FINANCIAL MANAGEMENT STRATEGIES FOR CORPORATE RETAIL INDUSTRY IN INDIA-A CASE STUDY OF RETAIL SCENARIO IN HYDERABAD AND SECUNDERABAD SYNOPSIS IINTRODUCTION: (1) Retail Industry in India The Indian retail industry is the largest among all the industries, accounting for over 10 per cent of the country’s GDP and around 8 per cent of the employment. The retail industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market.
But all of them have not yet tasted success because of the heavy initial investments that are required to break even and compete with other companies. The Indian retail industry is gradually inching its way towards becoming the next boom industry. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector are going to be the key factors in the booming growth of the organized retail sector in India.
The growth pattern in organized retailing and in the consumption made by the Indian population will follow a rising graph helping the newer businessmen to enter the Indian retail industry. In India the vast middle class and its almost untapped retail market are the key attractive forces for global retail giants wanting to enter into newer markets, which in turn will help the retail industry in India to grow faster. As per a McKinsey report, India’s overall retail sector is expected to rise to US$ 833 billion by 2013 and to US$ 1. trillion by 2018, at a compound annual growth rate (CAGR) of 10 per cent. As a democratic country with high growth rates, consumer spending has risen sharply as the youth population (more than 33 percent of the country is below the age of 15) has seen a significant increase in its disposable income. Consumer spending rose an impressive 75 per cent in the past four years alone. Also, organised retail, which accounts for almost 5 per cent of the market, is expected to grow at a CAGR of 40 per cent from US$ 20 billion in 2007 to US$ 107 billion by 2013.
According to the Investment Commission of India, the overall retail market is expected to grow from US$ 262 billion to about US$ 1065 billion by 2016, with organised retail at US$ 165 billion (approximately 15. 5 per cent of total retail sales). India is expected to be among the top 5 retail markets in the world in 10 years. The future of the retail industry in India looks promising with the growing of the market, with the government policies becoming more favorable and the emerging technologies facilitating better operational efficiencies.. (2) Retail Scenario in Hyderabad and Secunderabad
Retail forms a large part of the business sector in Hyderabad and Secunderabad both in terms of establishments and employment . The burgeoning retail outlets in Hyderabad and Secunderabad are evidence of the immense potential that these twin cities offer for business. The emergence of Hyderabad as the preferred destination for the IT and ITES industry in recent times has brought with itself the cascading effect on other industries like retail and real estate. Big corporates like the Mukesh Ambani led Reliance Industries, the Kishore Biyani led Future group etc. ave made substantial investements and are ready to invest more in the Hyderabad retail industry. The retailing industry in Hyderabad has come into big Shopping Malls, and huge departmental stores and retail chains like Big Bazaar, Shopper Stop, and Metro, Hyper Mart etc.. The employment opportunities in Hyderabad retail are highly increased, and have good financial rewards also. In the next two years thousands of jobs will be generated in this sector. Innovative retail formats like Integrated retailing, retail cum entertainment is booming at a great pace in the Hyderabad city, e. . , Big Bazar combines with Big Cinemas, Hyderabad Central with PVR Cinemas and GVK Mall with INOX etc. Overall, the Hyderabad retail business sector has large opportunities for prospective business houses. With the retail sector generating fair profits in Hyderabad and Secunderabad, it would be beneficial for investors to tap it exactly in the manner in which they want. (3) Impact of the Retail Industry on the social and economic environment The boom in the Indian retail sector has impacted a change in the lifestyle of the Indian consumers drastically. The evident ncrease in consumerist activity is colossal and this has already created a money making recess for the Indian organized retail sector. What’s more, this growth trend in retail industry in India is not just a steady one but also one that is displaying exponential characteristics. With the onset of a globalized economy in India, the Indian consumer’s psyche has been changed. People have become aware of the value of money. Nowadays the Indian consumers are well versed with the concepts about quality of products and services. These demands are the visible impacts of the Indian organized retail sector.
