SM- P<>--f»v - 2-

rates (49% in 2006) over the past 4 years. Thus.Retail presents an enonnous growth opportunityin the coming few years which explains why do--.mestic heavyweights like Reliance, Bharti, AVBGroup, etc as well as global giants like Wal~Mart.Teseo, Carrefour etC. are announcing forays intothe sector. As the industry .landseape gets fiercelycompetitive, there is a lot of uncertainty about howthe sector would shape up in future; a lot of it de-pends on how the players are able to exploit thisopportunity "andimplement right strategies to win

the race.

'The case is p,ep,,9d only fo' ciassmom diSCUssionP",poses and nollo .,ilieila Iha p,ocass

of admin;sl,.-we decision.making or actual decisions at the company. Copyright Arun Kumar Jain@2009.

Pantaloon Retail (India) Ltd.Fighting For New Space As Global

Competition Comes Home

Retail is one oflndi<i's,fastest growing industries. Itis growing at 9% per annum in value terms whichis beaten by only Indonesia in the world. _Indiapresents a retail market of over USS 300 billIon by2016. The industry is highly fragmented presently,with organized retail accounting for only 3% ofthe retail market in value terms. However, this isexpected to go up to 20% in the next 3 years.

Until 200t, retIDl had been largely unorgati•ized. With sustained economic growth and easingregularization: the country witnessed increasedconsumerism, giving a boost to the organized re-tail seCtor which has clocked astounding growth

Case Fourteen

Arun Kumar Jain I -Affiliate professor of Strategy, IB and Corporate Governance, EM StrasbourgSchool of Business (FranCe) and Nidhi Jain, Research Associate CALIC - Germany

Exhibit 1 PRIL's Lines of Business

FoOO-IJEB:s & MusK:

-Beauty

aaAltlSS

india'S economy is on the fulcrum of an everI •••• e:asiuggrowth curve. With positive indicators

-=It 2S a stable 8-9 per cent annual growth, risinghrign exchange reserves of close to US$ 250 bit.ioo.. the Government estimating FDI flow of US$12 billion in next 2-3 fiscal years and a more than35 ptt rent surge in exports, India is likely to be abiiog destination for foreign investment.

The boom in economy has resulted in crea-tion. of jobs in the services sectQr and translatediotD imttased personal disposable incomes. Theimage of organized retail goes hand-in.hand withnueased westernization of Indian culture and a~ shopping experience becoming one of thefuctors in the consumer's psyche.

Pantaloon Retail India Ltd (pRJL) is India'sfirst big country-wide retailer. Headquartered in~mnbai, the company operates through 3.5 mil-lion square feet of retail space and has over 100+stores in 30+ cities in India. The company ownsand manages multiple retail formats catering toa wide cross-section of the Indian society and itswidth and depth of merchandise helps it captureabnost the entire consumption basket of the In-dian consumer. In 1987 it \\1\5 established by Mr.Kishore Biyani to manufacture and sell trousersfor men using Pantaloons as the brand name andchristened as Manz Wear Pvt Ltd. In 1992 it wentpublic and changed its name to Pantaloon Fash-ions (India). The name was again changed toPantaloon Retail (India) Ltd. to reflect more

Pantaloon Retail (India) Ltd .. C-229

closely to its core l?usiness: 200 1 was the year toventure into the hypennarket sector by setting upits Big Bazaar hypennarket in Kolkata.In 2006 itopted for a new identity, bringing all its businessesunder the Future Group.

Pantaloon (PRJL) is attempting to create adominant presence in every retail format and eve-ry product category for every kind of consumerand be present everywhere in India.

PR.IU;Products & Services are shown in Exhibit I.

ENVIRONMENT FORRETAIL IN INDIAPopulation projections of th~ PlaJUlingCommis-sion of India suggest that the share of the workingage population (15-64 years) in total populationwilt grow from the current 59 per cent to about65 per cent, translating into 882 million pairs ofhands by year 2020. According to the Vision 2020document of the Planning Conunission of India,the country will witness continued urbanization.The urban population is expected to rise from 28per cent to 40 per cent oftotal population by 2020.Future growth is likely to be concentrated in andaround 60 to 70 large cities having a population of

SouI'C'6: Euromonilor International from trade press

Exhibit 2 Competitive Position 2006

Existing Retail Players inIndia

Beii:l.ghighly fragmented at the moment, the retailindustry with the top 25 players, accounts for lessthan 2% of the total retailing value sales. Panta-loon with a market share of 0.25% is the marketleader and is way ahead of the other competitors(Exhibit 4). Where firms like Shoppers' Stop oper-ate in Lifestyle Retailing only. Pantaloo~ follows aprudent mix of Lifestyle and Value Retailing.

