of Retail Indian Retail The economy may be slowing down, but Indian retail is back with a (cautious) bang. SYNDICATION/BUSINESSWORLD

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1 THE RETURN OF RE TAIL Emerging Markets Insight 26 The Return of Retail The economy may be slowing down, but Indian retail is back with a (cautious) bang. By Vishal Krishna, photos by Ritesh Sharma SYNDICATION/BUSINESSWORLD

2 Despite the gloom about the slow growth of the Indian economy, Renuka Jagtiani, vice-chairperson of the $4 billion Landmark Group, is remarkably upbeat about its immediate future. In fact, Jagtiani is chalking out a massive expansion plan for India You have to be positive about the future... India is going to be one of the most important markets for us. with the help of two of her deputies Kabir Lumba, chief executive officer of Lifestyle, and Viney Singh, CEO of Auchan Hypermarkets. You have to be positive about the future, she said. India is going to be one of the most important markets for us. She added that while the Landmark Group has created a $505 million business in the country over a decade, it will double that in just five years. Over the coming fiscal, the Landmark Group says it will add at least 400,000 sq. ft. of retail space to the existing 3 million sq. ft. under its belt. Apart from the $33.7 million budget earmarked for its main formats, Jagtiani plans to spend another $16.8 million on a premium apparel format called Splash. Jagtiani s plans for India are actually rather modest when compared to those of some of her retail peers. For instance, Reliance Retail has committed over $758 million for expansion over the next three years and it might actually end up spending far more, according to insiders. Of course, a bulk of this will go to the flagship Reliance Fresh, but the other units, such as the recently launched cash-and-carry for- A Grand lineup Most of the big retail groups have ambitious investments chalked out for the immediate future. Kishore Biyani Founder and chairman, Future Group Mukesh Ambani Reliance Industries Rajan Mittal Bharti Walmart Investment Plan $135 million 2.5 million sq. ft. $169 million 2.5 million sq. ft. $160 million 1.5 million sq. ft. Emerging Markets Insight 27

3 Govind Shrikhande Managing director, Shoppers Stop Micky Jagtiani Founder, Landmark Group Sanjiv Goenka RPG-SG Group Kumar Mangalam Birla Aditya Birla Group $160 million 1.5 million sq. ft. $42 million 800,000 sq. ft. $22 million 300,000 sq. ft. $25 million 300,000 sq. ft. mat Reliance Market, will also be expanded. Randy Guttery, CEO of Reliance Market, says in the current quarter alone, the company is going to open six cash-and-carry stores of 53,000 sq. ft. each. Sources say that the total investment could be around $25.3 million. Reliance has kept costs low because the next three months will determine whether the model will succeed or not and, therefore, it can learn valuable lessons to scale the business quickly. Guttery has signed on properties that nobody else would dare take possession of. For instance, he has been able to sign on a city council s bus repair shop in Bangalore and an old shoe company s warehouse in the northeast. It s all about converting them into great places for kirana [neighborhood shop] owners to shop at, says Guttery. There are at least half a million kiranas we can service in three years. Meanwhile, the Future Group, set up and headed by entrepreneur Kishore Biyani, and the Bharti Group, controlled by the Mittal brothers, are expected to spend more than India s big retailers are ready to dip into their reserves and even borrow money to build up scale for future. $337 million each over the next couple of years on their retail expansion. Biyani hopes to become the first retailer in India to have over 20 million sq. ft. of retail space under operations this year. Reliance Retail plans to dethrone it in a few years. Currently, with little more than 9 million sq. ft. under various stores, it has plans to grow to 60 million sq. ft. within this decade The Bull Is Back After four years of licking their wounds, chopping and changing formats and, in some cases, shuttering stores, India s big retailers are bullish again. Most of them are ready to dip into their reserves and even borrow money to build up scale for both future opportunities and threats. You could say the wheel has turned full circle. Between 2005 and 2009, Indian retailers had expanded frenetically, with the big players the Future Group, Reliance Retail, Landmark Group (Lifestyle), Shoppers Stop, AV Birla Group, the RP-SG Group s Spencer s and Tata s Trent together going from five million sq. ft. under operations in 2005 to 25 million sq. ft. in And then the Indian retail dream came crashing after the global Emerging Markets Insight 28

