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Pantaloon: The margin poser - Views on News from Equitymaster

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Pantaloon: The margin poser
Apr 1, 2008

Pantaloon has diversified its revenue stream well by catering to both value and lifestyle segments of retailing. The subsidiaries and joint ventures enable the company to tap the entire gamut of consumption basket, which in turn has enabled the company to gain a larger share of consumers’ wallet. It has stores across sections, in line with its vision to deliver everything, everywhere, every time for every Indian consumer in the most profitable manner. Owing to the company’s huge expansion plans, venturing into different formats and on account of its positioning as a discount store, its margins have been fluctuating over the years. After realizing that concentrating on expansion alone is not enough to survive, especially in a business, which depends upon consumption patterns and tastes and preferences of consumers. Having said that, the company now has made few strides such as improving sourcing efficiencies (farm out purchases), tying up with local manufacturers and adopting a judicious mix of private and branded labels.

The company is not only expanding its space but is also venturing into new segments in a move to have presence across formats and categories. A look at adjacent chart highlights the fact that the overall revenue mix has been quite fluctuating owing to company’s increased concentration towards lifestyle retailing and new concept home retailing. The value segment has grown at CAGR of 16% over the past nine quarters, while lifestyle retailing has grown at CAGR of 11% during the same period. Home retailing has been introduced recently and has grown at a CAGR of 41% in the past four quarters. Owing to the company’s moves at not depending much on value retailing segment, the share of the same to the total revenues has come down from 64% in 1QFY06 to 58% in 2QFY08.

While the company continues to explore opportunities in the value retail segment and general store kind of formats, which always have been able to attract more footfalls as compared to lifestyle segment or speciality retail format, it has increased focus on lifestyle business. The move is to provide cushion to pressurised margins with scaling costs of operation and intensifying competition. Margin picture depends upon the revenue mix, for instance, in case of electronic goods such as mobile and food business, which is a value segment, margins are lower, while apparels and private label products fetch better margins. The company has chalked out plans to open more pantaloon stores so as to balance revenue mix and reduce dependence upon Big Bazaar and Food Bazaar formats.

Currently, the company derives 45% of the revenues from the fashion segment, 20% from food, 10% is contributed by electronics and furniture section, 5% by the communication segment, 10% from general merchandise and the remaining by the other segment. In the next 3 to 4 years, it expects food and fashion segments to contribute 30% each to the total revenues, followed by electronics (25%), communication (5% to 7%) and general merchandise (10%). Thus, going forward too, the company’s focus would continue to remain on food and apparels in order to boost revenue growth, while venturing into other formats and categories would help it gain larger share of customers’ wallet. All the moves and strides only indicate the company’s efforts to continue be the largest player catering to all the needs of consumers, while not hurting margins.

What to expect?

The company is exploring new formats and new ventures to tap the consumption basket, which will not only boost sales but will help sustain margins. Trying out new formats and models help company grow, understand the target segment and boosts its confidence to further innovate, however, if faced with failure, then it not only impacts financials of the company but further strides or moves required to expand and grow may take a back seat. This, coupled with the company’s huge expansion plans, scaling costs and increasing competition strongly impact the company’s bottomline in either direction.

At the end of the day retailing is a volume game. Expansion plans would continue to give fillip to topline and help achieve economies of scale over a long-term period, meanwhile execution risk remains a concern. Increased space across geographies will not only enable company to propel topline growth, it will also further expand its reach and penetration. The ‘hive off’ of the different business divisions is being done keeping in mind the independent growth each division has achieved. The move is in line with the company's objective to concentrate on each division separately and unlock value in future.

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Sep 19, 2018 03:21 PM


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