Five Reasons why Modern Retailers failed in India

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.

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6 Responses to Five Reasons why Modern Retailers failed in India

  1. RR Rao says:

    First of all the Big Box retailers have not understand the cultural barrier…. The Indian consumer hither to habituated to Mom & Pop street corner small format stores with very personalized service with flexible pack size commodity availability…. To change this paradigm to a structured big formats is difficult and time consuming…. One has to consistently attract them to newer formats with competitive prices & cutting edge services…. Added to the above the financing structure of the Retail Formats as well as Realty costs have played adversely to the success of Newer Retail Formats in India….

    Best Regards
    RR Rao

    • pvnsastry says:

      Thank you for your comments. I think they all went for the gold rush without proper planning. Also big business houses wanted to have a footprint in the organised retail sector, which was projected as one of the fastest growing in the world as per the estimates of analysts.
      Warm regards
      PVN Sastry

  2. KETAN VYAS says:

    Dear Mr. Sastry: Having read your article with interest, I disagree with you. Modern retailers have made an entry into India and have long term plans. They are successful, for if not, they would have closed shop and run away. The P&L is not the only way to evaluate them as they would turn around sooner or later. They have brought to the Indian consumer a way of shopping and in many a way are responsible for the uplift of the totally antique business approach of the Mom & Pop retailers to change their strategy and lift their service and hygiene levels. They have provided immense employment, tax collection and deposit, employment and growth to various sectors. These formats are here to stay and they would continuously evaluate and tweak their strategy to emerge profitable in times to come. KETAN VYAS

  3. pvnsastry says:

    Dear Mr. Vyas,
    Thank you for your valuable comments and opinion. I am delighted with the diversity of opinion this blog has generated. I totally agree with you on Modern Retail bringing a new way of shopping, employment creation and tax collection etc. I also agree that the concept is still evolving in India. My only criticism is about the lack of planning, forecasting and business modelling. Also my debate is about the reasons why they failed and not a prediction about the future. I will be writing more about the future outlook soon. Look forward to your comments.
    Warm regards
    PVN Sastry

  4. Sunil says:

    All point is ok, But we missing One things…!!!!! is it Sourcing and procurement is the most important things but Indian retail can’t take it seriously.

    They Don’t have Sourcing and Procurement professional who source the goods with good quality with before time and good price. Especially Textile Product.

    • pvnsastry says:

      Thanks for the comments. Sourcing and procurement are also very important. I am able to see the difference here after having lived in the UK for 10 years. One of the issues here is that market is price driven. The vendor relationship is very important in the success of any retail operation. If you look at the examples of one of the best retailers like Walmart and Tesco, the suppliers are integrated to their IT systems and can see the sales of their products which enables them to plan the production. Indian retailers will have to follow the same model of vendor management if the want to succeed in the market. Please feel free to comment on any of my work. It will only improve my work.
      Cheers
      Sastry

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