4 financial meltdown triggered by the bankruptcy of Lehman Brothers. Suddenly, the organized retail players in India were caught in a world of slowing sales, dipping profits, increasing costs and higher debt servicing costs. Predictably, the biggest retailer in India, Biyani s Future Group, was the worst hit. Over the next two years, the pioneers of Indian retail concentrated on closing stores and rejiggering formats. Aditya Birla Group s More closed 50 stores adding up to 180,000 sq. ft. of space. Future Group shuttered 20 stores while Reliance shut down more than 50 stores. For every store shut, these brands chalked out plans to relocate or open new stores. Lifestyle and Shoppers Stop did not shut any stores, but they slowed expansion plans. To get out of debt, Biyani even sold off parts of his empire. By the end of 2011, the shrinking of operations had been largely completed and some of the retailers started exhibiting a cautious optimism. Last year, the Aditya Birla Group picked up a 49% stake in the Pantaloons store format from Pantaloon Retail $269.6 million to expand their operations to smaller cities. Biyani, for his part, completely reworked his plans after reducing much of his debt. But for the big guns of Indian retail, the real trigger for a new round of ambitious expansion came after the UPA government managed to clear the measure allowing 51% foreign direct investment (FDI) in multibrand retail in September For the retailers, FDI in the sector presented both an opportunity and a threat. Some of the big groups hope to stay independent in the long run and, for them, it became imperative to scale up quickly before competition came in from abroad. For most others, FDI is a big opportunity because of the assumption that many global giants interested in India would like to either acquire an existing group or form a joint venture. After all, few global retailers can hope to come in and match the scale already achieved by the Future Group or Reliance Retail in the short run. Also, as retail consultant Devangshu Dutta of Third Eyesight explains, quality real estate is in short supply and that is likely to hamper global retailers plans in this market. Joining hands with an Indian retailer makes sense because many of the stores opened by big domestic players are located in prime locations. Analysts believe that any new global retailer looking for a partner would first Retail stock (million sq. ft.) rising stock Retail stock in India is expected to exceed 100 million sq. ft. by F 2013F 2014F 2015F Source : Real Estate Intelligence Service, 2Q12, Jones Lang Lasalle Research, India Retail s Newest Hot Spots Coimbatore The emerging IT and auto parts hub saw two malls totalling 500,000 sq. ft. come up in the past 18 months. It will add 3 million sq. ft. of retail space over the next two years. Average size in sq. ft. 1,200,000 1,000, , , , , , , , , , ,000 more & bigger Total mall supply and sizes in India are expected to increase over the medium and long term. Average size in India for malls becoming operational in a particular year 200, , , ,000E Average size in India for all operational malls Crosses 200,000 sq. ft. in 2007 Expected to cross 300,000 sq. ft. by Source : Real Estate Intelligence Service, 3Q12, Jones Lang Lasalle Research, India Visakhapatnam The port town and SME hub has seen 400,000 sq. ft. of retail space added through two malls in the past two years. ahmedabad The home of Reliance Retail's first ever cast-and-carry outlet. Five malls came up since 2011, adding 4 million sq. ft. of space. LUCKNOW Six malls have opened up in the past three years, adding over 1.5 million sq. ft. of retail space. Emerging Markets Insight 29

5 The expansion plans this time around are very different from those at the height of the last boom. approach either the Future Group (the biggest so far, in terms of stores and formats under operation) or Shoppers Stop, which has consistently been the most profitable retailer in the industry. Shoppers Stop, which commands a higher price-to-equity ratio than all the other retailers, says that it s FDI, but is not scouting for a partner as of now. Its vice-chairman B.S. Nagesh says the retail business is a great asset to the real estate business of the K. Raheja family. Our retail business is cash rich, has great processes; so why would a great business look for a foreign partner? he said. That is also why his colleague and the current CEO, Govind Shrikhande, is planning to grow the current number of stores from 55 to 90 in three years time. The company has already committed $50.5 million to expanding all formats under it. It is also going to open a couple of HyperCity (the grocery format) stores every year. Currently, there are 12 HyperCity stores, and they contribute 30% to Shoppers Stop s revenues of $421 million. The company says it plans at least 800,000 sq. ft. of retail space in the current financial year. A Measured Charge The expansion plans this time around are very different from those at the height of the last boom. In , most retailers were expanding in all formats and in all sizes. More importantly, almost all of them focused on the half a dozen big cities and fought pitched battles for customers in the biggest urban centers. One fallout was the high real estate costs as big retailers got into bidding wars. Equally, the cost of setting up a new store skyrocketed. This time around, most of the plans are focused around two areas groceries/food and apparel/fashion. In most others, plans have either been put on hold or formats are still being resized and business plans reworked. For example, Shoppers Stop says it is reducing the size of most Crossword stores and changing the product mix. Similarly, the Future Group is concentrating on the Big Bazaar and KB s Fair Price formats and the rollout of Central and Brand Factory apparel stores, which are part of its newly created Future Lifestyle Fashion vertical. For Reliance Retail, more than 50% of the operations are concentrated on the Reliance Fresh brand, which runs the food and groceries stores. It is currently slowing down on formats such as books, footwear, fashion and automobile accessories. It says it will add at least a million sq. ft. of space in the current financial year. RP-SG is focusing on Spencer s hypermarkets and is rumored to be scouting for partners, though the group has declined to comment on this. Spencer s plans to open 30 hypermarket stores in the next 12 months, adding a total of 300,000 sq. ft. It is spending over $51 million on the venture. This is our single largest expansion plan in a financial year, said Mohit Kampani, CEO of Spencer s Retail. Moreover, we have about 25 hypermarkets signed up for rollout in the next 36 months. He expects the business to be in the black by the end of fiscal Spencer s currently has 106 supermarket stores and 25 hypermarkets. Even the AV Birla Group is largely concentrating its efforts on the More stores rental realty Leasing has been dull in metros, but there is fresh momentum. DELHI-NCR With vacancy rates in performing malls in single digits and retailers favoring expansion in projects offering optimal, leasing acivity was sluggish across the Delhi-NCR retail market in Retailers are now choosing space in upcoming procjects that offer good location, design, branding and business potential. MUMBAI A few major malls in the suburban sub-market are nearing completion. The polarization of demand is likely to continue as it concentrates in strategically located and well-designed malls with good management. Vacancy rates are likely to fall as supply dries up over the coming years and developers move to standalone and mixed-use development retail formats. CHENNAI With over two million sq. ft. of mall space in advanced stages of construction and 65% of the space already commited, vacancy rates might rise. But they will fall over the medium term as retailers waiting for a good location to set up shop take up space in new malls in prime locations. Information Value*: $4.1 psf pm Status: Slow growth No. of quarters since last trough: 4 *only for prime south Value*: $4 psf pm Status: Rent rising No. of quarters since last trough: 5 *only for prime south Value*: $2.3 psf pm Status: Slow growth No. of quarters since last trough: 9 *only for central sub-market PSF PM: Per square foot per month Source : Jones Lang Lasalle Research 12-month outlook Capital Capital Capital Emerging Markets Insight 30

