Black Friday Sales Hits Record, Retail traffic and Foot-falls up.

Preliminary reports for Black Friday indicate that retailers may have seen their strongest sales ever during the all-important kick-off to the holiday shopping season.

black friday sales

Retail sales on Black Friday climbed 6.6% this year to an estimated $11.4 billion, according to ShopperTrak, which tracks foot traffic at malls and stores. Last year, sales climbed just 0.3% to $10.7 billion, which was a record one-day sales amount at the time, according to the company.

“This is the largest year-over-year gain in ShopperTrak’s National Retail Sales Estimate for Black Friday since the 8.3 percent increase we saw between 2007 and 2006,” said ShopperTrak founder Bill Martin. “Still, it’s just one day. It remains to be seen whether consumers will sustain this behavior through the holiday shopping season.”

However, sales have been strong throughout the entire month of November with retailers rolling out holiday deals earlier than ever. In the two weeks leading up to the week of Black Friday, retail sales were up 3.6% and 3.8%, respectively, ShopperTrak reported.

“Retailers continue to stretch out Black Friday weekend by enticing shoppers with doorbuster deals weeks in advance,” said Martin.

Online sales have also proven to be strong, with many big-box retailers and department stores offering deals online earlier this year.

Black Friday online sales surge 24%

Online sales were up 39.3% on Thanksgiving Day and 24.3% on Black Friday compared to the same days last year, according to IBM’s (IBM,Fortune 500) Coremetrics, which tracks real-time data from 500 retailers in the apparel, department store, health and beauty and home goods categories.

“This year marked Thanksgiving’s emergence as the first big spending day of the 2011 holiday season with a record number of consumers shifting their focus from turkey to tablets and the search for the best deals,” said John Squire, chief strategy officer at IBM’s Smarter Commerce division.

Consumers also spent slightly more than they did last year, although they spent most of that money on themselves. According to NPD Group consumers spent about 3% more on purchases during Black Friday. However, about 44% were self purchases up from 33% last year, the research group said.

Retail traffic on Black Friday up 2%

Total US visits to the top 500 Retail websites increased 2% on Black Friday as compared to 2010 and received more than 173 million US visits. Traffic has increased each day leading up to the Thanksgiving holiday and the total visits dipped slightly (-1%) on Black Friday compared Thanksgiving Day 2011. Early Black Friday sales resulted in a shift of online traffic, which climbed prior to the Thanksgiving holiday, however, continued heavy promotional activity helped to drive significant online traffic on both Thanksgiving and Black Friday. While Black Friday has been the top day for online retail traffic over the past two years, warm weather and early store openings encouraged shoppers to go online sooner this season.
DMS Retail 500 11-25-2011.png

Among the categories driving the growth in traffic on Black Friday were Department Stores (e.g. Amazon and Wal-Mart) Apparel & Accessories, Appliances & Electronics (e.g. Best Buy) and Video & Games (e.g. Game Stop).
DMS Retail Categories 11-25-2011.png

Below is a list of the top visited retail sites on Black Friday:
DMS Retail 500 Sites 11-25-2011.png

Many of the major retail websites experienced growth on Black Friday, including Amazon, Best Buy, JC Penney, Sears and Kohl’s. Amazon.com was the most visited website on Black Friday for the 7th year in a row.

IT ’ S A ‘MALL ’WORLD

The retail revolution in Mumbai has enhanced residential spaces across the city

When Crossroads, the first mall in Mumbai and in the country was launched, little did we know that the city would witness such a huge retail boom in the years to come! Today, Mumbai is home to some of the most prominent and successful malls in the country.

The start of this retail revolution in Mumbai can be traced to the initial years of the last decade. However, during the time frame of 2003-04 to 2007-08, the sector witnessed significant growth of around 11 per cent. The second half of the year 2010 re-witnessed an upsurge in the retail market post the economic meltdown.

Mumbai is estimated to have total organised retail stock of 8.72m sq. ft. and will witness 11.26 m sq. ft. of new retail development over the next three years. According to a study by McKinsey Global Institute, India is poised to become the fifth largest consumer market by 2025. The retail sector in the western parts of India like Mumbai, Pune, Nagpur and Ahmedabad, have seen a huge transformation, thanks to the changing consumption patterns, high disposable income in hand and favourable demographics.

Explains Shreesh Misra, Center Director of Phoenix Marketcity, Kurla, “An asset like a mall becomes a catalyst for people to converge at a particular location and spend leisure time beyond their office hours or during their weekends thus offering utmost convenience. So as and when the consumers start frequenting a mall or a retail space, the administration also plays a key role to support the property with proper infrastructure. Considering all these factors when people of a certain profile start taking a keen interest in a particular demographic it directly results in demand of residential spaces thus resulting in a complete makeover of the area.”

Phoenix Marketcity, which is coming up at Kurla, is predicted to change the face of this central suburb. It will floor 2.1-m sq ft project area for retail and boast of one of the biggest multiplexes in the city with 11 screens.

