Consolidation likely strategy, but not because sector isn’t expanding: Experts

Consolidation is the way forward for the Indian retail industry, but not through distress sale, say experts and analysts tracking the sector.

The consolidation talk has gained momentum following the recent sale of Vishal Retail to the Shriram Group and private equity firm TPG. However, Vishal is selling at Rs 70 crore, much lower than the valuation done two years before. This was not a measure of the retail industry, said experts. The Vishal sale was triggered by its extremely fast expansion, without having deep pockets, an analyst said.

N V Sivakumar, leader, retail practice, PricewaterhouseCoopers India, told Business Standard: “Transactions in the retail sector send positive signals to the marketplace in terms of investor confidence in the long-term potential of the sector, its ability to generate robust returns and its importance as a provider of value-for-money products for consumers, to name a few.” Adding, “Consolidation will continue to occur as the retail sector evolves”.

While noting some in the retail industry could be looking at consolidation, KPMG executive director (retail) Ramesh Srinivas said funding was a concern. “One could see some amount of JVs (joint ventures) and acquisitions in about a year or so,” he said.

Market growing
Another analyst, who did not want to be named, argued “More sale would happen only if assets are available”. He said “there is interest in retail assets”, but mostly private equity funds, rather than existing retailers, would look at acquiring potential brands. “Setting up a retail business works out cheaper than acquiring one, unless there’s a distress sale,” he added.

Purnendu Kumar, vice president (retail & consumer products), Technopak Advisors, also cited opportunities in the retail industry, in terms of consolidation/acquisition, but added that “India at this stage was not into distress sale”. “Distress assets are available only when the market becomes mature. Once you stop growing, even revenue ceases to grow,” Kumar said. But India was in a growth phase, he said.

According to Technopak’s Kumar, Vishal Retail going belly-up was not an economic slowdown effect. Discounting stores (the model that Vishal followed) have mostly done well during the slowdown, as people were not willing to shell out much, he said. The problem with Vishal was its mounting debt as it expanded fast into smaller towns and cities. “Either you have deep pockets or you move slow,” he added.

KPMG’s Srinivas reasoned that Vishal’s slide started because of the economic slowdown, and rapid expansion of its stores made things worse. Relatively low knowledge of the retail industry was another reason he gave for what it was reduced to doing.

PwC’s Sivakumar termed India “one of the most attractive retail destinations in the world given its market size, low organised retail penetration rate, large and aspirational group of middle-class consumers and young consumers, to name a few”. To succeed in the Indian retail sector, he said, “Participants need to have deep pockets and an understanding that retail is a long-term game”.

On the entry of global retailers, Sivakumar said, “most are keen to enter the Indian retail market; most will do so once the sector is fully liberalised”. He, too, said the market was rapidly evolving and had not reached the level of maturity that characterised retail markets in other countries.

“Retailers are assessing expansion and growth opportunities and are in the process of launching new products ( private labels), entering new cities, improving customer service. Consolidation will continue to occur as the retail sector evolves.”

Source: Business Standard

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