6 (groceries) and apparel, especially after the Pantaloons takeover. The More operation has seen three CEOs in double quick time. The first, Sumant Sinha, expanded rapidly, but burnt a lot of cash. The second, Thomas Verghese, rationalized operations and built a large private label business, but could not make the business profitable. Now, Pranab Barua is focusing on doing that while expanding cautiously. More has close to 534 stores and plans to open 100 supermarkets and six hypermarkets every year, with an outlay of $25.3 million. The group has one million sq. ft. of space currently and plans another two million sq. ft. in the financial year. We want to be a top-three retailer in the country, said Barua, business director for retail apparel and food business for the Aditya Birla Group. New Shopping Destinations A bigger change, though, is that much of the retail expansion is moving out of metros and into smaller towns, which are emerging as hot retail destinations. Analysts proffer two explanations for this. The first, of course, springs from the clauses of the FDI policy, which has made Indian retailers consider many smaller cities. The FDI regulations in multi-brand retail restrict operations of retailers with 51% foreign ownership to cities with 1million-plus population. The stores can also be set up in a 10-km radius of such cities or urban agglomerations. An ICICI Securities report calculates that 79 cities/urban agglomerations would qualify under this clause. Of these, 53 are cities with populations of 1 million or more, while others qualify even with lower populations because they fall within the 10-km radius of larger cities (Gurgaon vis-a-vis Delhi, for example). Of them, most of the bigger cities already have a good organized retail representation but there are many others that have not yet been tapped by the big Indian retailers, and that is where those retailers are now headed. New hotspots include business hubs such as Coimbatore, Visakhapatnam, Lucknow and Ahmedabad, among many others. That apart, Bharat Chhoda, analyst at ICICI Securities, points out another powerful imperative to go into these towns. The cost of experimentation and opening stores in these areas is considerably lower than in bigger metros. As a result, stores tend to break even quickly and, even if they fail, retailers can close shop with relatively lower losses. That pragmatism, he points out, was missing during the heady era. But even as big retail has started scouting for new locations, reports suggest that mall-building activity is actually decreasing. In , everyone wanted to build a mall. Now, fewer malls are being built, though these are much bigger in scale than earlier. As real estate consultancy CB Richard Ellis points out in a report, retail inquiries have gone up sharply in the past two years, but the number of malls has come down dramatically in the same period. The report adds that despite an 83% drop in supply of organized retail space across key cities in the country, 2012 continued to witness an increase in transaction activity and retail expansion. Retail expansion is starting once again except that it is not the same as in The retailers are now much more mature, said Pinakiranjan Mishra, national leader of consumer markets at Ernst & Young. Looks like the retail gladiators are marking out their territory once again. A bigger change, though, is that much of the retail expansion is moving out of metros and into smaller towns, which are emerging as hot retail destinations. Emerging Markets Insight 31