The Indian retail landscape has witnessed tremendous churn in recent times. Skyrocketing real estate costs have rendered large swathes of big box and mom-and-pop retailers unviable.
In Superior Customer Insight Is Key To Winning Round 2 Of The Indian Retail Battle, I’d quoted the owner of a famous department store in Pune, India. He lamented that he’d earn more returns by renting out his store premises to a bank or a call center, or even by letting the money he spent on renovating his generations-old store idle away in a bank fixed deposit (Note: Fixed deposits in Indian banks tend to outperform equity over the long term and, even after the GFC, yield around 10% p.a. interest).
To take a more recent example, a big box sports goods retailer pays INR 15 Lakhs (US$ 30K) rent for a 18K square feet store in a mall in suburban Mumbai and generates around INR 30 Lakhs (US$ 60K) in sales per month. Even assuming that the retailer enjoys a gross margin of around 50% – high as it might appear, it’s par for the course in this product category – it makes just enough money to cover its monthly rental. It will be forced to dip into the reserves of its parent company to meet its payroll, promotion, utility and other expenses (H/T to my friend and retail industry specialist Jayesh Desai for sharing this info). This business is hardly showing signs of being viable in the long run.
Having said that, different categories of retail have different ticket sizes, space requirements and gross margins. Accordingly, it stands to reason that some categories will be more resilient to escalating rentals than others. With this hypothesis in mind, I surveyed the retail landscape in my neighborhood – Bund Garden, Kalyani Nagar, Koregaon Park, Viman Nagar and other parts of Central and North East Pune – and kept a tally of the type of stores that have stayed open versus shut down (or moved to lower cost areas) over the last couple of years.
The result of my quick-and-dirty observation and subjective analysis is given below:
THE WINNERS: RETAIL CATEGORIES RESILIENT TO ESCALATING REAL ESTATE COSTS
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THE LOSERS: RETAIL CATEGORIES HIT BY ESCALATING REAL ESTATE COSTS
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As someone rightly pointed out, most things become obvious after they’ve been said, so the above lists should make perfect sense to everyone.
However, even with the benefit of hindsight that’s supposed to be 20/20, I can’t understand why a retail cateogory like jewellery, with its high ticket size, belongs to the losers list. But, it does – in last couple of months, I’ve seen at least three gold and diamond stores in the surveyed region downing their shutters within one year of opening up.
UPDATE DATED 10 JULY 2020:
It’s almost eight years since I wrote the above original post. The winner and loser categories in the original post have remained more-or-less unchanged during the interim period. But that’s only up until March this year, when the coronavirus-caused lockdown commenced. No one knows how many retail categories will be left in the Winners list now.