Funding in Retail: Opportunities and Challenges

The panel discussion on Funding in Retail: Opportunities and Challenges had industry experts discussing on the topic.

Panelists were:

Funding in Retail

Moderator: Ambreesh Baliga, Managing Partner, Edelweiss Financial Services; Paresh Parekh, Partner, EY; Vidya Sarathy, Vice President, Lifestyle International; A Gurudutt, Director – Finance, Levis; C P Toshniwal, Executive Director, Future Lifestyle Fashion

Opening Remarks

Ambreesh Baliga, Managing Partner, Global Wealth Management, Edelweiss Financial Services

Discounting by E-tailers is an area of concern – but capital is still abundant.

  • E- tailing is the ‘new kid on the block’ and this is affecting the Brick and Mortar (B&M) retailer. E-tailing has raised a couple of billion dollars of capital.
  • There is a divide between Brick & Mortar (B&M) retailers and E-tailers; when it comes to the ability to raise money.
  • Is e-tailing a threat or opportunity when it comes to raising capital?
    • B & M  is USD 500 billion dollar business globally, E-tailing is around 12.6 billion dollar – I.e., about 22%. Expect e-tailing to reach 70 to 80 bn by 2020.
  • There is no difference as far as capital raising is concerned.
    • B&M need not be threatened. There is a need to Integrate and not ‘ape’ e-tailers.
  • From an environmental perspective, stable government is required for both types of retailers.

 

Impact of Predatory pricing / Discounting by e-tailer 

A Gurudutt, Director – Finance, Levi’s India Pvt Ltd

As a strategy, we offer fresh stock through the store and discount ‘old’ fashion.

  • Huge discounts are offered by e –tailers – upto 13 times what brick and mortar retailers can offer.
  • It is a matter of concern. Levis participates in discount only in particular months and that too very cautiously.
  • Levis has tied up with Myntra.com – and we do a balancing between the two channels.
  • As a strategy latest styles are offered in the B&M channel and ‘old’ fashion is offered  on discount.
  • E-tailing should be done in-store to combine best of the two worlds.
  • B&M retailer is loaded with costs – real estate which does not exist for an e-tailer and also the low cost of technology. These two costs enable the e-tailer to discount merchandise.
  • Lost sales in-store (due to lack of range, size) can be covered up by e-tailing.

 

Entry strategies by Overseas Retailers

C.P. Toshniwal, Executive Director, Future Lifestyle Fashion Limited

To counter the problem of discounting the MRP rule should be abolished.

  • Foreign retailers will not go solo in India as an entry strategy.
  • To get a feel of the nuances of the local market  they will need a local partner. In the absence of this option, they may choose to ‘wait and watch’.
  • No real estate company will succeed as a retail company – the business is operationally very different for real estate.
  • Brick and mortar retail makes it easier for customers to return merchandise; and provide better service.

 

Issues of Funding

Paresh Parekh, Partner – Tax and Regulatory Services, EY

Currently, (Brick and Mortar) retail is not getting the same kind of valuation from the stock markets, as e-tail is from the VC / PE community.

  •   For the purpose of Funding: multiple ways & investors are available; Franchise route – getting franchising fee; JVs are created for different regions and categories etc
  •    Once global situations improve and global retailers become strong on their home turf, Indian economy will be back in the reckoning.
  •    B&M retailer have not died in countries where E-tailer or ecommerce has matured.
  •    E-tailer in some categories are taking a lead but not in all categories. Retail  is not getting the same valuation from the bourses , they are better with seed capital and private equity. Retail should explore the route of NCD for funding.

 

Expectations of the future / ‘Wish list’ for Policy

Paresh Parekh, Partner – Tax and Regulatory Services, EY

Need policy intervention to open up the ECB route for Retail.

  •   Future expectations: B&M retailer will still provide some value and hence survive the onslaught of discounting.
  •   Powerful brand will not resort to discounting. Issue in the single brand retail is sourcing criteria only.
  •  Overseas retailers do not have a problem with other conditions.
  •  Policy intervention needed:
    •   ECB should be rationalized for retail sector
    •   Multi brand retail should be a National subject and not left to the state to deal with.

 

Funding in retail – Lifestyle Retail’s Approach

Vidya Sarathy, VP – Group Accounts, Lifestyle International

Most retailers look at different models of funding from sale or return, leasing, vendor funding to equity options.

  • Follow different models of funding eg. Sale on Returnable basis, reduce cost of rentals, leasing with companies
  • Vendor funding: If sale happens the vendor gets paid or he gets the product returned.
  • Leasing with the vendor (IT, and other services) instead of banks.
  • Completely opting e-tailing is not the right option. B&M retailer will coexist  along with e-tailing.
  • On the question ‘whether a retailer should integrate backwards and become a manufacturer’ – Issues of Excise and service tax has to be visited.

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