats in a market offering limited breadth. Home retailing, for instance, is apopular choice across retailers. Post the downturn, there has been a move to consolidate. Shoppers Stop, primarily inthe department store format, has abandoned its catalogue and food and beverages retailing. Store expansions have

been dramatically curtailed. At Pantaloon, the plan, 2 years back, was to have 25 million sq ft by March 2011; thathas been cut back to 14 million sq ft. Niche formats like Crossword or Music World make little...

money. But in segments like electronic goods, where the Croma chain is doing exceptionally well, niche formats havepaid off. The convenience store format has suffered the most, though chains like more. chain are attempting to get itright by opting for a high share of private labels. With a high shareapproximately 80%of store brands, Westsidehas done well and is able to control both cost and quality.

Why does organised retails share of the market remain small?


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The biggest category is food and groceries, which accounts for 55-60% of spends and the kiranas do a good job ofproviding both service and credit. Besides, the FMCG companies do a good job of servicing the kiranas so thatstockouts are low. Also, most cities just dont have enough space for organised retail and rentals are prohibitivelyhigh.

Why do you need FDI in retail, surely local firms like Reliance have...enough capital, and they can buy thetechnology?

No one firm has enough capital or management bandwidth to do a good job. Fresh vegetable and fruit retail, for

instance, requires a cold chain of trucks and refrigerated warehouses connecting most major growing areas with retail

markets. Globally, supply chains are developed by third party logistics firms, not retailers. But these firms come in

only when there are enough big chains they can supply to. Whether this requires FDI or not is unclear, but you do

need a lot of players to create an efficient supply chain that is vital for organised retail to start doing well. Effectively,

the capital needed to address 50 million sq ft would be $2.1-3.2 billion over 3 years at the front-end of the business.

The cold chain and other back-end infrastructure could cost a lot more, maybe requiring an investment of $15-20

billion over 10... years. FDI flows into India over the past 5 years have been $156 billion, so the amounts required are

manageable .

So a Wal-Mart alone cant change things?

No, it cant.

How will the entry of Big Retail change the farm sector?

When enough chains buy directly from the farm sector (and this will take decades), the 20-30% loss that takes placein fruits and vegetables, in terms of both theft and the shrinkage that occurs due to the long farm-to-fork time taken,will come down to say 4-5%. Conservatively, this could result in a saving of $8-10 billion annually. More importantly,farmers should get a better price for their produce.

How will the entry of Big Retail affect the aam aadmi?

First, lets keep in mind that even if Big Retail comes in in a big way, its not going to finish off the kirana shopsBig

Bazaar and its... peers have been around for 10 years now, but their market share is minuscule. The better kiranas

operate on a negative cash flow (they get credit from FMCG firms and sell their produce within the required period if

theyre efficient). To the extent that the kiranas look tacky, FMCG firms like Hindustan Unilever are beginning to

spend money to help them refurbishdont forget that a Lever makes more money from kiranas than from selling to

Big Retail. Once Big Retail takes off, it will reduce the difference between wholesale and retail prices; consumers will

benefit from choice (private labels), hygiene and better prices.

Wont Big Retail hit employment?

The traditional argument is that it will. Wal-Mart alone has a turnover thats equal to that of the entire retail industry in

India and it employs around 5% of the labour that Indias retail industry does. So, the argument goes, Big Retail... will

mean Big Unemployment. Thats not necessarily true. For one, any impact will depend upon the market share of Big

Retail and thats not going to grow suddenly. Second, with the economy growing at 8% and inflation at 6%, thats a

14-15% growth in nominal sales each year, or a doubling of the retail market every 5 years. So, if in 5 years themarket grows from 100 to 200 and the share of retail trebles from 4% to 12%, that still leaves a market of 176 for

kiranas in 5 years or a growth of around 13% per year. McKinsey estimated that organised retail would create over

1.6 million jobs between 2009-2014. But if FDI into multi-brand retailing is permitted, this number could be higher....


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