Retail developments in Mumbai like Inorbit Mall at Malad, Center One at Vashi and High Street Phoenix at Lower Parel were among the first to successfully bring in landscape changes in these respective areas. Such developments have had a positive impact on the real estate prices in the areas of their operations. Commercial places like Kamala Mills Compound, One Indiabulls Centre, Raghuvanshi Mills have gained prominence after High Street Phoenix. Adds Misra,”High Street Phoenix has acted as a catalyst for commercial and residential developments for Lower Parel which was not perceived to be good for any kind of development earlier. Today, it is one of the most sought after locations.”

Similarly, several residential projects by leading developers like Rustomjee and Kalpataru, to name a few, have launched their residential projects post the launch of Inorbit Mall in Malad.

Mumbai undoubtedly has a large number of working couples, migrants, DINK (Double Income and No Kid) and families with good disposable incomes and display an increasing appetite for socializing. These retail destinations being closer to such residential hubs add more vibrancy and convenience to the lifestyle.

Says Reema Kundnani, V.P – Marketing & Corporate Communications, Oberoi Realty, “Today, an average Mumbai family spends their weekend in a mall where the lady of the family gets to shop and meanwhile the kids get to play in the fun zone.

The main reason why malls are gaining popularity is because facilities like shopping, entertainment, movies and food are all available under one roof which makes it a hassle-free destination. We started with Oberoi Mall as the initial step of Oberoi Garden City project followed by the other planned developments.”

Similar is the story of central suburbs and Navi Mumbai where the mall culture is fast spreading with the commencement of malls like R-Mall, Nirmal Lifestyle, Korum, Eternity and Center One, Inorbit and Raghuleela in their respective suburbs. Center One, the first mall in Navi Mumbai, has played a significant role in the development of Vashi node.

Says Sandeep Runwal, Director, Runwal Group, “A good retail development changes the entire look of the area. Before the launch of R-City mall the area wasn’t a preferred destination for residential spaces. But now the residential prices have been almost doubled or tripled in the area. A good mall always adds value to the area and people are willing to pay premium price for a good lifestyle.” Runwal Group has established R-Mall, the first mall in Mulund, R-City and R-Odeon in Ghatkopar and R- Mall in Thane.

Clubbed with 7 -7.5% growth in GDP, the organised retail market is expected to grow in the near future, adding convenience and a new buzz to residential locations across the city.

Global Brands Rake in Moolah.

Indian Stores Among Best in generating revenue per square feet per year.

What is M.A.C?” The question, posed by Govind Shrikhande of Shoppers Stop, must have taken the top brass at Estee Lauder Companies by surprise. 

To the top managers of the New York cosmetics group, the question may even have come across as a case of rare ignorance about Make-up Art Cosmetics or M.A.C, especially surprising from the boss of India’s largest department store chain who had been pitching for a partnership with Estee Lauder in India.
But just four years later, two of the 20-odd stores that Estee Lauder runs in partnership with Shoppers Stop in India rank among their top 10 worldwide in terms of revenues.

And Estee Lauder is not alone.
Scores of leading international brands – Swarovski, Accessorize, US Polo, Aldo and Promod, to name a few – are realising that some of their stores in still third world India are among their most successful across the world, helped by a constantly expanding army of consumers with increasing disposable incomes and high brand awareness.

Such is the level of awareness that it has even taken retail industry veterans by surprise. Shrikhande drew a blank then about M. A.C, but consumers in India knew about the Canadian brand that Estee Lauder had acquired in 1994. “Many consumers knew about the brand and were using the products even before it entered the country officially,” he says.

And now M.A.C stores at Select City Walk shopping mall in south Delhi and at Dynamix Mall in Mumbai’s Juhu are generating revenues in excess of $1,000 per square feet per year, executives who did not wish to be named said.
High-end crystal products maker Swarovski’s stores at Bandra in Mumbai and at the T3 terminal at Delhi airport rank among its top stores by sales, says Sukanya Dutta Roy, director of the company’s consumer goods business.

Similarly, British fashion accessories retailer Accessorize’s store at Ambience Mall in Gurgaon is the company’s second biggest revenue earner, clocking sales of about $600 per square ft per year.

Two of apparel brand US Polo stores also rank among the top ten globally. The 1,000 sq ft stores in Delhi and Bangalore generate sales of around $700 per sq ft a year, says J Suresh, managing director of Arvind Lifestyle Brands, which launched US Polo in India barely two years ago. Sales at the company’s other stores across the world usually vary between $200 and $500 sq ft a year.
Women’s fashion brand Promod’s store in Delhi reports the highest sales per sq ft in Asia, while Canadian shoe and accessories brand Aldo has two of its top 50 stores in India.

While some analysts believe that the performance at Indian stores may reflect the declining offtake in the more developed markets, others argue that several brands generate above average sales for short periods because they have a few stores servicing a large catchment.