_ Vah •• RtfailiDg Same S1Ol'eGrowth_ Lifo:stylc Rctailin, SlUDC'SlOrCGrowth

30%

SO'.

40%

Exhibit 3

C-230 Crafting and Executing Strategy

one million or more. This profile of concentratedurbanpopularion .will facilitate multiple-formatofferings by companies in the organized retail in~dustry. On an average, 30-40 million people arejoining the middle class every year, representinghuge consumption spending.

The Government regulations allow 100 percent POI in cash and carry through automaticroute and 51 per cent in single brand. Besides, thefranchise route is available for big operators. Now,the Government also proposes further liberaliza.tion in the retail sector allowing 51 per cent POI in .consumer electronics and sports goods. ----

At present PRIL is the market leader in theorganized retail segment in India. In retail valuesales, it had 0.25% market share in 2006, wellahead of the second placed LG Electronics.Pantaloon Retail India ltd also had the most ex-pansive spread in terms of presence across differentfonnats and/or channels (See Annexure I and 2).

i•, Exhibit 4 Retailing Company Shares (% Value 2004-00)

Source: Euromanilor International Irom trade press.

PantaloonRetail (India) ltd. C~2J I

':"

Pantaloon is placed comfortably in the retailmarket vis-a-vis the existing players, largely be~cause of the scale and the multiple fannars thatit O~rates in. The threat of the new entrantsposes (he biggest challenge to Pantaloon. AI.though, the industry is growing and at the sametime the market is expanding, when a new play_er like Reliance Retail (RR) enters the industry,it will first eat up into Pantaloon's market share(Exhibit 5). RR has been expanding rapidly andthen there -are other big players such as Wal-Man, reseot Carrefour, expected to enter asand when the government pOlicy eases FOr in

Exhibit 5 Pantaloon VsReliance

Retail Wal-Mart has already collaborated withBhatti to open a chain of stores, .

A comparison between Pantaloon and Reli_ance Retail reveals the kind of competition Panta-loon will be 'up against within the next two years(Exhibit 5-6).. Traditionally, the buyer-supplierrelatioru;bip in India has been in favour of sup.pliers. But the emergence of organized retail hastilted power in favor of retailers. For example, aretailer like Wal-Mari with sales of Over$350 bil.lion sells more P&G Products than the entire salesof the finn in Japan. This is wba[ gives W~I-Mart

C-232 Crafting and Executing.Strategy

;~}.i6,392,1 !:6,360.4 ;';~5.536.3r. .,::..2,824.1.':~

31i '£.+- t- "

. 3.2 .~.~. "::'--7.3 ~.

212 ..

Employcoe Strength(in lalr.b)

, -...,16.2

No.ofSlores(x 100)

Indian economy has been growing at a healthy rate .for the last few years. This has led to the emer-gence of a new urban class. The profile of theIndian shoppers has been changing over the

Changing Profile of IndianCustomers

Targe! Turnover by2010 (0000 Cr)

• Investment OuIlay('000 Cr)

D Reliance retail • PantalOOTlmail

18

16

I'12

10

8,4

2

o

Source: Official statislics, Trade associalions. Trade press, Company research, Tra<kt interviews, Euromonilor InternaliOOal

estlmales '

Exhibit 7 Sales in Retailing by'Sector (Rs bn): Value 2001-2006

Source: Retailing Fast Forward:http.'lIindiaaidcshQw.com/llM61es!74,hrm

its teeth and enables it to dictate terms to its sup-pliers. In India, Pantaloon has been able to do thesame by achieving the size and the scale. Not longago, it asked suppliers like P&G, Marico, etc., toreduce prices by 5% in its stores. With more bigplayers commg into the sector, the supplier bar-gaining power will further diminish.

Exhibit 6 Pantaloon Vs Reliance

Pantaloon Retail (India) Ltd. C-233

Exhibit 8 Size of Market in Different Categories fu India

Bhatti and Aditya BirJa Retail among the domesticplayers and the likes ofWal-Mart, Tesco,who posethe greatest challenge to Pantaloon. To maintainit's current level of growth and profitability, Panta-loon would need to either match them in scale orfoUowa strategy where it vo'Ould position itself asa niche player. . '.

