An issue very close to my heart has brought me back to blogging. It also gives me an opportunity to say - "I had told you this". It was the news in the Economic Times dated 19th March, regarding Office Depot and Staples putting a halt to their India plans.
http://economictimes.indiatimes.com/news/news-by-industry/services/retail/office-depot-staples-concede-fight-to-kiranas-pack-up-retail-plans/articleshow/19055125.cms
It is very clear that the large format retailers have a significant overhead and would need a huge scale to be able to sustain their business model. The MD's salary for Shoppers Stop is around 0.15% of the total revenue. For Walmart, this percent is 0.000045%. Well there are lots of difference between WalMart and Shoppers Stop, but the differences in the proportion mentioned above are too large to be ignored. (WalMart does not reveal the salary expenses and based on newspaper reports the remuneration for Mike Duke has been assumed to be 20 million USD). To put this into perspective roughly one third the gross margins (not profits) of one Shoppers Stop store are expnesed in paying the MD's remuneration. With only 53 stores this is way too much money spent on one person. (The expenses of Shoppers Stop considered for Gross Margin inclde the COGS and the employee costs)
According to a report, 90% of Americans have a WalMart within 15 minutes of their house. It is only with this huge scale and the superlative use of technology that WalMart makes the money that it does. For a population around 2 million, Dubai has six super stores of Carrefour. Thus there is one Carrefour for every three hundred thirty three thousand (333,000) people. Mumbai metropolitan area which is about the same size as Dubai and a population of around 20 million has six Big Bazaar stores. This makes it around one Big Bazaar store for 3.3million people.
Again, it is debatable if Mumbai and Dubai can be compared. The idea here is to indicate the stark difference and the lack of scale among Indian retailers. Overheads like salaries, IT expenses, etc are not very linear to the scale of Operations. Shoppers Stop is not even 0.1% of the size of Walmart in terms of revenue, but the compensation to the Shoppers Stop MD is around 3% of the WalMart CEO compensation.
Unless these large retailers in India plan for scale, it will be impossible for them to sustain. They have to have planned growth that has a significant multiplier effect to the number of stores. Shoppers Stop has managed 53 stores in 20 years, and in ten years Big Bazaar has managed 214 stores. That they still have such a small footprint does not seem right. Walmart has 3000 stores in the US. Even Toys "R" Us has around 875 stores in the US. Tesco has 471 super stores in UK which is 80% of the size of Maharashtra. In all formats combined Tesco has almost 3000 stores in the UK. France, which is just around twice the size of Maharashtra has 1200 super and hyper markets of Carrefour. Across formats the number of stores is more than 5500. An Asian country like Taiwan, which is around 12% of the size of Maharashtra has 70 Carrefour stores.
It is clear here that scale is an essential component for survival in organised retail. And, this scale is more about the stores in the same retail format than across formats Given this common knowledge the behaviour of Indian retailers is surprising. McDonald's India has managed to create around 250 restaurants in 15 years and now they plan to double the number in West and South India in the next two years.The message here is that it is okay to have a lower number of outlets now, but without a significant increase in capacity the survival of the organised retail market in India is questionable.
http://economictimes.indiatimes.com/news/news-by-industry/services/retail/office-depot-staples-concede-fight-to-kiranas-pack-up-retail-plans/articleshow/19055125.cms
It is very clear that the large format retailers have a significant overhead and would need a huge scale to be able to sustain their business model. The MD's salary for Shoppers Stop is around 0.15% of the total revenue. For Walmart, this percent is 0.000045%. Well there are lots of difference between WalMart and Shoppers Stop, but the differences in the proportion mentioned above are too large to be ignored. (WalMart does not reveal the salary expenses and based on newspaper reports the remuneration for Mike Duke has been assumed to be 20 million USD). To put this into perspective roughly one third the gross margins (not profits) of one Shoppers Stop store are expnesed in paying the MD's remuneration. With only 53 stores this is way too much money spent on one person. (The expenses of Shoppers Stop considered for Gross Margin inclde the COGS and the employee costs)
According to a report, 90% of Americans have a WalMart within 15 minutes of their house. It is only with this huge scale and the superlative use of technology that WalMart makes the money that it does. For a population around 2 million, Dubai has six super stores of Carrefour. Thus there is one Carrefour for every three hundred thirty three thousand (333,000) people. Mumbai metropolitan area which is about the same size as Dubai and a population of around 20 million has six Big Bazaar stores. This makes it around one Big Bazaar store for 3.3million people.
Again, it is debatable if Mumbai and Dubai can be compared. The idea here is to indicate the stark difference and the lack of scale among Indian retailers. Overheads like salaries, IT expenses, etc are not very linear to the scale of Operations. Shoppers Stop is not even 0.1% of the size of Walmart in terms of revenue, but the compensation to the Shoppers Stop MD is around 3% of the WalMart CEO compensation.
Unless these large retailers in India plan for scale, it will be impossible for them to sustain. They have to have planned growth that has a significant multiplier effect to the number of stores. Shoppers Stop has managed 53 stores in 20 years, and in ten years Big Bazaar has managed 214 stores. That they still have such a small footprint does not seem right. Walmart has 3000 stores in the US. Even Toys "R" Us has around 875 stores in the US. Tesco has 471 super stores in UK which is 80% of the size of Maharashtra. In all formats combined Tesco has almost 3000 stores in the UK. France, which is just around twice the size of Maharashtra has 1200 super and hyper markets of Carrefour. Across formats the number of stores is more than 5500. An Asian country like Taiwan, which is around 12% of the size of Maharashtra has 70 Carrefour stores.
It is clear here that scale is an essential component for survival in organised retail. And, this scale is more about the stores in the same retail format than across formats Given this common knowledge the behaviour of Indian retailers is surprising. McDonald's India has managed to create around 250 restaurants in 15 years and now they plan to double the number in West and South India in the next two years.The message here is that it is okay to have a lower number of outlets now, but without a significant increase in capacity the survival of the organised retail market in India is questionable.
1 comment:
I think your point is very right about scale...
For Shoppers Stop, I think problem is also in its pricing. Once we checked out the store for an hour and found only a handful things which we should buy. Because we knew that the same articles were available in other stores much cheaper. Also, a lot of luxury articles, e.g. decorative things were stored with too high price - almost no one bought those. So SS has to live with low Inventory turnaround.
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