“The reason could be initial attraction of the brand and fewer points of sale compared to the size of the overall consuming population,” says Ramesh Tainwala, CEO, Planet Retail.

At German sportswear brand Puma, executives do not look at sales figures alone but also factor in the exchange rate fluctuations. “We compare performance of Puma stores on a percentage profitability basis as opposed to sales per square feet,” says Rajeev Mehta, managing director of the company which counts three of its stores among the top ten globally.

Even as some analysts view the strong sales at Indian stores of global brands with caution, Raghav Gupta, principal at management consulting firm Booz & Co, points to the emerging big picture. “It links back to the overall position that India is starting to take in the global economy,” says Gupta.

Global India Stores

M.A.C
Juhu in Mumbai and Select Citywalk in Delhi

Swarovski
Bandra and Delhi Airport Terminal 3

Accessorize
Ambience Mall, Gurgaon

Puma
Bangalore’s Garuda Mall, West Gate Mall in Delhi, and Church Road in Pune

US POLO
Select Citywalk Mall at Saket in Delhi, and The Forum, Bangalore

Promod
Select Citywalk Mall in Delhi

Aldo
Select Citywalk Mall and Palladium

Which retail model rules?

Fashion retailing – a perennially sexy sector for many professional investors – could become a little ragged around the edges as more players begin strutting their stuff on the profit ramp. Does that mean investors should re-look at some of the JSE’s mainstay fashion retailers, which have – save for the odd blip – generated smart returns over the past decade and a half? Maybe. The segment is changing style rather quickly.

Players traditionally not plying the fashion trade – most notably supermarket group Pick n Pay Holdings [JSE:PWK] – have over recent years thrown their hat into the ring. Meanwhile, market leaders Truworths, Mr Price and The Foschini Group (TFG) have been unrelenting in growing their businesses and fighting for market share.

In the process, small independent operators have been gradually evaporating (see Conservative Cinderella). Apart from the re-listing of sports retailer Holdsport (the former Moresport), there – perhaps significantly – hasn’t been a trend of fashion retailers pushing for listings on the JSE, not even during the mid-noughties small cap boom.

In fact, a number of fashion-related listings have disappeared off the JSE over the past two decades. They include Fashion African, Dynamo Retail, Romens and AK Peer’s much-loved LA Group.

Empowerment company Brimstone Investment Corporation [JSE:BRT] valiantly tried its hand at building a fashion house by leveraging off its clothing manufacturing capacity. Hosken Consolidated Investments appears to be considering something similar at Seardel with its Speedo brand, but the retail component will initially be on brand building rather than any chain store ambitions.

While breaking into a fashion retailing sector dominated by a handful of large players is no easy ask, Pick n Pay’s surprisingly strong clothing thrust has already rattled a few cages. The arrival of Walmart – the world’s biggest retailer – on our shores also means there’s a possibility of Massmart stepping on to the fashion retailing catwalk. Massmart already sells clothing in small quantities at its Makro outlets.

Zara – owned by Spanish group Inditex – is also expected to open its first store in Sandton (Johannesburg’s most affluent suburb) later this year. Though plainly speculative at this stage, some believe the coming of Zara may trigger other global players to also pursue SA’s fashion retail market.

“Africa is seen as a huge growth opportunity and SA has a fast-growing middle class,” says Abri du Plessis, chief investment officer at Gryphon Assert Management. “If Zara and the likes are interested in SA, others will definitely consider coming as well.”

SA’s clothing retail industry is estimated to be worth more than R50bn/year in turnover. Much of the sector’s growth has been achieved over the past two decades. Driving that expansion, as Du Plessis notes, has been the growth of SA’s middle class, which has benefited chains such as Truworths, TFG and Edgars that mainly target that market segment. The increased popularity of malls and bigger shopping centres has triggered the formalisation of the sector, with bigger players taking market share from independent “mum and dad” stores or relegating them to old CBD buildings.

Pick n Pay’s foray into apparel retailing hasn’t been modest but has yet to grab major headlines. The group initially had a clothing offering in its hypermarket stores. It opened its first stand-alone clothing outlet in 2002 in Menlyn Park, Pretoria. It now operates 60 clothing outlets: 50 corporate owned and 10 franchised.

Michael Coles, head of the group’s clothing division, says Pick n Pay aims to become one of the biggest clothing retailers countrywide over the next decade. “The clothing format has proved to be highly popular with our customers, with all stores contributing to group profitability,” he says. “Our clothing stores offer real growth opportunities for the future.”

Coles says growth has been great, with like-for-like sales growing by more than 10%. The group plans to add at least 10 outlets/year but could push that number to 20 when opportunities arise.

“This is a good opportunity for Pick n Pay,” says Simone Kruger, a retail analyst at Avior Research. “Though it’s still basic it gives them better margins.” She commends the group’s introduction of a more fashionable range as a step in the right direction.

Coles says the target market is essentially Pick n Pay’s food customer, with a wide appeal catering for all LSM ranks: a female shopper who buys for her family, but mainly looks for affordability.

