Powered by aggressive cost cutting and favourable terms from real estate developers, retailers have posted a healthy increase in operating profit margins.
The growing margins suggest that the belt tightening is paying off. For example, the margins of Pantaloon Retail, the country's largest listed retailer, have gone up from 9.2 per cent in June last year to 10.6 per cent in June 2009 (the latest numbers available).
Others such as the Raheja-owned Shoppers Stop and Tata Group's Trent, Reliance Retail and Spencer's Retail aren't far behind. Operating margin is the percentage of sales left after subtracting production, marketing and other expenses. A healthy operating margin is required for a company to be able to pay for its fixed costs such as interest on debt.
Shoppers Stop's OPM went up to 5 per cent in the first quarter (April-June) of this financial year from 0.2 per cent in the year-ago period. The company's OPM now hovers around 7.5 per cent. In fact, Shoppers turned around handsomely in the first quarter after losses in the preceding quarters.
Trent's margins also went up to 3.1 per cent in the first quarter against 0.7 per cent in the same quarter of the previous financial year, after the company cut costs on raw materials, employees and inventories. The future looks even brighter. For example, international brokerage HSBC has already increased Pantaloon's margin expectations from 10.4-11 per cent in FY 2010 and 10.5-11.5 per cent in FY 2011 on account of better sales per square foot and gross margin expansion.
Kishore Biyani, managing director of Pantaloon Retail says, "We are taking a number of steps to reduce costs in the areas such as office space, employee costs, rents and so on. Consumer sentiment has also picked up, and that helped."
Pantaloon's employee costs have dropped 133 basis points and operating costs 178 basis points year-on-year after the company adopted tight cost control measures over the last one year. Pantaloon has also pared its expansion -- compared with 2.8 million square feet of space it added in 2007-08, it added just 1.8 million sq ft in FY 2009.
Analysts endorse the strategies of retailers to boost profitability and margins. Says Hemant Kalbag of retail consultancy AT Kearney: "Retailers are aligning the costs to business realities of the day. They are becoming smarter about their business -- gross margins, product mix, wastage and so on," says Kalbag.
Adds Hemant Patel of Enam Securities: "Retailers have rationalised warehousing and logistics costs, consolidated real estate requirements. Hence, their costs did not go up as a percentage of sales and profitability improved."
Shoppers Stop Managing Director Govind Shrikhande says costs are down from last year's levels and the extra sales due to improving consumer sentiment are translating into better margins.
Shoppers Stop took drastic steps to cut employee and administrative costs. Its top management took a 15 per cent salary cut, while 300 floor-level staff were not replaced. The company shrank its office space 20 per cent, power bill 12 per cent and corporate office expenses 40 per cent to cut losses.
The company has also changed its depreciation strategy. It will write off its assets in seven to 10 years, depending on the products, instead of three to five years till now, which has contributed to improving profits in the June quarter.
"Sales growth and margin growth are the top-up for our cost-cutting measures,'' says Shrikhande.
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