The social changes with the rapid economic growth due to trained personnel, fast modernization, enhanced availableness of retail space are the positive effects of liberalization. The growth factors of organized retail in India are:- •Increase in per capita income which in turn increases the household consumption •Demographical changes and improvements in the standard of living •Change in patterns of consumption and availability of low-cost consumer credit •Improvements in infrastructure and enhanced availability of retail space •Entry to various sources of financing
The non-food sector, segments comprising apparel, accessories, fashion, lifestyle products felt the significant change with the emergence of new stores formats like convenience stores, mini marts, mini supermarkets, large supermarkets, and hyper marts. Even food retailing has become an important retail business in the national arena, with large format retail stores, establishing stores all over India.. India will be a unique business arena in the whole of the global economy, for the social and economic parameters that would overrule the big bang of the vivid competition. (4) Financial Management
Taking a commercial business as the most common organisational structure, the key objectives of financial management would be to: • Create wealth for the business • Generate cash, and • Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested. There are three key elements to the process of financial management: (a) Financial Planning Management needs to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions. (b) Financial Control Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as: • Are assets being used efficiently? • Are the business’ assets secure? • Does management act in the best interest of shareholders and in accordance with business rules? (c) Financial Decision-making
The key aspects of financial decision-making relate to investment, financing and dividends: • Investments must be financed in some way – however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers • A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.
Finance which acts as the lifeblood in the modern business types is one of the most important considerations for an entrepreneur-company. While implementing, expanding, diversifying, modernizing or rehabilitating any project the meaning of finance is better understood. From an organizational point of view, the process of financial management is associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available and plan the size and timing of expenditures. Financial control refers to monitoring cash flow. Inflow is he amount of money coming into a particular company, while outflow is a record of the expenditure being made by the company. Managing this movement of funds in relation to the budget is essential for a business FINANCIAL MANAGEMENT AND THE RETAIL INDUSTRY Financial performance is vital to competitive success. It is a factor that can either enhance the competitive standing of the company or lead it to destruction. Businesses are ultimately judged on their ability to perform financially. Domestic growth, international expansion, strategic repositioning, are the strategic decisions to be taken.
But each of these is punctuated by the need to generate corresponding financial returns. Understanding the drivers of financial performance, their roots, and causes is a must for sound retail management. As retailing is an intensely cash generative business, an important characteristic of any retail operation is the ability to recycle cash received from sales. Generally in any cash conversion cycle, the interaction between the three components of cash tied up in inventory, cash tied up in receivables and payables is examined.
However in the retail industry, cash from receivables is not a concern since most of the sales are made in cash. Hence the cash conversion cycle in a retail setup is a result of the interaction between the cash tied up in inventory and the payables. While payables can be predicted easily, the challenge lies in minimization of the inventory to cash conversion cycle. This requires constant monitoring of the amount blocked in inventories. A major component of the retail balance sheet is inventory and the industry average for the retail sector is 27% of the total assets.
The Retail sector thus has a peculiarity in its fund requirement since there is a greater need for short term finance rather than long term or medium term finance. Another large component is the property, plant and equipment. Usage of the retail space in the most effective and profitable manner is what sets apart a successful retailer. This is the reason why the profit per square foot is regarded as an important measure of performance evaluation of a retail outlet. Managing a retail business is a little like riding a bike—there are going to be strenuous uphills, effortless but hazardous downhills and demanding stretches in between.
How this ride is handled is based on the ability to keep the wheels moving by combining judicious pedaling with knowing when to shift gears quickly and skillfully while maintaining balance. If we compare a retail business to the two wheels of a bicycle, one wheel is the sales wheel and the other one is the working capital wheel. Financial management in the retail sector is the art of achieving perfect co-ordination between the two so that the ride is smooth and the organization can move ahead. FINANCIAL MANAGEMENT STRATEGIES-CONSIDERATIONS
Financial strategy, as a functional strategy, is subject to the overall corporate strategy. Therefore, financial strategy includes profit distribution strategy, investment strategy, financing strategy and legal relations strategy. The strategy must accommodate the interests and needs of company owners, management and customers as much as possible. Since these interests differ from company to company, the financial strategy too differs. The considerations for framing a financial strategy are as under: a)Analysis of the external environment of the company )Key stakeholders’ expectations and objectives related to the company c)Analysis of internal environment of the company d)Analysis of the company’s customers e)Analysis of the company’s competitors f)Analysis of the company’s resources g)Analysis of the company’s suppliers h)Analysis of the functional strategy of the company i)Marketing R&D IS/IT strategy II NEED FOR THE STUDY There have been a lot of players who have crafted the Indian retail success story, and a few that have closed or closing their shop.