Admittedly, it will take a while for Pick n Pay to reach the level of success its competitor Woolworths has achieved in offering a full line food and clothing product range. Woolies – a traditional apparel retailer – has an almost evenly split revenue stream coming from both its food and clothing businesses. Clothing gives Woolies better margins than food.

Massmart currently has no major plans for its clothing division. Other than its small range in Makro stores, it doesn’t have a retail division. However, new parent Walmart is big in clothing in the many countries it operates in. Kruger expects the merged entity to eventually venture into clothing retail in SA, though she says that’s still distant because Massmart’s current focus is food retailing. For that reason she doesn’t expect the arrival of Walmart and Inditex to shock the earnings of dominant players.

Pick n Pay still has a long way to go to pose significant competition to Mr Price and its ilk. Nevertheless, Du Plessis reckons things are poised to heat up. What will make it even more difficult is SA’s fragile textile industry. With the rand getting stronger, some retailers have hiked their imports from cheap Asian markets, such as China. Says Du Plessis: “The differentiator will be the quality of the product.”

CREDIT VS CASH

Paying premium

FOR INVESTORS, it’s often a question of credit versus cash when it comes to fashion retailers as an investment. Truworths and The Foschini Group (TFG) have the reputation of being the best credit retailers in the sector; Mr Price the king of cash.

Below we take a look at the three shares. We exclude Woolworths because of its significant exposure to food, which would distort our comparison.

The three shares seem to be mainstays in quite a number of well-regarded asset managers’ portfolios – judging by the latest unit trust holdings. Warren Buys, a portfolio manager at Cadiz Asset Management, says the big selling point for these growth funds is the large number of people in SA moving up the LSM curve. During the full blast of the recession credit retailers across the board took a dip in their earnings – in varying degrees, of course. TFG, being the weakest, was the hardest hit. However, cash-driven Mr Price had a ball.

MR PRICE GROUP

Mr Price Group [JSE:MPC] ’s story is intriguing. Largely aimed at the lower young LSM market, less than 15% of its sales are on credit. Its model has delivered handsomely over the years. The group has seen compound growth of 23,5% in headline earnings per share (HEPS) over the past 25 years, while dividends per share have grown by 25,3%. Coming from a very high base, the group pleasantly surprised many when it posted a 51% rise in HEPS in its 2011 financial year. It has over the years diversified its business and ventured into home textiles, kitchenware and home accessories through Mr Price Home and Sheet Street and has operations throughout Africa, where it wants to accelerate.

“Mr Price should be losing market share to the likes of Foschini and Truworths because credit sales are picking up – but it’s not. And that’s because of its huge appealing iconic brand,” says Chris Gilmour, a retail analyst at Absa Investments. He says Mr Price has developed a highly successful model of offering great fashion at cheap prices.

However, the question on most analysts’ lips is whether Mr Price will sustain its phenomenal growth when credit is expected to outperform cash. Gilmour says the group may loosen up on credit to extract maximum benefit of the upturn.

Abri du Plessis, an analyst at Cape Town-based Gryphon Asset Management, expects Mr Price to grow slower than Truworths and TFG over the next couple of years but says its performance will continue being robust, boosted by an increase in social grants recipients.

TRUWORTHS INTERNATIONAL

Truworths International [JSE:TRU] is often touted as the jewel of SA’s credit-orientated fashion retailers. It’s been consistent in performance, even throughout the recession. Once bundled with Woolworths to form the Wooltru Group, it’s been charting its own path since partially unbundled from Wooltru in 1998. The group operates more than 530 stores, with popular brands for young people such as Uzzi and LTD. Its emporium stores’ design and its ability to spot fashion trends have been its strong points compared with TFG.

Warren Buys, of Cadiz Asset Management, adds supply chain efficiencies have been another differentiating factor. “Truworths has operated on shorter lead times, which has enabled it to mitigate any problems with its ranges. Foschini’s lead times are longer, which makes it more difficult for it to make changes and limits any damage done as a result of getting its offerings wrong.”

If consistency and predictability are what you’re looking for, surely Truworths will impress you. In its past financial year it reported a 40% compound return on equity growth over the past decade. In its 2011 interim numbers it posted a 19% rise in HEPS and widened its trading space by 4% as it continues to open new stores. It said its debtors book continued to perform satisfactorily.

Though credit sales remained stagnant at 65%, its doubtful debt allowance and net bad debts to gross trade receivables improved to 10,1% (2009: 11,3%) and 7,5% (2009: 11,3%) respectively. It has predicted a lukewarm performance in its second half, which ends this month.

THE FOSCHINI GROUP

While Truworths’ track record over the past decade is impressive, some analysts believe the money is in TFG. The group began its upward cycle last year after about three years in a downward curve. Group CEO Doug Murray says the business is now in good shape. The group has invested time, money and energy re-engineering the business, particularly its division for women via Foschini [JSE:FOS].

