Indian Retail: In all the sizzle, where's the steak?

If one were to go by the headlines in the past one year, Indian Retail has gone from boom to bust rather quickly!

Given that media may have hyped both the boom days and the bust predictions, what is really the situation on the ground? Sure, we have had spectacular debacles like Shubhiksha, streamlining (I presume an euphemism for 'rightsizing' or 'downsizing') in Spencers, More, Reliance Retail.

The numbers coming in have been spanning the spectrum, some impressive numbers …Pantaloon Retail reported a 21-per cent increase in revenues Y-on-Y for quarter ending March '09 with OPBDIT up 50 per cent; Koutons showed a 32 per cent increase in sales for the full year 2008-09 versus LY with an equal increase in OPBDIT of 33 per cent; some merely acceptable - Provogue reported a 5 per cent increase in revenues Y-on-Y for quarter ending March '09 with OPBDIT up 10 per cent; and some truly dismal - Vishal Retail reported a 30-per cent decrease in revenues Y-on-Y for quarter ending June '09 with OPBDIT down to negative Rs31 crore from a Rs49 crore positive last year.

But these numbers, good or bad, merely reflect what has happened. Let us try to understand why it happened in the first place.

The first insight comes from one particular number : the number of times stock is turned around in a year (a measure of how much over stocking has been done and in turn, a sign of how well demand has been estimated). Wal-Mart has a ratio of 10.8 times a year…that means that it roughly holds at any time stock of just over one month's sales. Big Bazaar has a ratio of 4.2 and Vishal Retail has an astonishing number of 2.2! That in very simple terms means that Vishal holds roughly 5 and a half months inventory! A sure sign of demand estimates being far far higher than the actual sales.

This same underlying factor - demand being lower than actual sales is also behind the rationalisations of stores talked about earlier. (While purists may say that it could be due to per square foot profitability, merchandising mix etc…the fact is simple: had you estimated demand and therefore profits right you wouldn't be in this situation.)