In view of the opportunities that the industryoffers, all the retail finDs in India are looking atexpansio~ especially. into tier II 'and tier III cit-ies where the customer base is largely. lUltapped.Also, firms like Reliance and Pantaloon are tryingto acquire smaller but well established brands likeSubhiksha and Nilgiris, This might lead to a con-solidation of the retail industry,

While political compulsions have kept 1000/0FDI away, global giants have taken the N' route.Wal-Mart haSannounced its entry through a tie-upwith Bhatti and Woolworth has entered into a N

Futnre Prospects for PantaloonBased on the above analysis, the short term pros-pects of Pantaloon would not be affected as theexisting players do not pose a significant threat toit.But it is the new entrants like Reliance Retail,

The 5350 billion Con~umptior6penchngthe$lngle bi!l':lWbusllll'» .QPI)ortunit)in rl'ld~ and" diYldedin[Qsomekeycat~1ed by food. fashionandno~ P'"oouet

years. Most of the Pantaloon's retail fonnats aretu&ening the middle class segment of the iridiansociety. The disposable income in this segmenthas been increasing at a fast pace. The customerstoday are more aware and they are dictating theterms at the retail stores.

This segment would comprise the Non~store~based Retailers .and etai/ers. In value terms, thisqux:nt is very small at present (see Exhibit 7),-.:I does not pose a big threat to the fonnalS in..-nPantaloon is operating at the moment. .

2 'Pantaloon; Reliance set 10 forayintowholesale trade'Source: http://economictimes.indialimes.comiarticteshowf1486521.ems

.C-234 Crafting and Executing Suategy

with Tatas.Tesco is also finalizing itsN partner. In-dian organized retail is thos'well on track to becomeaUSD 35bn opportunity on the back of USD25bnof iaveslnlents ~iitedup over the next fot!r yeats,

Also; companies'realIze that to remain com-petitive,.;they' will need to bring down the totaloperation costs. For this, t}1ecompanies are tryingto enhance their supply 'Chain efficienCy.Compa-nies ~re also experimenting w'ith'different formatsin'o!der~,tij:~ a I~ger sha:feofth~ co~ers'waneL ~ile ;hypqtrij!rkets continue to ~ the key.f~rina~ playerS'are F$lpidlyramping .uP their reachin Segirients like jeWelry~home solutions, specialtywear. electronics. beauty and healthcarc, airpOrtretailing, catalogue reiailhlg, et;c.. : " .

Pantaloon Retail Limited operates bOth in thevalue ~tailing in4ustry and the lifestyle retailingindustry; The .value retailing industry traditionallyconsisted of the following players operating in thevalue chain-supplier, manufacturer" distributor,retailer and the customer.

The main difference between the traditionalIndian value chain and the value chain in devel-oped cOWltries is the presence of the distribu-tor (Exhibit 9). Retailing in the United States islargely consolidated, with large chains buyingconsumer goods from most manufacturers, Thisconsolidation gives retailers sufficient scale sothat the introduction of an intermediary such asa distributor does little to reduce costs and mayactually increase costs because of an additioni\1transaction. In contrast, India has millions of smallretailers. The small size of Indian outlets limits theamount of inventory they can hold, thus requiring

Exhibit 9 Traditional Retail Value Chain

frequent replenishment. The only way for a manu.facturcr to keep transportation costs low is to bringfull truckloads of product close to the market andthen distribute locally. Distributors in India alsohandle collections, because their cost of collectionis significantly lower than the cost of manufactur-ers collecting directly from retailers.

However, with the development of organisedretail in India, retailers have achieved sufficientscale to deal directly with manufacturers. So thecurrent industry level value chain for the organ-ized retail industry in India is (Exhibit 10):

Modern.retail formats are trying to build upefficiencies in the sourcing system to cut costsdrastically by eliminating the distributor in thesystem. Large distributors typically claim a mar-gin of 5-6% and the savings from eliminating thedistributor will help lift margins for the retailers.

Pantaloon Retail is focusing its resources andenergies in expanding its chain of retail stores.(Le. on the outbound logistics and customer serv.ice part of the value chain) It plans to invest aboutRs 40,OOOmin 2008 and expand its different retailchains as a part of a strategy to touch a top lineof Rs 3oo.000m by 20JO.I1. It will increase thenumber of outlets of Big Bazaar from 50 to 100bynext year. Pantaloon Retail is also chalking out amassive foray into the wholesale agri-eommoditiesbusiness trade in India. with a business-tO"'business(B2B) model similar to that ofWal.Mart's Sam'sClub across smaller towns and cities.2 The move ispart of a strategy to strengthen its back.end sup-ply-chain and sourcing capabilities to reduce costsand sharply scale up business volumes.

