We would liek to quickly share some Insights into the operating metrics of Hypermarkets and Departmental Stores in India compared to the rest of the world.
Margins for retailers in India tend to be in the region of 8-10%. The notable thing is that there is not much difference between margins of hypermarkets and department stores. In the Western World, hypermarket margins are much lower than department store margins. This is because even in department stores, most merchandise sold is not their own brands.
In India, the brand owner fixes the maximum retail price – MRP so gross margins earned by a department store are the same as a mom-and-pop store for that product.
The overall consumption power in India is low, so it is likely that even if department stores were able to charge more for products, consumers would shop for similar (but cheaper) products elsewhere.
Most retailers in India do not purchase real estate as they lease out a bare shell and spend capex on fitting out the store. Store capex stands at around INR1,500 per sq ft with a similar amount spent on non-store capex (corporate offices, technology,
supply chain, etc).
Moreover, while hypermarket operators in India have similar margins compared to players in other countries, their inventory days are higher. We believe that while there is scope to improve inventory management, sales per square metre need to improve for inventory turnover to be brought in line with international standards.
Investors, as well as retailers themselves, have underestimated the strength of wet markets and the competition from mom-and-pop stores across the country. The result was lower than expected sales at retailers.