Store owners and retail developers across India thought they only had to build new malls and the shoppers would come. Suddenly sales growth slowed sharply this year.
Reality check for Indian retailers
Sunanda Sriram enjoys leisurely shopping at the mall, but she avoided going to her neighbourhood shopping centre on weekends because it was just too crowded. She might find them harder to avoid: in the past year, malls have popped up across Mumbai and Ms Sriram, 40, a software developer, now has five new centres within a one-kilometre radius of her home in the Ghatkopar area. "Now, it's a lot less crowded," she says. "It's good for me, but I just wonder, how will the retailers even cover their costs? There were so many shops built, of which many are closed now." The economic downturn has handed a reality check to retailers the world over and India's booming economy is no exception. With India's annual GDP growth averaging about 8 per cent in recent years, more disposable cash was put in the hands of a young, educated, middle class which wanted to spend it on brand names and a more modern retail experience than the one offered by small, independent "kirana" shops. Last year, retailers saw sales grow by 40 per cent, with total retail sales of 9.94 trillion rupees (Dh759bn), which prompted local companies and property developers to proceed with aggressive expansion plans. But when the economic downturn hit at the end of last year, even India's voracious consumers felt the pinch. Sales growth slowed to single digits early this year and retailers found themselves having to scale back their plans to stay afloat. For the first time, retailers in the world's second most populous country began looking closely at their balance sheets and company efficiencies, or lack thereof. That shift in thinking will fundamentally change the face of India's retail sector for the better, according to Hemant Bakshi, the executive director of sales and customer development for Hindustan Unilever. "Probably when we write history we will remember the last 12 months as the most important," he said at last week's India Retail Forum. "This is the year modern trade in India corrected the mistakes of the past. If we get this right I am confident we will go faster than we have in the past." Vineet Kapila, the chief executive of the chain Spencer's Retail, said many retailers believed India's 1.2 billion people were a pie of profits, with slices easily up for the taking. "A lot of people made the assumption we could throw in some capital, create a huge retail model, and you would get business," he said during the forum. "I think that was a lot of arrogance on a lot of our parts to assume such a simple business model." More than 600 malls were to be constructed between now and 2012, totalling 1.6 million square metres, which would more than quadruple the country's retail space, says Shubhranshu Pani, the managing director of retail for Jones Lang Lasalle Meghraj (JLLM). But almost a third of those projects have been cancelled or delayed after developers learnt that India did not have enough retailers to fill all the malls, Mr Pani says. "With these shopping centres no longer to be developed, I think the market has now realised that by 2011 and 2012 we will now have a rational number of shopping centres. We will no longer be in a situation where we are considered overbuilt," he says. Retailers are now concentrating on understanding the complicated Indian consumer better, something that was somewhat overlooked in the past, industry insiders say. Kishore Biyani, the chief executive of Future Group, says India's diverse make-up, with 28 states, seven major religions, and castes and subcastes, make it difficult to apply a broad retail strategy. Tastes change dramatically between cities, Mr Biyani says. "It's a heterogeneous market and modern retail has always survived on homogeneity." Paul Martin, the business development director of the UK-based consultancy Planet Retail, says most retailers in India still have little understanding of the consumers they are catering for. "A lot of the brands are seeing growth rates, but they don't really understand where the growth rates are coming from," he says. "As long as you're generating double-digit growth, you don't really ask that many questions. "You just know that the actual growth is there. Now things have gone down a little, people are asking those questions. And that's from high-ticket items all the way down to the lower everyday items." Another important lesson from the downturn has been for retailers and developers to work together to bring in more customers and boost sales. Shopping centre developers, after finding there were not enough retailers to fill their malls, or few who were willing to pay the then-record high rents, are now open to negotiation for lower prices or a payment model based on a percentage of retail sales, says Renuka Jagtiani, the chief executive of the Dubai-based Landmark Group, which has a large number of stores, including chains such as Home Centre and Shoemart, in India. "Everyone had this thing about the India story and there was a lot of optimism. And the rentals were going up unrealistically for retail to sustain long-term," she says. "I think the one thing that's helped is that landlords have realised now that definitely there is growth, but there has to be a partnership between the landlord and the retailer. There has to be a win-win for both." Despite its retail woes this year, India has been described as the world's biggest retail opportunity by the management consultancy AT Kearney, topping its global retail development index. Even in tough economic times, India remains one of the fastest-growing countries in the region, and its government is projecting GDP will grow by 7.1 per cent this year, at a time when many other economies are likely to shrink. B S Nagesh, the managing director of the retail firm Shoppers Stop and the chairman of the Retailers Association of India, agrees that opportunity still abounds and retailers who have trimmed the excess fat will see record profits this year. "It is a defining moment for retailers, but not for retail," he said on the sidelines of the retail forum. "Nothing has happened to retail. It did slow down, but don't forget that India is still seeing at least 6 per cent GDP growth. "So, it's a defining moment for retailers because retailers went too fast. They have corrected it, and now they're going at the right pace." Kabir Lumba, the executive director of Lifestyle, the Indian subsidiary of Landmark, says the lessons of the past year will start to bear fruit by 2012. "I feel that organised retail will leapfrog in the next two to three years," he says. "The economic slowdown has been a good lesson. People have revisited their fundamentals. Everything is very real, very sensible, very rational, very logical. So I think based on this, in two to three years, we will see some kind of magic." email@example.com