Kdn"bit 10 Organized Retail Value Chain

Raail is an industry which operates mainly on, las and low cost derived from supply chain

ditiucies, a concept which was pioneered by1IW-Mart and adopted by other retailers around.• v.orid to ensure survivaL Sourcing, storage,~aneul: of goods can be a key differentiator and,...,1•••lti ihaJ:'sthe reason why Reliance. with plansm e,"e5t Rs.80bn in supply chain is well poised_ dris fronl Working capital efficiencies can be-mired through sophisticated technology and.• can be a big source of competitive advantage.Far example, Shopper's Stop with its IDA software~'S an advantage over its peers.

KEY PERFORMANCEINDICATORS IN RETAILCustomer service is the most critical area to main.min a sustainable competitive advantage in the re.tail space. This is because one of the most criticalsuccess factors in this business is providing a su-perior shopping experience to the customers. Thiseotails recruiting and training of professionals andprudent use of technology.

~. Salesperson's time spent selling (percentage)• Training hours per employee• Customer re-visits• Cross-selling potential• Point-or-sale service• Customer complaints as a percentage of sales• IT CostIn order to solicit customers away from the con-venience of the next door Kirana Store, Pantaloonneeds to provide the customers with superior value

Pantaloon Retail (India) Ltd. C-135

vis-a.-vis quality and price. And to be able to pro-vide quality product at low price, It will need to eD-hance its operating efficiency.This is where supplychain efficiency is as critical as it constitutes themaximum operating cost to a retail. form. Let ustake the example ofWal-Mart. Wal-Mart has bcenable to provide its customer with the lowest priceon quality products because of its extremely ef-ficient supple chain network. According to a 2006study, Wal-Mart's distribution costs account for3% of the revenue as against the industry averageof 6%. This enables Wal-Mart to offer its custom-ers the best price and at the same time earn a bet-ter profit margin. Pantaloon will need to replicatesuch model to be competitive as Indian customersare highly price sensitive. This partly explains the •..success of its Big Bazaar chains.

Supply Chain Efficiencyit is difficult to quantify supply chain efficiency asit involves many players and a number of businessprocesses. Backward integration is all the moreimportant for the Indian retailers because Indianconsumers are very much price-sensitive and ef-ficient backward integration helps to cut the costdrastically. Two points are emphasized here while

ranking Pantaloon and Reliance higher than theother players-

• Pantaloon is integrated backwards in the ap-

parel business, with its group company, Panta-loon lndustries--supplying fabric. This enablesit to have some control over the cost and qualityof its apparel. It markets most of its productsunder private labels, thus offering products that

Pantaloon Retail (India) Ltd. C-231

ap-andllil-

ish- -

Annexure }; Income Statement

(Rs in Crore)

f..:~a?:~~i~.t:~~r.i:;;.:LTh.~~ti6:~~~~~_qua;i)4:h~~~)3'~~~~~:::su~_~?:~;r, INCOME: ,", - ... ' • '.. , - -,' ,,. ,~". .•.•. ,.-..." ,,-.; ,~,:~

6.85..... -. "1.-78 .,

213.91

.5.34..19.82

4.35

39.76

2.26

285.44

23.97

12.22

11.75

4.22

7.53

0.4

0.1

7.03

o'7.03

.1.7

19.56

o24.89.oo.4.06

99.13

..

444.83

3.4_ 28?.29 .. '.~'

,.;.,..,4.58.,:, ~..-,. ~'.,..~""'-441.43~ ..• ','>('280.71 .. -

';..' " ")"-," , ',," ',,.., "

1.1 . 4..97. "-:.24.83~ ..•~ 23.73 .

467.36 309.41

1.13

11.41

--0.64--

12.05

o24.89

2.05

34.25- 1.8210

6.15

;.<~101.97

328.32

~7.94';.,16.a-: .;..16.87

54.8 •

3.24

•.. 427.97

39.39

19.41

19.98

6.35

13.63

1.09

658.31

3.36

654.95 "'

29.19 .'

685.92

4672

12.08

27.52

27_11

88.995.43

628.33

57.59

24.39

33.2

8.79

24.41

1.52

3.11

-.. 19.78

10.02'. - 19.76

o34.25

15.:9S .

