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Retail Strategy: Focused or Broad Based?

Mar 6, 2012

The Retail industry's fortunes are directly related to the GDP growth of an economy. India's annual GDP growth was 5 % in 1985-1994, and has consistently increased to almost 8-9% in 2005-2009. So, Indians now have more money to spare, and are spending it more willingly than ever. Habits are changing from basic to more discretionary spending. Consumers are not just buying basic food and clothes, but also accessories like watches, belts and branded jewellery. In fact consumers now are increasingly attached to both domestic as well as international Brand names.

Given this consumption scenario, big retail players see a huge potential for overall industry growth. While retailers are ramping up their operations to capitalise on this increasing demand for branded goods, they are adopting different strategies to approach the market.

Kishore Biyani's Pantaloon Retail started with selling branded formal trousers in India in 1987. The company, considered a pioneer in India, has since then grown by leaps and bounds, and now has nationwide presence with a wide variety of store formats (see the Table below).

Name of the store Main operations
Home Town Home furnishings including furniture, electronics, tiles, electronic, electricals and services
Pantaloons Apparels for all genders and ages- casual, ethnic, formal, party wear and sports wear
e Zone Electronics speciality store
Central A small mall offering branded apparel, accessories, music, books, coffee shops, food courts, etc
Brand Factory Stores that sell international fashion brands at great prices
Big Bazaar Hyper market selling food and grocery, utensils, home furnishings, crockery, etc
KB's Fair Price Neighbourhood stores serving as ration shops for customers satisfying their daily needs
Food Bazaar Supermarket selling food and grocery items
Planet Sports Multibrand sports and lifestyle speciality retail chain

Westside stores
Name of the store Main operations
Westside Departmental stores selling apparels, cosmetics, accessories
Star Bazaar Hyper market selling foods, beverages, consumer electronics and household items
Landmark These offer books, stationery, music, toys, gift items

In a diverse country like India where people's needs and wants are varied, Pantaloon Retail's strategy is to target consumers of all income and demographic types, each with specific Branded retail store formats. For example in addition to its existing Food Bazaar, it has recently launched "Foodhall" an upgraded food store targeted at the luxury segment, and catering to the evolved customer who is willing to pay more. With this strategy, management believes it will broaden its customer base.

In contrast to this "target all segments with unique formats" strategy; Tata's Trent Limited which owns the popular Westside stores thinks differently. It wants to focus on targeting customers from a broad income band with select store formats. Instead of getting into newer formats of retail stores, the company has chosen to allocate all its resources towards its flagship store Westside, along with Landmark and Star Bazaar. Although the company has a few other stores namely "Sisley", "Fashion Yatra" and "Zara", it aims to generate maximum revenue from Westside, Landmark and Star Bazaar.

Share price changes of both these retail companies reflect which company's strategy the investors have shown more faith in. Over the last 5 years, the stock price of Tata's Trent Ltd. has gone up by 38%, while that of Pantaloon Retail is down by 52%, both on a point to point basis.

We feel that even though Westside has fewer formats, it is still able to target as many customers wallets as Pantaloons does. This is because in India the consumers have not developed to be able to create large enough markets for the smaller segments. Trent Ltd. is basically present in all the distribution channels that Pantaloon Retail is in. This includes hypermarkets, apparels, accessories and books and music. These categories account for almost 65% of total consumption basket of an Indian (Source: Technopak report).

Lately Pantaloon Retail has started divesting its stake in other non-retail related businesses (for example, investments business in Future Capital Holdings), and it is focused on becoming a "pure" retail player. In our view, the facts seem to indicate that the company's financial performance would improve if it reduced the number of its formats to a select few. It would still reach the bulk of the consumers it currently does, and management would be more focused. Investors too seem to have the same view as is evident from the big thumbs down given to Pantaloon share price in the last five years. As with all things, in retail too, it helps not to spread yourself too thin perhaps?

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