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Realistic retail and more... - Views on News from Equitymaster
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  • Aug 28, 2008

    Realistic retail and more...

    New-found realism
    "I was an eternal optimist; now I have become a realist" says Mr. Kishore Biyani, the founder of one of India's largest retailing company - Pantaloon Retail. The retailing sector that was until a few months back shirking off concerns over economic slowdown, inflation and rising operating costs has finally, in Mr Biyani's own words, acknowledged the 'miscalculations'. While global players like Wal-Mart have deferred their plans of opening shops in India until 2009, the homegrown players themselves have scaled down some of their expansion plans.

    However, surprisingly the Index of Industrial Production (IIP) growth that has nearly halved to 5.2% in FY08 as compared to last year, showed that consumer durables, the mainstay of the retail sector, grew by 8.5% YoY (9% YoY in FY07). Nonetheless, the retail sector that currently clocks US$ 350 bn in sales a year - a figure that was expected to double in the next seven years - has some rethinking to do to improve dwindling margins. Mr. Biyani opines rising input prices have driven up construction costs of shopping malls by as much as 40% in last two years. In an interview to the The Financial Times, Mr. Biyani has expressed concerns over the steep property prices in Delhi and Mumbai that are among the highest in Asia, despite poor infrastructure and uneven quality of properties.

    It is therefore no surprise that the smaller retail players are tying up with global giants like Wal-Mart and Tesco to cash in on their experience and well-knit supply chains. However, for the same to be replicated here will require a lot of careful planning.

    Some relief for Indian textile companies...
    In the past few months, amidst poor sales volumes, falling realisations and wrong calls on their forward contracts, Indian textile companies were also bearing the brunt of steep cotton and power costs, which have risen by nearly 40% YoY. Despite being the second-largest producer of cotton in the world, Indian companies have to pay a higher price to compete with the global demand. However, the global slowdown had in some ways been a boon to them as lower global demand coupled with sufficient rainfall and improved yields are expected to drive the prices lower.

    The Cotton Corporation of India, the country's biggest buyer of the fiber, projects that production of cotton may be more than 31.5 m bales in the current harvest year (China is expected to produce 35.5 m bales). U.K.- based Cotlook has projected the world production of cotton to touch 24 m tons, 78,000 tons higher than expected, as rains improved prospects of higher yield in India.

    ...while those in Brazil see red
    Brazil, a member nation of BRIC countries that is also one of the fastest growing developing nation and relies heavily on its cheap exports due to the lower cost of labour, is discontented with the US' unfair and partial policies. Brazil plans to ask the World Trade Organization (WTO) to impose punitive sanctions worth billions of dollars against the US for handing out illegal cotton subsidies. The country has asked the WTO for approval to impose up to US$ 4 bn in annual sanctions against American goods and services as it accused the US of offering cotton subsidies which give US cotton farmers an unfair advantage when exporting billions of dollars worth of the crop worldwide.

    Brazil (the fifth largest producer of cotton) and several West African cotton-producing countries have long claimed their farmers suffer because of the payments to US cotton growers that ensure artificially high production and export levels, hurting Brazilian and African producers. The Brazilian government claims the US retained its place as the world's third-largest cotton grower and biggest exporter by paying out US$ 12.5 bn in government subsidies to American farmers between FY99 and FY03.



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