38.08

2.87

15

10..14

49.58

1,085.23.

0.28 "J,::"1,084.95.

,,' ;

127.69

1,219.49

828

21.95

SO.65 ',.

SS.41

158.16

9681,124.85

94.64

28.19

68.45

13.33

53.12

7.56

7.01

38.55

0.82

37.73

o38.08

10.12

66.51

5.52517.17

99.33

1,477.58

37.41 ;'

112.0864.92

321.82

J9.07

2.052.88

14724

34.53

112.71

20.82

91.89

12.86

f4.87

64.16

0.73

63.43

o66.51

14.08

116.59

6.72

2523.52

196.02

1,960.76

o1,960.76

5.2 •

'2$4.1S'"

2.200.12

Gross Profit

Depl'ecialion

Profrt Before Tax

Tax

Deferred Tax

Reported Net Profit

Extraordinary Items

Adjusted Net Profit

Adjst. below Net Profit

P & l Balance brought forward

Appropriations

P & L Balance carried down

Dividend

Equity Dividend %

Earnings Per Share-Unrt Curr

Book Value-Unit CUrT

Sales TurnoverExcise Duty

Net salesOther Income

Stad<. 'Adjustments

Total Income

EXPENDITURE:

Raw Materials

Power & Fuel Cosl

Employee CostOther Manufacturing Expenses

Selling and Administration Expenses

Miscellaneous Expenses

Total Expenditure

Operating Profit

Interest

OD-of

In

on~c

""ny

,on

try,on

~orthe

tail

Source: CapitalirlEt Plus.

C~236 Crafting and Executing Strategy

cost 20-25 percent lower than branded items,owing to an absence of advertising and otherrelated expenses.

• In Reliance Fresh, replenishments are donetwice a day, mainly from their own distributioncenters. It is also investing in IT infrastructurefor better inventory management.

• Vishal Retail Ltd. has a factory in Gurgaon.Haryana. This factory has more than 700 im~ported machines that have a capacity to manu~facture ISOOOO pieces a month. The factoryoccupies. 80000 square feet of covered space.

But the limitation of this assumption is that, Pan-taloon is a multi-fonnat retail chain. Also, Vishaland Spencer'S are going for more than one format.So, some additional information is incorporatedwhi~~.ril.tingthe players.

• lndivison-a private equity fund promoted byFuture Capital-a subsidiary of Pantaloon Re-tail has invested Rs. 500 mn in fitness, beautyand health finn Vandana Luthra Curls andCurves (VLCC). The funds would help thecompany to have 300 beauty and wellness cen-tres across India.

• Pantaloon is in talks to form N with BurgerKing of USA to open fast food restaurants inthe country. The N would be on a franchiseemodel where- Pantaloon Retail would be themaster franchise of Burger King in 1Ji.dia.

•. Pan .lndia Food Solutions Pvt. Ltd. a JV com-pany between Pantaloon Retail and Blue Foodsis planning to launch a chain of restaurants UD-

der the brand name "Yatra", the company plansto have a chain of 15 such restaurants acrossIndia.''':

• Reliance Retail has roped in Celebrity Fashionto manufacture economy range of men's cloth

wear under the brand name "Spirit". The ap-parel range would consist of shirts, trousers andT-shirts. The brand would be exclusively avail.able for Reliance Retail outlets.

• Vishal Retail Ltd. sells garments, home furnish.ings, foods and household items.

• Spencer's product range includes-

• Food items• Personal Care and Baby Care Products• Home Care Products• Office and Home Stationery• Apparel and Fashion Accessories• Electrical and Electronics• Music, Toys and other Entertainment

Case Guideline Questions

Q. I (a) How is the retail industry evolving iIndia? Should the players be proactive {reactive to the evolutionary phases ofd:different formats?

(b) What are the different fonnats for retaand how do they differ from each other?

Q,2 Identify critical success factors for Pantalo((India) Ltd.

Q. 3 Draw a strategic group map for retail industfocused on the key parameters and positilPantaloon Retail (India) Ltd. on this map.

Q. 4 Analyze the company's internal resourcand construct an audit of where the compa:should focus in the emerging environment

Q.5 What could be the growth objectives ofPataloon? In your opinion, the emergencelarge retailers would affect the Pantaloin what way? What could be the strate,choices for the company?

C-238 Crafting and Executing Strategy

Annexure 2: Key Financials

(Rs in Crore)""" 02(121'. 285.29~;~

23.97. ~-t