1. Hyper Frenzy for Space Addition:
During the hyper growth phase of 2005-07, retailers got carried away and went about adding as much space as possible to have high visibility without proper research about the catchment area or mall density. Some cities had too many stores very close to each other causing store cannibalisation resulting in poor footfalls with a knock on effect on store viability.
2. Unviable Formats:
In their attempt to get a higher share of the customer wallet and increase the market share, retailers experimented with numerous formats without researching the Indian consumer’s shopping behaviour. They simply copied western retail formats attempting to replicate them in India.
3. Poor Supply Chain Management:
Back-end, systems and processes constitute the backbone of any retailer. They ensure the smooth running of the business, control the inventory and reduce costs. Retailers concentrated their efforts on store openings and did not consider the importance of back-end operations like vendor development, logistics, inventory management and wastage management. The result was high logistics cost, poor fill rates, stock outs and low inventory turnover which resulted in lower ROCE and ROE.
4. High Lease Rentals:
Due to high real estate costs, Indian retailers followed the lease rental model. Normally, lease rentals should be between 3-6%. In their race to acquire prime real estate, retailers pushed these rates to unsustainable levels affecting profitability.
5. Debt Funded Growth:
Most of the retailers’ growth was primarily funded by debt. To chase high growth in the boom days, they continued to expand using debt. As growth slowed down, retailers found themselves saddled with huge inventories, high costs and cash flow problems due to high working capital requirements making it increasingly difficult to raise capital as investors had become wary of ROI. Retailers like Vishal Retail had unsustainable debt equity ratio and had to undergo a debt restructuring program, while Future Group’s profits were eroded by high debt servicing.