The fledgling retail sector is set to witness a spate of sellouts amid falling valuations. Small grocery retail chains, typically with less than 100 stores, are sending feelers to bigger chains and potential new entrants for possible buyouts.
The lack of funds is casting a doubt on their sustenance and ability to scale up in the low-margin and dog-eat-dog world of retail business. What is making matters worse is that big retailers—the likely buyers—have already garnered some experience and achieved a sizeable presence and want to buy out smaller players only on their own terms.
Some months ago, a north Indian supermarket chain called off a prospective sell off deal with a business house because it wanted a much higher valuation. The chain is now back in the market scouting for a buyer, but this time the asking price is 30 percent less. Similarly, a south-based chain is sounding out prospective buyers for a complete sellout. Representatives of another small retail chain are approaching even real estate players with retail plans, sending out proposals under fictitious names so that its identity is not leaked in the market.
“We are not averse to selling out but only after we have set up 500 stores. If the promoters of Ranbaxy can sell out, why not us?” says a retailer, who owns 50-60 stores in NCR. He says he hasn’t been approached by any big Indian retailer for a possible buyout so far. According to Ernst & Young Partner (retail) Pinakiranjan Mishra, the bargaining power has shifted from small retailers to potential buyers in the past six months.
“It will still make sense for big Indian retailers to buy the smaller ones in markets where they are not present. Also, they will get a good deal today since small retailers are desperate for cash infusion. FDI restriction bars private equity as well as big foreign retailers from investing in Indian retailers,” says Mishra.
Also, regional players were under the impression that accumulating square feet area (number of stores) and creating a brand with some visibility were enough to claim a high valuation. What they didn’t anticipate is the real estate crash. “In this backdrop, valuations are bound to come down because they lack a clear business model, sustainable profits and robust supply chain,’’ said retail consultancy Technopak’s Arvind Singhal.
Tables have clearly turned since the retail revolution began two years ago. When the big business houses entered the scene and started wooing regional business chains for buying them out to build immediate scale, the owners acted pricey. While some deals were sealed, majority of the negotiations didn’t consummate on account of high asking prices.
Since then, large conglomerates, whether it is Reliance Retail or Spencer’s, have moved on their own and built a fairly big retail presence across all formats. They have locked in real estate space and built management bandwidth. So, they see no value in regional players anymore, barring one or two. On the other hand, small players, some of whom had built their businesses only to sell at a targeted period, find themselves pushed to a corner.
They don’t have money to pump into the business on a sustained basis. More importantly, real estate prices have started correcting, so the edge of having signed real estate at a cheaper price much in advance is no longer there. “The rentals have corrected by as much as 15-20 percent since January this year,” says grocery chain LM@365 owner Prem Garg.
“I have signed locations for supermarkets that will be launched 6-8 months from now at prices that are 15-20 percent cheaper than what a retailer negotiated two years ago? So, where is the advantage?’’ asked a large retailer who has been approached by two small retailers for an alliance.
