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Retail: Pantaloon Vs Wal-Mart - Views on News from Equitymaster

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Retail: Pantaloon Vs Wal-Mart

Apr 7, 2008

The retail revolution is being witnessed in India after decades of being rebuffed by its traditional mom-and-pop neighborhood stores. Like a product life cycles, businesses also have a cycle and pass through those same stages Ė introductory stage, growth stage, saturated/matured market and decline. The world over, especially in developed countries, growth has slowed down, while developing economies are moving ahead to lead the world in times to come. So is the case with companies. MNCís are stepping into India to tap the growth potential over here as markets where they are present have saturated or there is little chance to hit a new growth trajectory. As explained in one of our previous articles, in a mature market, mature stage companies are able to maintain their profitability, however, growth rate slows down. As we all know retail is basically a volume game and margins tend to be on the lower side. As a company passes through the life cycle and develops into a huge company, it may witness few basis points expansion in margins owing to economies of scale, better bargaining power, better understanding of the market or well managed inventory levels.

In this article we will take a look at the operating parameters of the two retail companies, Wal-Mart a global retailer and Pantaloon the domestic or Indian Wal-Mart.

Now before moving ahead, we would also like to highlight that retail business is more closely linked to consumers than probably any other business and hence, its success also largely depends upon the retailerís ability to understand the market (consumer mindset, changing tastes and preferences) and ability to satisfy the consumersí demand. In that sense, India is a big challenge given its diversity not only in terms of culture but also geographic and climatic patterns that govern consumption patterns.

The table below highlights operational performance of the above-mentioned companies.

Parameter Units Companies
Pantaloon* Wal-Mart**
Operating parameters
Net Sales (US$ m) 809 344,992
Sales CAGR - (FY04-07) (%) 70.0% 10.4%
Operating margin (%) 6.7% 4.9%
Net margin (%) 3.7% 3.3%
Ratios depicting efficiency
Current ratio (x) 2.7 0.9
Working capital /sales (%) 23.9% -1.5%
RoNW (%) 18.7% 18.3%
RoA (%) 6.3% 7.5%
Debt to equity (x) 0.9 0.2
Valuations
EPS 7.9 2.7
Price to earnings (x) 56.2 20.1
*FY07 **CY07

From the above table, a look at net sales highlights huge difference in scale of operation, which is mainly owing to different stages of business life cycle and reach of operations. Market penetration is not linear, it accelerates initially till a point when saturation level is attended, which is reflected by the CAGR in net sales for the past three years. In the past three years, Pantaloon has grown by 70% compounded annually, while Wal-Mart has grown by 10% during the same period under consideration.

A look at operating margins may force one to conclude that Pantaloon is efficient or better managed company. However, one must note that Wal-Mart is a discount player in true sense and present in a highly competitive market. The giant is foraying into developing and emerging markets to give a push and /or sustain the current growth rate. Further, margin expansion or benefits of economies of scale diminish, as incremental sales are comparatively lower to result in cost savings owing to scale of operation. As mentioned earlier after a saturation point, incremental growth slows down owing to base effect (huge base).

Though Pantaloon is following Wal-Martís model, it is not a discount retailer in the right sense. It is following a mixed model, the Wal-Mart model- discount stores that drive value for customers and the different retail stores (link between manufacturer and consumer) that sell different goods across categories with a mix of private and own brands in order to cater to the different tastes, habits of different consumers. Such a model or a move by the company not only results in gaining a lionís share of a consumerís wallet across age and income group but also supports margins.

As mentioned earlier in B2C business like retail, where retailer is the link between a manufacturer and end consumer, the efficiency of the business or a particular company in that business is justified by its working capital requirements. These companies are not fixed asset intensive and hence efficient working capital management makes the difference and acts as a yardstick to judge soundness of the business. The working capital ratios highlight the efficiency of Wal-Mart and its ability in real terms to deliver the product desired by the consumers. Current ratio below 1 highlights low levels of inventory and a negative working capital ratio indicates that the company works on cash basis, need not borrow funds to pay suppliers. The low gearing also highlights the fact that the company is not dependent on external sources of funds except for capex plans i.e. opening new stores and or funding new units.

While in case of Pantaloon, the current ratio of 2.7 highlights the need to pump in funds to support working capital requirements. Owing to a not so favourable current ratio, the company is dependent on external resources to support working capital requirements. Though the debt to equity ratio is below 1, the same is expected to be on the higher side going forward owing to its huge capex plans to the tune of Rs 40 to Rs 60 bn. The increased dependence on external funds not only exhibits the companyís inability to generate cash to support its operations but also exerts pressure on bottomline with increased finance charges.

While mentioning all this, we would like to again highlight the fact that one is a matured player and the one is in the process of gaining a strong foothold.

While Wal-Mart no doubt is an efficient player and has been able to generate 18% retunes to shareholders, the same has dipped from 21% in CY06 to 18% in CY07 owing to the recessionary situation in US and general slowdown in developed economies, which has impacted consumption in these regions. In order to sustain current growth rate, the giant is foraying into emerging markets, however, that calls for infusion of funds. Further, Asian markets or Indian markets are not like the developed markets in terms of consumption patters and hence, understanding the same is the key to success. This may be the reason behind partnering with domestic players apart from regulatory issues.

As far as valuations are concerned, Pantaloon, because of its presence in a growing market and expectations with regards to better performance in future, trades at a premium to the retail giant Wal-Mart where the high growth in developing economies gets offset by a rather muffled growth in mature economies like the European nations and the US.

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