There is thus an absolute need for research in the field of financial management strategies, and to formulate informed suggestions for Improvements and cautions for the retail industry in India. The booming retail business is attracting a number of corporate players from within India and also those from outside India. This would involve a huge investment by the corporate players and a wrong strategy would lead to erosion of capital and loss of employment. The performance of the successful players is lending credence to the growth figures projected as per the above studies.
Reliance Retail has set up 700-plus stores in the past two years, almost at the rate of one store per day, Future Group has begun opening a new no-frills discount retail chain called KB’s Fair Price Stores, a format that is similar in concept to Subhiksha stores. Reliance’s food and grocery format Reliance Fresh on the other hand is high-end in terms of display, ambience and size. However in the midst of the success stories of the Big Bazaars, Reliances and the Walmarts, we have the case of a home-grown ‘Subhiksha’ which went sour.
If the reasons for the downturn in Subhiksha were analysed, what starkly stands out is that poor funds management was responsible for bringing down the organisation. It is thus evident that financial management is the crux of retail business. Since the retail sector is fast expanding and highly competitive, there is a need for studying financial management strategies which will result in sustained and profitable operations of an organization successfully weathering the vagaries of economic conditions.
In a retail setup the changes in the external and internal environment are more frequent and there is a need to continuously look out for indicators that signal need for change in strategy. Consequently there is a need for constantly revisiting and reviewing existing strategies in order to meet challenges. Financial analytics comes out as one of the major decision making parameters and success factors. The social and economic impact of retail industry is too pronounced to be ignored or made light of. The positive impact of a successful financial strategy in a retail setup augurs well for employment generation and wealth creation.
The reverse happens when a financial strategy fails and the retail company crumbles. In the present day scenario of reeling economic recession/correction, it is very important to have financial management strategies that will not only result in profit maximization and wealth maximization but more importantly will not result in loss or erosion of investors’ capital or employment opportunities. It is because of this requirement that this study is being taken up. IIIREVIEW OF LITERATURE 1. Case Study- Subhiksha: A Saga of Ups and Downs- by Bindu Rathore This study starts from the very beginning of the concept on which Subhiksha was ormed and studies the journey of the organization right from tracing its astronomical growth to its downfall. As per the study, the retailer was a trendsetter in many ways not only for the speed with which it was adding stores but the revenue model on which it worked. It promised the customer the most optimum prices and for this it applied a different supply chain management methodology. It would source items for cash and obtain maximum discounts that were passed on to the customer. Since this inventory would need some time to get converted into cash again, it would stock only the fastest moving stocks.
This was the USP (Unique Sales Proposition) of the organization. With this sales ideology, the company turnover grew from Rs. 330 crore in 2005-06 to Rs. 833 crore in 2006-07 and then to Rs. 2,305 crore in 2007-08. The number of stores grew from 150 stores in September 2006 to 2300-odd stores in the year 2008-09. The inside story was that the rate of expansion was too fast for the funds in hand. By the time, the management realized this, global markets fell and there were no chances of raising capital.
The company became unable to tie up funds even for ongoing operations like wages, inventories and advertising expenses etc. Apart from this it was also reportedly carrying a debt of Rs. 700 crores at an average interest cost of 12% per annum. That slowly started choking and led to paralysis of operations completely. 2. News report in the Wall Street Journal on 26th May 2009. A cash crunch and slowing consumer demand not only forced retailers to shut stores and stall expansion plans, it also set back makers of home and personal care products that had hoped to widen their sales reach through chain stores.
