The Return of Brick and Mortar Retail

THE ₹2.6 LAKH CRORE Reliance Retail, spread over 65 million sq.ft. with multiple formats, is inarguably India’s largest retailer. However, its best-performing stores are neither in Delhi, Mumbai, Chennai or Bengaluru. Strange as it may sound, they are in Jalpaiguri in West Bengal and Pasighat in Arunachal Pradesh (both are Reliance Trends stores). The two stores generate upwards of ₹4 crore in revenue per month. The 8,000-10,000 sq.ft. stores, the only fashion destinations within 100 km radius, attract thousands of consumers from villages and towns in and around. In fact, the closest city to Pasighat is Guwahati, an 8-9 hour bus ride away!

These stores have busted the belief that organised retail is best suited for the top 20 cities. While Reliance is the front runner with a footprint in over 7,000 towns and cities, the likes of Trent Retail, Shoppers Stop, Lifestyle, Aditya Birla Fashion Retail, Arvind Fashion, Raymond, Spencer’s Retail and V-Mart are also spreading their wings deep and wide. The current playbook of the $110 billion organised retail industry — expected to touch $230 billion by 2030, according to Deloitte India’s Future of Retail report — has one defining principle — to be wherever the consumer is.

Rewind to Covid-hit 2020, every retailer was hurriedly preparing its online strategy to stay afloat, and many believed it to be the end of the road for brick and mortar. It was also the time when the country’s first organised retail chain, Future Group (with formats such as Big Bazaar, FBB and Central), went bankrupt. Three years hence, e-commerce has played a huge role in increasing consumption (with a consumer base of 220 million), but brick and mortar is back with a bang, too. In fact, retailers are integrating their offline and online channels to provide the best of both worlds to consumers.

“India is one of the largest and fastest-growing consumer markets in the world. We have to be present at every touch-point and in every channel to cater to our consumers,” says V. Subramaniam, MD, Reliance Retail, which opens 2-3 stores per day on an average across formats.

But then, Reliance has always eyed scale. Even in FY20, it clocked a revenue of ₹1.30 lakh crore, spread across 22 million sq.ft. of retail space. It has since almost trebled the retail space to 65 million sq.ft. The ₹8,799-crore Trent Retail is present in 90 cities and towns with 580 stores (Westside, Zudio and other lifestyle concepts). In FY20, its revenues were less than half at ₹3,056 crore and the company had around 330 stores. Similarly, the ₹12,418 crore Aditya Birla Fashion Retail (ABFRL) has 3,977 stores (Pantaloon, Style Up, Louis Philippe, Van Heusen, Allen Solly and Peter England) across 10.8 million sq.ft. of retail space. In FY20, ABFRL was at ₹8,788 crore with 8.1 million sq.ft. of retail space.

Shoppers Stop, with 4 million sq.ft., is present in 52 cities with 98 departmental stores, 8 Home Stop stores and 25 airport entrances. The company clocked a revenue of ₹5,066 crore in FY23. Its competitor Lifestyle Retail has 450 Max stores (its value format which is mostly in Tier-II and III markets) and 100 Lifestyle stores. Kolkata-headquartered ₹2,453 crore Spencer’s Retail has 152 stores across 35 cities. It also has 36 Nature’s Basket stores, its premium grocery retail format. The food and grocery chain recently launched its value hypermarket format to expand beyond 35 cities.

The past year, particularly, has been among the best for all these retailers, both in terms of growth and profitability. While Reliance Retail’s revenue grew 54% year-on-year in FY23, Trent registered an 83% growth. ABFRL’s revenue grew 53%, while Shoppers Stop grew 60%. Lifestyle Retail closed the fiscal with ₹12,000 crore in revenue, 50% more than FY22. The exponential growth in FY23 was mainly due to revenge buying post pandemic.

However, the momentum has slowed down. “In Q1-Q2 of FY23, there was 50-80% growth, but that was the impact of Covid-19. The growth started dipping from Q3 onwards and in Q4 it slowed down. There is normalisation,” explains Govind Shrikhande, retail advisor and former MD, Shoppers Stop.

“Unlike earlier, when consumers would go to a physical store for everything, now they buy from ecommerce and quick commerce too. However, when they do large purchases, they still prefer going to a physical store,” says Shashwat Goenka, sector head, retail and FMCG, RPSG, and chairman, Spencer’s Retail.

Multiple Formats

Even as offline retail continues to expand, Deloitte believes online retail is expected to be 2.5 times ($325 billion by 2030) more than physical retail. But retailers are aggressively growing their physical presence, not just opening stores, but also experimenting with formats.