It received much praise when it posted a sterling set of annual results for its 2011 financial year. Murray says TFG is growing ahead of its competitors, having achieved a 15% increase in retail turnover and a 21% hike in HEPS in the year to February. “We’re seeing the effects of our strategies in the supply chain. We’ve reduced lead times and established better relations with our suppliers.”

Nino Frodema, a portfolio manager at Metropolitan Asset Management, agrees. However, he says the group’s problems are not yet over. “We believe Foschini still has some work to do [in supply chains] – but it’s certainly made good progress.”

TFG is a much more complicated business than Truworths. It has a portfolio spanning apparel and jewellery retail and owns a majority stake in consumer finance group RCS. Among its popular apparel brands are Markham and Totalsports. Its jewellery portfolio includes leading chains American Swiss and Sterns. RCS extends credit to a number of retail chains, even those not owned by TFG. With the SA Reserve Bank widely expected to start lifting interest rates later this year, RCS is expected to boost TFG’s bottom line. Nedbank’s economic desk expects the hike to begin earlier next year, because the economy remains volatile.

Edcon and Pepkor

Still rule

“IF YOU AREN’T IN fashion, you’re nobody.” We believe that quote by British statesman Lord Chesterfield has some merit for Finweek readers. Let’s be honest: we all have our own favourite retail outlets. Asset managers will talk up Foschini because they can afford to shop there. Stockbrokers like Woolies because you can get your grub on the run along with your polyester suits. And journalists and those unfortunate Sharks supporters favour Mr Price because they don’t have too many choices.

However, none of that answers the question of how our readers are going to actually make any money by investing in South Africa’s fashion retailing sector. The acid test for us when we write about would-be investments is to take whatever money is in our wallets – normally not much, having blown it at Mr Price – and asking ourselves: “Would we put this money into the investments we’re writing about?”

In our view, the two best fashion retail investments aren’t even on the JSE… yet. Our first pick is Pepkor, the Christo Wiese controlled retailer. Investors can currently access Pepkor through investment holding company Brait. The company has recently undergone a restructuring, which sees it now as a majority shareholder in Pepkor and Premier Foods. There are a few other investments but nothing of any real substance. So if you put your money down you can effectively say you’re primarily a buyer of Pepkor.

Stockbrokerage Barnard Jacobs Mellet (BJM) recently encouraged clients with a high risk appetite to follow their rights at Brait, pointing out much of the new Brait’s NAV is made up of Pepkor. BJM notes: “Pepkor is currently undervalued relative to other SA clothing retailers and is likely to make up a considerable percentage of Brait’s NAV (around 70%).”

BJM also advises: “Recent corporate activities and price movements in the retail sector could provide upside for Pepkor and Premier, since high liquidity and greater transparency will impact positively on their valuation.”

The beauty of Brait is if you want to put your money into fashion retail now you get all the defensive characteristics of a cash retailer, coupled with plenty of upside. Simplistically, you’re paying a 10 times price earnings multiple against 13 to 15 for the other fashion retailers – receiving a comparable dividend yield and you get the reinforced balance sheet of Brait behind you. If the idea is to grow your footprint you can do so without tapping the market for expensive debt.

A straight price earnings valuation is important on a second front and that’s because as many as six offshore retail players are eyeing the African market through a South African entry. So there’s going to be competition for quality assets. With Walmart already setting a bar by paying 22 times earnings for Massmart, you have to ask how much room is left in the price of SA’s other retailers.

Throw in the fact that you’re paying a discount to NAV for Brait assets because of its investment holding company structure and you have to believe the patient investor can’t lose from here on.

The second play is Edcon, once the JSE’s retail darling but now out of sight and mind for most investors. That doesn’t necessarily mean it will remain there. Though there’s far less information about Edcon than there is on SA’s other listed retailers, we do know that for its past financial year it lost R1,6bn despite growing its trading profit by 14%. The losses incurred were due to derivative hedging and a R2,6bn interest bill, which all calls into question just how much value private equity firm Bain has created by taking this business private. That’s a far cry in profit from the R3bn in headline earnings and R22bn in revenue it was generating in the year it was de-listed.

As noted by Standard Securities in a recent note to clients, Edcon is still SA’s largest clothing retailer by both sales and cash flow. However, it’s heaving under a mountain of debt, taken on when the business was delisted. And that may see it come back to the market for an alternative source of funding.

But analysts say its future working capital investment is likely to continue to be constrained while it tries to balance its debt with cash flows – and that presents opportunities for other players. “As a result, the listed clothing players – TFG [the Foschini Group], Mr Price, Truworths and Woolworths, and unlisted Pepkor – are likely to continue to benefit from relative market share gains, in our view,” the firm advised clients.

Standard Securities says its preferred pick in the sector is Woolworths, saying Mr Price and Truworths are too “highly rated on a price earnings basis relative to their earnings prospects”.