Companies such as Hindustan Unilever Ltd (HUL) and Marico Ltd and Wipro Ltd’s consumer products division say the contribution of retail chains to their sales declined significantly in the two quarters ended March from the year-ago period. “The economic downturn that resulted in a liquidity squeeze, coupled with the decline in consumer sentiment and spending, hit the modern retail business. As a result, some FMCG (fast-moving consumer goods) companies are not generating enough sales and inventories are piling up… ,” said Asitava Sen, director, retail consulting, at Nielsen Co. , the market research firm. In some exceptional cases, payments have not been made on time. ” HUL’s managing director and chief executive officer Nitin Paranjpe cited slower growth in modern trade as one of the reasons for a decline in the company’s sales volumes Wipro Consumer Care and Lighting (WCCL) said sales growth through chain stores had slowed. The rapid growth of retail chains in 2006-07 had encouraged consumer product makers to chart strategies to take advantage of that boom. Some, such as Wipro, GlaxoSmithkline Consumer Healthcare Ltd and Marico, set up separate teams to drive sales through modern retail outlets.
Several others changed their packaging and even pricing to suit the new retail format’s needs and some offered higher margins to organized retailers. IV OBJECTIVES OF THE STUDY The current study titled “Strategies for Financial Management in the corporate retail industry in India” is being undertaken mainly with the following broad objectives in mind: 1. To suggest a management information system framework that will aid in formulating financial policies of a retail organisation in the Indian business environment. 2.
To examine the impact of product service mix, consumer segment, format mix, geographical market strategies on the financial performance of the organisation and suggest financial management strategies for improvement of financial performance of retail organisations. 3. To study the factors responsible for the failures of certain retail organisations and analyse them. The findings would be useful to rationalise ways and means for timely implementation of or alteration to business strategies followed in a retail organisation. 4. To suggest review methodologies for business strategies to ensure adaptability to changing economic environment. . To compare the impact of the financial management framework in the retail organisations vis-a-vis organisations in other sectors like information technology , telecom etc.. 6. To suggest early warning mechanism through financial analytics. In brief, the purpose of the current study is to undertake detailed research of the impact of various business strategies used in the selection of the segment, the geographic location, the revenue model and other business decisions on the performance of a retail organization and to analyse the impact of these decisions on the financial strategies of the organization to ome out with informed and rational deductions. The study would also examine various existing financial management strategies of the organizations and their impact on the performance of the organization and suggest improvements in financial strategies for enhancing business performance. V HYPOTHESIS We have set a few hypotheses for the abovementioned study. The first hypothesis is that the economic conditions will either remain the same or will improve but will not deteriorate. Second, all the retail players will be impacted by the economic conditions in the same manner and respond to similar financial policies in a similar manner. Third, there could be differences between the performances of the retail players based on the products dealt with. Fourth, we would not have access to the confidential data of the sample organizations taken up for study due to strategic reasons. VI RESEARCH METHODOLOGY Sample: A sample of three organisations in the retail sector in the twin cities of Hyderabad and Secunderabad would be selected as a sample for this study. The organisations proposed to be taken up as samples for this study are as under: 1. Reliance Fresh 2. Big Bazaar . Pantaloon Retail A minimum of three department heads would be selected and a survey of the target respondents would be taken to analyse the financial needs of the organisation and the financial management policies being followed. Primary source of information would be the survey conducted on the respondent population through questionnaires and personal interviews. Secondary source of information would be review of Journal and websites on Financial Management, Retail Management, like www. retailowner. com, www. economywatch. com etc. Financial information from General purpose financial statements available in the public domain like websites of the respective organisations, annual reports, and news articles published in financial newspapers and magazines. VII PERIOD OF STUDY On an average 3 years financial and operational data in each organization will be studied for arriving at a conclusive result of the current study. VIII IMPLICATIONS OF THE STUDY The findings of the current study would be useful to the various corporate players, both Indian and Global companies in the retail industry in India.
The study would also be helpful to the stakeholders and also the small investors in such retail organizations in India. It would also help in developing a comprehensive research agenda around identified themes which include: (i) financial planning methodologies for the retail organisations; (ii) strategies for category optimizations to optimize performance management of the retail organizations; and (iii) Strategies for category optimization through Revenue Management.
IXREFERENCES 1. Retail Management- Perspectives and Cases by V. V. Gopal 2. Retail Strategy- the view from the bridge- by Jonathon Reynolds and Christine Cuthbertson 3. Economic times- a financial daily 4. Wall Street Journal- e –newspaper 5. Retail Owners Institute website-www. retailowner. com .