Take a stroll in Mumbai’s sprawling Phoenix Market City Mall, and the number of ethnic wear brands would confuse even a shopaholic. Unlike earlier, when ethnic wear used to be a small part of a large format department store, today, there are numerous standalone ethnic wear stores — Ethnix by Raymonds, ABFRL’s Tasva and Marigold Lane to Avantra By Reliance. ABFRL has acquired TCNS Clothing Company, which owns a host of women’s ethnic brands such as W, Aurelia, Wishful, Folksong and Elleven. “Indians are holding their Indianness in high regard. There is a huge demand for ethnic wear. We have 75 Ethnix stores since our launch in October last year. The plan is to have another 150-160 in 8-9 months,” says Sunil Kataria, CEO, lifestyle business, Raymond.

The same goes with categories such as lingerie and beauty. The Indian consumer had just about gotten used to shopping for beauty online, and now she has the opportunity to not just buy beauty products at stores but also get makeovers. Options include Shoppers Stop’s SS Beauty and Reliance’s Tira and Nykaa. While Tira is Reliance’s premium beauty offering (and would be limited to top 20 cities), the company is also planning to launch Blush Lace, a beauty-cum-lingerie format targeted at the masses.

Trent, meanwhile, has opened more Zudio (its value format) stores than its flagship Westside in FY22. Zudio is now present even in Prayagraj and Ranchi. ABFRL is also making inroads into these markets with value format Style Up. It has signed a licensing deal with U.S.-based Authentic Brands Group to retail Reebok in India.

While Trends is Reliance’s ubiquitous mass fashion format, it also has Azorte, its premium high street and contemporary offering. The company recently acquired Hyderabad-based sari retail chain Kalaniketan.

The last one year has also seen big retailers pick up stakes in designer brands. ABFRL has bought strategic stakes in designers such as Sabyasachi Mukherjee, Masaba Gupta and Tarun Tahiliani, while Reliance has picked up stakes in the businesses of Manish Malhotra, Raghavendra Rathore and Abu Jani Sandeep Khosla. “There is a distinct market for designer brands. The unique consumer would want to buy an eponymous label since it reciprocates his or her identity,” says Reliance’s Subramaniam. ABFRL has ventured into multi-brand luxury retail with the licence to set up stores of French luxury retailer, Lafyette in India.

Retailers are even looking at adjacencies. ABFRL, for instance, has ventured into lingerie with Van Heusen, while footwear is a ₹200 crore business for Arvind Fashions’ US Polo.

“Our business is modelled on a multi-channel, multi-format strategy that enables us to serve every consumer need across the country. The share of organised retail is very low across categories in India. Food, particularly, lags with penetration of around 5%, compared to apparel and electronics with 20-25%. There is a lot of scope to grow across segments,” explains Reliance’s Subramaniam. Its consumer durable brand, Reliance Digital, has 7,000 stores across the country.

“Retailers have expanded their target audience, while the consumer has also upgraded,” adds Rishav Jain, MD, Alvarez and Marsal. “The consumer is getting tuned to shop in an organised store even in smaller towns. He/she wants an ambience with larger width and offering. Format transition is happening all across, be it product category or price-point,” adds Jain.

The Consumer

The proliferation of organised retail beyond the conventional 20-30 cities is because of increasing consumer appetite. According to the Deloitte report, there has been a significant rise in per-capita income in India, from around $1,400 in 2014 to $2,200 in 2022. The economic growth has led to the emergence of a rising middle class, projected to expand by 110 million households (from 190 million) between 2021 and 2030.

And it is the Tier-II and III cities that are propelling the next phase of growth in India’s retail sector, fuelled by shifting consumption patterns and increased purchasing power. The growing appetite for branded goods and quality retail infrastructure has led retailers to expand their presence beyond Tier-1 cities.

Trent Retail, for instance, has launched its premium ethnic brand, Samoh, in Lucknow, while Arvind Fashions plans to take its premium brands US Polo, Tommy Hilfiger, Calvin Klein and Arrow into Tier-II and III cities. The plan is to open at least 200 stores every year in metros as well as smaller markets. “There is a convergence of demand across markets. What sells in big cities sells in smaller towns, too. It’s a misconception that different products sell in smaller towns. One needs to give consumers a uniform, consistent experience across the country,” says Shailesh Chaturvedi, MD and CEO, Arvind Fashions.

“There is a lot of consolidation that has been happening in the retail industry, but that is because of the journey where the industry is in. On one one hand you have the national players which are becoming bigger, but there are a lot of regional players. There is a space for them, too,” says Shashwat.