While its debt is an obvious concern, what people forget about Edcon is it’s an absolute monster in SA’s retail sector. It has an 80-year trading history, 3,7m private label credit cards and it’s almost twice the size of its nearest competitor. Its credit and financial services business is what sets Edcon kilometres apart from its competitors. When it delisted in 2007 this division contributed around R360m in operating profit. That currently tops R1bn at a time when credit is tough to come by and consumers are cutting back on their spending.

You aren’t just acquiring a retailer but also a micro-lender with a massive balance sheet and reach. You have only to look at the cash flows African Bank generates (coupled with its attractive dividend yield) to understand why this is a good story.

When – not if – Edcon comes back to the market in time for the next consumer boom, shareholders are going to again be able to cash in. Why rush to put your money into a BMW 3-series like Mr Price or Woolies when you can conserve your capital for the Mercedes AMG with a bit of patience?

Just as we kicked off this report with a quote, we’re going to end with one from fashion guru Giorgio Armani. It might make investors think a little harder before putting their money into SA’s listed fashion retailers:

Armani said: “The goal I seek is to have people refine their style through my clothing without having them become victims of fashion.”
While there haven’t been too many successful entrants into South Africa’s competitive fashion retailing segment, Cape Town-based family-owned business Rex Trueform Clothing Company [JSE:RTO] has managed to carve out a very viable niche with its Queenspark chain. Queenspark was founded in the early Nineties as a sideline business to Rextru’s core clothing manufacturing operations. It didn’t take long for its retail arm to overtake and then render almost insignificant its traditional manufacturing business. In fact, Rextru’s clothing manufacturing arm probably earns the bulk of its keep manufacturing for Queenspark.

In the year to end-June 2010, Rextru generated profits before tax of R45m from turnover of R480m – showing a smart net operating margin of 9,4%. Things became even better in the interim period to end-December 2010, with turnover up 18% to R290m and pre-tax profits coming in 45% higher at R32m – meaning the all-important margin had extended to 11%.

But the most reassuring aspect of Rextru’s business model is its ability to pump cash. In the year to end-June last year its cash flow from operating activities was R53m – equivalent to more than 260c/share. Its interim operational cash flow was R37m, or 185c/share.

At current prices the Rextru ordinary and N-shares (as well as parent company Africa & Overseas Enterprises) represent remarkable value in a sector where earnings multiples are mostly in excess of 15 times. The discount (the market rates Rextru/Af&Over on a multiple of between five and seven times) placed on the share is only partly prompted by the fact that the company is so much smaller than its larger listed competitors.

Finweek believes the main reason for discounting Rextru’s prospects is because its controlling shareholders – the Shub family – rule the company with a conservative rod.

The Queenspark chain has been cautious, with the result that – other than Spur Corporation – there can’t be many other listed companies that hold such a large cash balance in relation to turnover and profit. At its interim stage Rextru held net cash of almost R150m – three times more than its last annual profit after tax number and equivalent to a rather hefty 750c/share. Its dividend policy also remains tight and earnings covered Rextru’s annual payout of 40c/share almost four times.

The critical question is whether Rextru needs to adopt a more aggressive model – especially in terms of expanding its Queenspark footprint. Brimstone is currently the biggest shareholder in Rextru, but its N-share and pyramid holding structure has left the empowerment group without much influence.

Whether Brimstone can coax Rextru’s controlling shareholders out of their conservative state to unlock both value and growth opportunities remains to be seen. There are market watchers who believe Brimstone should simply sell its stakes in Rextru and Af&Over to one of SA’s larger fashion retailers or perhaps dangle the stake in front of overseas players wanting to buy exposure in the local market.

Unfortunately, the Shub family’s artificial control of Rextru will probably keep a lid on any predator’s enthusiasm for acquiring a large stake in the company – even if such a large shareholding can be garnered at below fair value. Perhaps it wouldn’t really suit Rextru shareholders to see Queenspark swallowed up by a large listed fashion retailer.

A one-off settlement is one thing, but there’s the long-term potential to consider even if operations remain cloaked in conservatism. Rextru’s done the hard yards with the brand and it would be sad to see a large corporate walking off with the undeniable upside in the Queenspark business.

Then again, a company such as Pick n Pay – which is keenly aware of intricacies and eccentricities of family ownership and might want to expand its fashion retailing format – might make a far more sympathetic suitor or equity partner for Rextru.

Beauty business set to boom.

Beauty consciousness has dawned on rising affluence. With an increase in the number of households upgrading to a higher consumption lifestyle, there is an explosion of growth in the Indian beauty space. Consider the Living Standard Measurement (LSM) classification, which is the new socio-economic classification to gauge consumption patterns : between LSM 1-4 , which is the lowest level, and LSM 8-plus (top end), there has been an 80-fold jump in growth in the consumption of beauty products and services. 

