Kishore Biyani has yet to crack one segment of the business: electronics retailing. eZone has been a drag on his Future Group and India’s largest retailer last month decided to hive off the business and look for a strategic partner.
Biyani also decided to shrink eZone outlets to almost one-tenth their current size, build centralised inventory and boost online sales to revive the business.
"Margins are low, costs are high as we are present in malls and prime locations," says Biyani. eZone has to provide display and store inventory, and needs a warehouse for every store. "This calls for a relook at the model," he says.
Biyani is not the only one struggling to fix tech retailing.
Caught between low retailers’ cuts and high inventory costs and rentals, other big players such as Videocon’s Next Retail and Reliance Digital too are reducing shop sizes, expanding into smaller cities, negotiating higher margins with brands, integrating online operations with retail outlets and/or even offering after-sales services to improve profitability.
So what’s ailing big electronics retailers?
The retailer’s cut, or margins, on electronics goods are much lower than, say, fashion apparel and packed food (see graphic).
Retailers such as eZone and Next are negotiating higher margins with brands, but the bargaining power favours manufacturers because modern retail accounts for only 6% of total electronics sales.
A senior executive of a Korean brand says it is not possible to offer higher margins because manufacturers themselves operate on low margins of around 2-3%. "In the US, the margins offered to retailers like Wal-Mart and Best Buy may be more, but they also take care of product installation and after-sales service which is the responsibility of the manufacturers in India," the executive says on condition of anonymity. Korean brands LG and Samsung account for half of India’s 35,000-crore consumer electronics market.
COSTS GO OUT OF CONTROL
If their margins are wafer-thin, big tech retailers’ expenses are sky high. They are present in prime locations and mostly have large-format shops.
The segment is driven by technology and trends, which force retailers to clear out stock faster and offer discounts on older models and pieces used for display.
Inventory-holding costs are higher due to big size and fragile nature of electronics and durables. They need more staff because consumer engagement is higher and employees need to be educated to explain the latest technologies to customers. Power consumption is huge because all products are wired. Then there is marketing expense.
"National retail chains are barely managing to break even and sometimes even selling at a loss to liquidate excess inventory," says the chief of a durable maker.
But the person blames retail chains’ price undercutting and excessive spends for this. "Their overheads on manpower, ads and price promotions are in excess of 12%, on an average. Dealer-driven stores or even regional chains have overheads of only 3-4%."
Industry experts say national chains expanded aggressively without understanding the market nuances.
"Three years ago, when large companies entered the electronics retail segment we wondered how they would manage costs, particularly with a top-heavy structure," says Nilesh Gupta, managing partner at Vijay Sales, a 1, 250-crore family-run electronics retailer that entered the business 45 years ago and has presence in Maharashtra, Gujarat and New Delhi.
BA Kodandarama Setty, CMD of Chennai-based Vivek Ltd, says big retailers were in a hurry to build scale. "Indian retailers want to do in five years what someone has done in 50 years," he says. "Retail takes time to builda¦Even Wal-Mart took 60 years to become the world’s largest."
The 370-crore Viveks operated with just three stores in Chennai for 46 years. And in the last two years, it expanded to 48 outlets across Tamil Nadu and Bangalore.
LEARN TO RESTRAIN
So what can they do? The trick is to keep a tight leash on costs.
"One mistake turns profits into losses," says Gupta of Vijay Sales. "For instance, if I estimated a particular product to go out of stock in 30 days and it does not, it will result in a loss."
That is because the retailer will have to offer big discounts to clear out stocks for newer products.
Experts say big retailers need to cut their expenses such as rentals and salaries, increase volumes and manage inventories better.
"Large chains need to adopt a clustered approach, whereby they would treat each city as an independent market and flood it with stores every few kilometres," says Retailers Association of India CEO Kumar Rajagopalan. "That’s what local retailers have done and the national guys failed."
Big chains are at it.
eZone will shut 8-9 stores and downsize stores from 15,000 sq ft to around 2,000 sq ft.
The company, which posted a loss of 12 crore in its earnings before interest, tax, depreciation and amortisation for the October-December quarter, will also revive online business and call it New Zone.
"We should be able to rope in a strategic partner and launch New Zone by June-July," says Future Group CEO Biyani. "We may divest some stake to the partner."
eZone plans to move into the franchise model to grow business. Its retail outlets will double up as payment and delivery points for Internet orders. And it will build a centralised inventory to stop having a warehouse for every store.
Videocon’s Next has opened 80 franchisee stores in the last six months and streamlined supply chain management. "Efficiency of operations is the key to break even," Next Retail Director Saurabh Dhoot says.
Next plans to focus on the top 500 towns over the next three years when it will double its number of stores from 500 now. "We would be dominantly present in smaller markets," Dhoot says.
Expansion in smaller towns and cities, where the demand is on the rise and cost of operations is less, is something most retailers plan.
Reliance Digital says it will expand to Ludhiana and Jaipur and improve customer service and experience to drive sales. Besides installing durables for consumers at their homes, the firm undertakes maintenance of all durables at a consumer’s home, no matter from where they were bought.
"This could eventually turn out to be a differentiator for Reliance Digital," a company official says.
Multi-category retailer Spencer’s Retail has reduced the space allocated to electronics from 15% to 10% in its hypermarkets. "It is important for us to carry the electronics category as we are in the hypermarket business," says Spencer’s Retail operations and merchandising chief Mohit Kampani.
A section of the industry says tough operating conditions could trigger a consolidation in electronics retailing. "A few of them (big retailers) may exit the business while others may remain without a strong focus but to sustain their hypermarket operations," says Gupta of Vijay Sales.
Durable makers say big retailers have a space in the premium segment. They account for 14% of flat televisions LED and LCD sold and 12-15% of 350-litre and above frost-free refrigerators, front-loading washing machines, convection microwaves and smart phones.
"This shows top-end consumers are buying more from modern retail," says LG Electronics India sales head Amitabh Tiwari. "The retailers can then develop this consumer segment in the metros rather than selling at desperate prices."
Insiders say big players are here to stay. It’s a matter of time before they cut costs, improve efficiency and build scale. Once they are big enough, then they can bargain for higher margins.
Source : Economic Times