“We will see more retail growth in India. The demography is undergoing a shift, characterised by a surge in the urban young, led by millennials and Gen Zs,” explains Anand Ramanathan, partner, Deloitte India.

Profit Matters

Big retailers are, indeed, spreading their wings, but more cautiously. Profitability of each store has become a crucial factor for expansion. “I want to open more stores, but they should also get me the right sales per square feet,” explains Kataria of Raymond.

“None of the retailers are shooting in the dark, they are calculative in their approach. We are holding on to our ground and getting deeper into the value market,” adds Lalit Agrawal, MD of the ₹2,645-crore value fashion retail chain V-Mart.

“Retailers have figured out how to run a successful business. Earlier, they thought opening stores was enough. Retail is all about knowing what your brand is, who your consumer is and where he/she resides,” says Bijou Kurien, chairman, Retailers Association of India. (RAI) ABFRL has been especially active with acquisitions in the past year, in line with its decision to become a ₹25,000 crore brand by 2030.

From maintaining a tight ship in terms of inventory, high sales per sq.ft., high rentals, and ensuring the right kind of assortment at each store, retailers are going all out to ensure they are profitable. In its grocery formats Reliance Smart and Smart Bazaar, RIL ensures that assortments are localised 40-50% for them to be viable. But margins in grocery are fixed between 10% and 15% (margins in apparels or consumer durables are upwards of 35%) depending on the product and brand, which makes profitability challenging. Therefore, Reliance makes sure if a new product doesn’t do well within the first few days it is taken off the shelves, so that there is no inventory pile-up. “Our local teams keep a pulse on consumer choices based on which replenishment happens,” explains Subramaniam.

Arvind Fashions made ₹37 crore in profit in FY23 after incurring losses to the tune of ₹267 crore the previous fiscal. Chaturvedi says the company’s focus on premiumisation and a capital constraint mindset helped. It chose to scale up its four premium brands (CK, Tommy Hilfiger, US Polo and Arrow) and exit value retail (it sold its value brand Unlimited to V-Mart). “We want to focus on brands that can be scaled to at least ₹1,000 crore in the next couple of years,” says Chaturvedi. The company has kept a check on its inventory, ensuring its stock rotation increases from three times a year to four. “We have been building the collections closer to the season. In FY23, we grew 45% with almost the same value of inventory,” adds Chaturvedi.

Shoppers Stop, on the other hand, may have expanded its departmental store format to close to 100 cities and towns and also its home format, Home Stop, but it has reduced the size of its stores. It has also shut down 14 unviable stores. “We have given up space which was there for the sake of being there. We are focusing on better-performing brands to improve productivity. We have also reduced the inventory in stores and made each private label a proper brand,” explains Venu Nair, MD and CEO, Shoppers Stop. The strategy is to be a premium house of brands targeted at the upper middle class, says Nair. Premium is what gives the company higher margins.

Raymond also doesn’t intend to foray into too many formats. Kataria says entering womenswear, given its massive potential, was a huge temptation. “However, we have chosen to focus on the growth potential within the men’s space,” he explains.

Private Brands

Ask a Gen-Z consumer about his/her favourite brand and the most likely response would be that style matters more than the brand. He/she is happy to buy an unknown brand from Trends or Zudio if it has a better style quotient than a US Polo or Zara. More importantly, it is far more pocket friendly.

For the retailer, having private brands means margins upwards of 50%, which makes it a highly profitable proposition. Westside was among the first large-format stores to have adopted the private brand route. Right from apparel, footwear to home products, everything Westside sells is self-sourced. It has followed a similar route with its value brand Zudio as well.

As retailers expand their footprint across cities and towns via multiple formats, they are also making sure they have more private labels in their portfolio. High margins in private labels allow them to offer products 30% lower than national brands. Over 80% of the merchandise sold in Reliance Trends is private label. Its other formats such as Avantra By Trends and Azorte also have a 100% private label strategy.

Shashwat has ensured that around 32% of food offerings at Spencer’s are private label brands, while in apparels it is as much as 65%. “Our endeavour was to be in a space where margin improvement was giving us the highest benefit at the bottomline, and one way to improve margins was to do a lot more private labels. These initiatives have resulted in margin expansions from 17% in 2013 to 31% in the third quarter of FY23,” explains Shashwat.

While Shoppers Stop has increased its private label offering to 21%, 34% of Lifestyle International’s offerings are its own brands such as Ginger, Melange and Code. “Tier-II markets expect wider assortment and lower prices. Customers in Bengaluru’s Electronic City are more value conscious than say, in Indiranagar, so we have over-indexed the private labels,” explains Kabir Lumba, chairman, board of directors, Lifestyle International. Pivate labels provide margin advantage. “We have products at a lower price and have managed to net off higher margins through more efficient sourcing. This is good for customers as well as business.”