That explains why a Hindustan Unilever (HUL) is speeding up to open a Lakme salon a week. Or how a Jawed Habib Hair & Beauty (JHHB), which has grown from 37 salons in 2006 to around 225 at the end of November 2010, is eyeing a similar growth. Or why foreign chains like the contemporary French beauty salon, Jean-Claude Biguine, with annual revenues of 150 million euros, are setting up salons to groom the Indian consumer.Clearly, the predominantly unorganized locally run beauty salon market is at an inflection point. The mushrooming of branded chains like Lakme is expected to change the landscape completely a few years down the line, ushering in a new era of trained salon personnel, offering services based on global insights and professional products strutting the latest international technologies.”Step back and look at the way consumption has changed in India. Growing affluence has resulted in increased experimentation. This has accelerated the growth of beauty categories. You see this explosive growth in beauty services as well. Salons are at the centre of that growth. So it’s a big opportunity . A couple of years ago, we really decided to pick beauty as a theme. We have dramatically stepped up investment, innovation and go to market capabilities behind our entire beauty portfolio. And the Lakme brand is core to beauty. We see the Lakme business building scale within beauty,” said Gopal Vittal, executive director – home and personal care (HPC), HUL.

With close to 150 salons at present, HUL is scaling up rapidly , setting up one Lakme salon per week. The ambition is audacious. If one does the math, there would be about 200 Lakme salons a year down the line. But HUL would rather scale up this ambition to open 2 salons per week, if it has its way. Is there really room for so many? “We believe that there is room to keep adding salons for now. But what is crucial is to be true to the business model – the right return on capital, the right cost structure and the right people,” said Vittal.

“Currently, Indian hair and beauty industry is seeing a per capita annual spend of only $1.2, which is far lower than world standards. We are expecting this number to grow to $5 by 2015. So, in terms of market potential , there is no problem, however, only those companies which can have strong manpower and can overcome the hurdles of the industry can sustain this growth,” said Rohit Arora, executive director, JHHB. The Rs 23-crore firm has proposed to tap the capital market with an initial public offering of Rs 60 crore.

The roughly Rs 7,000 crore organized and unorganized hair and beauty industry is growing at the CAGR of 35%. At this rate, it has the potential to become a Rs-30 ,000 crore business by 2015.

Professionalization of salons 

About 18 months ago, when HUL took a closer look at its salons business under Lakme, it realized that the traditional methods of running an FMCG company would not apply here. The company set up a 100% subsidiary where Lakme was housed and looked after by a dedicated team having a separate CEO. The business got the attention it needed at a time when beauty was developing wings to take off in India. “The purpose of setting up a separate subsidiary that is still nested within the HPC business was to ensure focus and the right culture. And what is important is to build capabilities that are structural and sustainable ,” said Vittal.

In addition, HUL realized it required high-quality trained staff to have an edge. It has now launched a beauty academy with the objective to provide in house training to stylists. For this, HUL has forged an alliance with Pivot Point, a leading beauty training company in the US.

Providing financial metrics was another important task because a salon business operates on a return on capital employed kind of business and not the gross margin kind. “It took us six months to perfect the model. Now we have got a reasonably good grip on how we need to go about it. We’ve understood the levers and we are ready to scale up. So in the last few months we are adding a salon a week. But even as we do that, we have to keep our eye on same salon growth. And we are pleased with the 20% odd growths that we are seeing there,” said Vittal.

As a next step, HUL wants to closely inter-link the product business and the salon business . It has created a Lakme brand council which will advise on product innovation. HUL has already launched Unilever’s global professional product brand TIGI and hopes to build the salon brand in a major way. It has also tied up with global partners—Toly (based in Malta) for packaging structures and applicators, Fiabila in France for Nail Enamel, Schwann Stabilo in Germany for all pencils and pencil applicators and Intercos in Italy for lipsticks, eye shadow and face make up.

With national players expanding their base, will the unorganized market eventually be devoured? “It will take time before anyone or few large branded players take a larger share of this market. However, we are expecting the consolidation to happen at the organized level in the coming years. Local players will continue to exist, considering that there are low barriers to entry in this sector,” said Arora. While no organized player can hold a substantial share of this market, Arora said “the pipeline is big enough for many players” .

Perhaps, till the government sets up a regulatory system , it’s going to be a beauty rush for all.

It’s No Longer Kirana Versus Modern Retail

While neighbourhood stores have been growing in single digits since 2006, modern trade has had double-digit growth, says a Nielsen study

Arrival of big retailers has had an impact on small grocers, but neighbourhood stores are still growing their sales, although at a much lower rate than modern trade, according to data from market research firm The Nielsen Company. 

