The latest issue of Business world has the cover story on how Biyani is in a bad shape and it will take his company more than innovation to stay in business.
The reason cited for the downfall was a high unserviceable debt in a recession scenario.As customers choose to stay away or downtrade(read buy at discounts) profitability will be the first victim.Retailers will try to save face by at least showing some top line growth by either adding stores or increasing top line by giving exceptional value to customers through promotions,deals and offers.
Many analysts have already dubbed Pantaloon retail a Satyam in the making due to their refusal to be transparent and their deftness at creative accounting practices.In the cover story I am talking about Kishore Biyani refused to talk about any Financial details.I fail to understand what’s the big secret.If I have shares or a house that I have to sell to be in business that I built over the years,so be it.
Anyways,you can read all that in the magazine.This blog is to bring to you more sinister secrets of the corporate world.
Just think about the below scenario :
1.Where does your money go ?
a) You Spend it
b) You save it
c) You invest it
d) You give it away but that’s small one so we will leave it
Let us take Pantaloon retail and you as a case.
No matter what you do you will be at a loss just as in Casinos.If you spend your money you will pay Pantaloon a hefty Margin – as much as 40-80% in case of Apparel.That’s twice what the product is worth !I am assuming that you still got value for your money which is not the case else Retail would not be falling apart like it is.The biggest reason why sales and margins are falling is that retailers in India are offering over priced products from a costly platform.Wal Mart is a success for a number of reasons but the biggest one is that when you pick up a product and you think that it should be worth X ,you flip the tag to find out that it is much less.That’s when you are compelled to buy more and more.It is estimated that Wal Mart keeps the US economy in check and saves Americans billions of dollars not only at their own stores but basically by being the benchmark for the retail industry – like a price index.Which retailer in India does that?So much so our friends even jack up the prices in SALE and then give you schemes such as Buy one get one free etc.But ‘customer is no moron,she’s your wife’ as David Ogivly said during a session at Sam Walton Institute for retail.Many of them have realized this Quickly and have decided not be lured by such cheap tricks.
Having established that it does not offer exceptional value and takes away unjustified amount of profit from your pockets let us see what they do with that money.
In a race to have more floor space,roll out faster and borrow more money Big B will be prone to buying products from inefficient supply chains and will have to stock them at stores in expensive malls with crazy rentals.Keep in mind that they have no long term partners and every new factory they walk in will try and fleece them just like they did with the customers.With a highly leveraged working capital position Big B’s ability to pay on time is compromised and suppliers add interest cost to their own margins,making the product costly to start with.Big B is still doing a good job on negotiation partially because it has better reach and scale but it is nothing when compared to ‘Buy, build,own and operate” model of Wal Mart.If the pace of roll out was not an issue even Kishore Biyani will agree that the best way to focus on your retail Model and not worry about shifting value preposition and cost disadvantages is to own the stores.But Reliance came and spoilt the Party.I know that’s another sad story.
Now where does Big B go for money? To one of the Banks.And why would they give him cash? For interest.And whose money was it – Your’s. But there is a small catch here.There is big gap between the interest rate that banks pay you and what they ask from you let us say when you take a Home loan.Now it is fine that you will save money and the banks will lend and give you interest but what will you do when you have a substantial chunk.Buy a house or a car right? Remember Alice in wonderland” Come into my parlor,said the spider to the fly” You will get a loan at a floating rate which will keep going up ap and away.In my case my home loan EMI increased from 9000 Rs 4 years ago to 14000 Rs now even with my term getting increased from 15 to 25 years !
So what ? ICICI bank will make profits .The truth is ,in this particular case it won’t.Remember we are not talking about overall banking but Big B ,you and banks.ICICI Retail Ventures has a huge stake and so do a lot of other Banks in other Retail companies.Venture funds stand to loose if the investment does not yield good results or if the value is not unlocked in an FDI deal or an IPO.Venture capitalists also have a substantial knowledge of the businesses they invest in and nurture good start ups and growing companies.This is not the case clearly in India.
Now how will ICICI bank cover up.You are damn right- by upcharging you on your outstanding loans.That explains their tendency to make a fool of everyone who was unintelligent enought to take a home loan from them like me.
It is for these Venture funds that Enterprenuers get pushed against the wall and not having enough resoures of knowledge,expertise,manpower,merchandise and supply chain go bankrupt like Subhiksha did.Subbu promoted his brand like anything so he can somehow get to do an IPO and get a good valuation so everyone gets a chance to party at the cost of the investor but I guess the Gods were in your favor so he had to walk away empty handed.Had he got a chance even he would have opened his stock at a price of Rs 350-400 just like Vishal retail did and the investors would now be weeping their hearts out while the share languishes at Rs 43 falling further with each bad news.
Sorry I went a little of the story.Well not really I think I was able to set the stage for what comes next.Option c) You invest in Pantaloon shares.The market capitalization of PRIL has fallen from Rs 12000 crores to Rs 2400 crores in just about 18 months.It simply means that a ruppe that you invested in PRIL share has become about 16 Paise only.And all the while you thought that what great saving I am doing by buying at Big Bazaar.The equation is quite simple.You shop for Rs 5000 ,think you saved Rs1000,comes back and invest Rs 2000 in PRIL.It becomes Rs 320. – a net loss !!!!
No matter what you do spend,save or invest you are bound to get jacked.You know why ?There is no real value being generated and so in the long run we are all dead.In hindi they say Jab tak Topi Ghum rahi hai gaadi chal rahi hai.Satyam would have never happened if the ball kept rolling but Raju was pushed into buying Maytas as he had no more money to support operations with the fall in share market.It could be the same for the retail players too. As per Warren Buffet ‘s suggestion we may see a lot of naked folks running around as the tide of high share markets withers away.
Moral of the story -Next time you go shopping please do not bother about this article and enjoy the ride while it lasts.
(wanted to use another word starting with R but my Kapersky blocks my own blog if I did)