The private brand concept, according to Kurien of RAI, is more viable in fashion than food and grocery. “In fashion, style is the defining factor. The label doesn’t show up as much as the garment does, therefore, retailers are aggressive in increasing their share of private labels. In food, consumers want to know more about what they put in their month,” he explains.

During his heydays, Future Group chairman Kishore Biyani had carved out an aggressive brand strategy, even in FMCG. He not only launched them at his own stores, he distributed them at conventional mom-and-pop stores as well. Reliance is now embarking on a similar strategy with the acquisition of brands such as Campa Cola and Joy Chocolates. But the distribution business remains a different ball game.

Grocery Dilemma

Just a few years ago, every retailer fancied becoming the biggest grocery retailer in the country. Barring DMart and Reliance Retail, all of them have burnt their fingers.

“Grocery retail is a highly localised business, it is difficult for national players to pull it off,” says the CEO of a leading retail firm. This explains why regional grocery firms such as Ratnadeep and Vijetha in South or Jalan’s Retail in the North are gaining might. They understand local consumer needs better and source more efficiently.

“Amazon was trying to integrate More for their local and hyperlocal deliveries, but couldn’t do it. E-commerce offers national assortment, but grocery can never be national as 45-50% of groceries are pure-play localised products. In Gujarat if you don’t have a five kg makhana bag, nobody will come to your store. In Mumbai, people prefer 100-200 gms bags of makhana. If you go to South, they need podis to eat, the same will not sell in Mumbai,” the retail company CEO further explains.

U.S.-based Amazon acquired More from Aditya Birla and also invested in Future Group (the controversial deal which eventually led to the latter’s death) with a desire to have an omnichannel play in grocery retail. Today, the world’s biggest ecommerce retailer seldom talks about its grocery foray. According to industry experts, Amazon has written off its physical retail acquisitions and isn’t investing in grocery as aggressively. Walmart-owned Flipkart is content being a cash and carry retailer in India. Trent India’s tie-up with Tesco for Star Bazaar is not a success either. The Tata Group has also acquired BigBasket, and is trying to build an omnichannel play.

Spencer’s Retail is India’s oldest organised retail chain. When Shashwat took over the business in 2013 it had quite a few unviable stores. He decided to first focus on its hypermarket format and chose to operate only in two geographies, south and the east (and eventually eastern U.P. and NCR). “We decided to exit the west completely. We just had a couple of stores in Maharashtra which didn’t make sense. The real estate cost there was high, and people’s cost was higher too. The unit economics didn’t make sense at all,” says Shashwat. “Retail is capital intensive, but if you limit it to a particular geography, then your investment whether you do one store or multiple stores is viable, as your backend remains the same,” he adds.

Shashwat also rejigged inventory by increasing focus on non-food categories (apparels, home products and so on) since that generated better margins. In 2013 non-food comprised just 10% of overall offering. It is at 21% in 2023. By making these changes Spencer’s Retail has managed to reduce its losses considerably. It has also ventured into premium grocery with the acquisition of Nature’s Basket and recently launched its neighbourhood value retail stores. Shashwat expects value to contribute 30-40% to the overall business. “Today, 15%-16% of our revenue comes from omnichannel. In fact, Research shows that consumers shop about 14 times a month for groceries and this could be at a kirana store, a modern retail store like Spencer’s or Reliance Fresh or even quick commerce,” he says.

Radhakrishna Damani’s DMart has been by far the most successful grocery retail format in India. Its strategy of opening stores in densely populated neighbourhoods in Western India and catering to the local needs of consumers have paid off. The strategy of offering products across categories but limiting the number of brands sold has also worked well. But despite growing by over 33% in FY23, the company reported narrowing of margins to 7.3% from 8.4% due to higher expenses.

“While India thrives on diversity, it is also a big challenge for grocery retailers. They have to offer regional assortments to be able to serve local demand,” explains Subramaniam of Reliance Retail.

According to Sourjendyu Medda, co-CEO and founder of online grocery retail company DealShare, it is essential to have a physical presence in order to stay in business. “A large part of the revenue will continue to come from physical stores,” explains Medda.

Grocery is the most challenging piece of India’s organised retail story, which may take a bit longer to stabilise. But what can’t be ignored is the country’s overall consumption story. The average Indian consumer wants the best of experiences both online and offline. She wants to go to the store, try out products, experience the ambience, as much as she would want to buy it online. Brick-and-mortar retail is certainly back.