Indian Retailing Suffers in the Slowdown

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Worst hit is India's largest discount retailer, Subhiksha. The Chennai retail chain had expanded tenfold, to 1,655 outlets, in four years, funding its expansion largely by debt. In early January, a large part of Subhiksha's operations came to a halt: 1,200 stores were closed down, its independent directors resigned, and it is battling the issue of nonpayment of dues to suppliers and 15,000 employees. R. Subramanian, managing director of the cash-strapped company, has ruled out bankruptcy and has asked Subhiksha's lenders, such as ICICI Ventures, to restructure its $150 million debt. He is also willing to sell more equity to raise $60 million to meet operational expenses, but the lenders are not showing any interest in the unlisted company—not least because it hasn't been audited since March 2007 and has grown too fast.

Revised Game Plan

A late entrant into the arena, Reliance Retail, a subsidiary of $35 billion petrochemical giant Reliance Industries, had planned to carpet-bomb the sector with every conceivable store format. A staggering 940 stores across 16 formats, including 640 Reliance Fresh outlets, were opened in the past two years. It also has joint ventures with global names like Apple (AAPL), Marks & Spencer, Office Depot, Hamleys, and Diesel.

But its aggressive campaign hasn't panned out quite as planned. Eight months ago, Reliance restructured operations, shut around 20 Fresh stores, and laid off 13% of its 30,000 people. A Reliance spokesman says that the business is "still at the pilot stage", but senior managers claim that the group's assorted formats are losing between $5 million and $20 million a month. "It's an outcome of scaling too fast," says one manager, who requested his name not be used.

The problems faced by retailers today stem from the frenetic pace of expansion in the past few years. Retailers grew without setting up proper back-end logistics and supply chains, leaving them vulnerable now that hard times have hit. "They all wanted to grow faster than what their balance sheets would have allowed them to," claims Nikhil Vora, managing director of Mumbai's IDFC-SSKI Securities.

Still, the downturn is producing some unexpected winners: the 12 million neighborhood kirana stores, or mom-and-pop outfits, which are the backbone of Indian retail. These 50-to-250-sq.-ft. shops, with low overheads and personalized service, are the survivors. Unlike big retailers that wooed customers with massive discounts, the kirana enterprises continued to sell at retail prices and offer short-term credit to customers.

A Time to Regroup

But bigger players are thriving, too. Tata Group made its retail debut in 1987, but has grown conservatively and has only 570 stores, ranging from bookshops to jewelry stores to hypermarkets. Its Star India Bazar group entered into a franchise agreement with Britain's Tesco in August 2008 to open 50 outlets in the next five years.

The good news is that the downturn has given retail companies a chance to whip their businesses into shape in preparation for better times. The Aditya Birla Group is revising its More branded grocery store chain, which since January 2007 has added 548 stores and 12,000 employees, an expansion Thomas Varghese, CEO of the group's retail business, describes as "a mad rush to put stores on the ground." Varghese, who last August transferred from Birla's viscose-fiber yarn division, has since cut staff by 5% and shut down 55 of the 715 stores.

Competition from multinationals will also increase. The Tata-Tesco partnership is also expected to launch supermarkets soon. Bharti Wal-Mart will commence operations in the second half of this year, while other big and small retailers are moving from frenzied growth to a more normal pace. They are focusing on increasing productivity and revenues, and investing to boost logistics and supply chain. "Just as well. Companies are going back to basics," says Arvind Singhal, chairman of Technopak Advisors.

Lakshman covers India business for BusinessWeek.