Since 2006, when most big retailers either entered the retail space or began expanding their network, sales in local kiranas have grown in the low single digits even less than the GDP growth rate, while modern trade has grown in strong double digits, though at a much lower base.
For instance, sales at modern stores grew 34% in 2006 and 29.3% in 2010. Traditional stores could increase sales only 1.5% in 2006, but improved the growth rate to 6.2% last year (see graph).
The data comes at a time the government finally moves closer to allowing multinational retailers such as Wal-Mart and Carrefour open shops in the country after several years of debates, protests and lobbying. Critics, including the Left and the BJP, say such a move will impact the livelihood of small shopkeepers and traders, but the thinking in government circles is that this will help check rising food prices by removing several layers of middlemen between farmers and consumers.
Organised retail accounts for less than 10% of India’s retail market estimated at close to $400 million. The Boston Consulting Group estimates the size of organised retail market at $28 billion and expects it to grow nine times to $260 billion in 10 years.
Nielsen says Indians have embraced modern retail.  “The Indian Shopper has discovered modern retail and is increasingly shopping there,” says Nielsen’s Executive Director for Retail and Shopper Practice Dipita Chakraborty. This trend is fueled by the growth in number of modern stores, she adds.
The study shows that the frequency of consumers going to large stores has increased. More than 37% consumers visited modern trade stores every month this year, up from 30% last year.
Reliance Retail President Bijou Kurien attributes this to more options that big retailers offer to consumers. “In momand-pop stores, customer has to be very specific with what they want, but they can get more options in a modern store, and that’s where we are gaining,” he says.
MOVING TOWARDS FDI
The Indian government has been advocating that FDI in retail could help small farmers and other producers as well as generate employment for some time now.
In fact, an inter-ministerial group set up by Prime Minister Manmohan Singh to suggest ways to tackle high inflation has said that organised retail will reduce the margin between the price farmers get and what consumers pay by eliminating traders, and this will bring down prices. The group also tried to allay fears of small shopkeepers by suggesting creation of several zones and restricting the number of large-format retail stores in each zone.
Multinationals like Wal-Mart and Carrefour, which are lobbying for entry into the big and fast-growing Indian retail market, also say big investments in cold storages will cut wastage of fruits and vegetable in the country, estimated at . 130 crore every day, or about half the total production.
And big retailers say they are no threat to small grocers.  “Both the formats can co-exist. In fact, when modern trade help create new categories, the spillover effect is helping generate more demand in kirana stores as well,” says Damodar Mall, director, integrated food strategy, Future Group, the country’s largest retailer. “Once more wholesale or cash and carry stores are opened, smaller stores too will have more bargaining power and source products at lower costs,” added Mall.
However small shopkeepers are not convinced. And they are holding their ground, more or less.  “It’s true that our business is down compared to what we did few years ago. But we are also observing that few consumers are coming back to our stores for want of better credit facility or home delivery which large format stores can’t offer,” says Chandrakant Gala, secretary, Bombay Suburban Grain Dealers Association.
Meanwhile, big consumer product companies, including the country’s largest consumer products firm Hindustan Unilever that has relied on millions of small shops to build its empire, are now aggressively tapping modern stores.
Modern retail now accounts for 10% of Hindustan Unilever’s sales, up from 5% in 2005. “Last year, 85% of our business has grown share in modern trade. In modern trade we want to be significantly overweight,” the company’s executive director for sales & customer development Hemand Bakshi had told ET in April.
One reason for this is premium products are sold more in modern retail. And the Indian consumers’ love for premium products, which offer higher margins to manufacturers, is increasing along with their rising incomes, exposure and aspirations.

Future Group to build wholesale markets

Agre Developers, a Future Group company, formerly known as Future Mall Management, has struck a deal with Bangalore-based developer the Sattva Group to build a wholesale trading market on the lines of Dubai’s Dragon Mart and China’s Yiwu wholesale market. This is the first of the eight businessto-business (B2B) markets that the company is planning to start across major cities in the course of the next few years. These trading hubs will stock general merchandise, IT peripherals, hardware products along with other commodities typically spread across a 5-10 acre space. The BSE listed-company will also be getting into the infra-logistics and retail infrastructure business. 

Kishore Biyani had merged his real-estate business with Kolkata-based developer Sumit Dabriwala into Agre Developers to strengthen the retail major’s foothold in the realty space. The retail to financial services group runs stores like Big Bazaar and Food Bazaar.
Sumit Dabriwala, MD, Agre Developers, told TOI, that the strategy for the company going forward will be to tie-up with strategic partners to facilitate the opening of these tradings hubs and also to build infra-logistics across the country. Agre Developers will work in tandem with Future Supply Chain, the logistics and supply chain vertical of the group, on the infra-logistics business.
“Even as the demand of logistics in the country expands, supply of good quality logistics infrastructure is extremely low. This is where we will work with Future Supply Chain and also with other logistics companies,” Dabriwala said.
The company will look to plough about Rs 500 crore of equity across the three formats and is evaluating the possibility of inviting strategic partners into each of these businesses. The total outlay on the three business verticals will be around Rs.3500 crore over the next five years, said Dabriwala.
“While the wholesale trading and the infra-logistics business will be in partnership with another entity, the retail infrastructure vertical of the company will be operated independently.
“On the retail infrastructure side, the mandate is to play a bigger role which will start right from spotting the location of the mall to designing the mall, determining the tenant mix, sub-leasing the mall and managing it over the life cycle of the transaction,” Dabriwala pointed out.
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