(Bloomberg) — Ever since Amazon.com Inc. and others started shipping items ranging from lingerie to iPads, Shoppers Stop Ltd., India’s oldest department chain store, has been under pressure to scale up its online sales.
That necessity is felt even more acutely now as it seeks to revive profit growth. Managing Director Govind Shrikhande, 54, is looking at a combination of e-commerce plus physical stores to boost margins as rising land prices drive up rents. Online sales will account for 20 percent of Shoppers Stop’s total by 2020, compared with less than 1 percent now, he said in an interview.
“Physical retail space growth is going to be slightly challenged for sure, which really means we will have to drive our online business harder,” he said. “Not many are going to get into the mall business because of higher realty costs.”
Having faced policy quirks over lipsticks to foreign investment, the old-economy Indian retailer that started in 1991 even before any Web browser became available, is at a crossroads as more buyers in the second-most populous country prefer to shop from the comfort of their homes. Gartner Inc. says total online sales will grow 70 percent to $6 billion this year.
The Mumbai-based company, which doubled the number of stores in the last three years to 72, is slowing the pace of that expansion and will add 20 more in the next three years, Shrikhande said.
Availability of quality retail space in established markets of Delhi and Mumbai is expected to remain tight, with rents in prime malls and high streets set to increase marginally, CBRE Group Inc. said in a report distributed in February.
The chain store, which has an exclusive deal to sell Estee Lauder’s products in India, expects earnings as a percentage of sales before interest, taxes, depreciation and amortization to rebound to 8 percent in about 12 to 18 months as the older stores turn profitable, he said.
“There are already many entrenched players in the Indian e-commerce scene, and finding their feet will be the challenge,” said Abhishek Ranganathan, an analyst at Mumbai- based PhillipCapital India Pvt. “They will have to focus on exclusive, strong brands to create a differential and retain existing customers.”
40 Percent Slump
Ranganathan recommended buying the stock on May 6, raising it from a neutral rating, after it had slumped 40 percent from a record reached Oct. 21, 2014. The shares, trading at 70 times projected 12-month earnings, climbed 1.8 percent to 390.40 rupees on Tuesday in Mumbai. Trent Ltd., a unit of Tata Group, trades at 22 times.
Online sales will account for 10 percent of total in three years, Shrikhande said, adding the company will become debt free once its Hypercity unit starts reporting profit in about 24 months.
E-commerce companies are well funded, helping subsidize customer acquisition costs, while a physical business may not enjoy the same advantage, said U.R. Bhat, a director at the Indian unit of U.K.-based Dalton Strategic Partnership LLP, which overseas $2 billion in assets.
“They give huge discounts, which you won’t get in brick- and-mortar business,” he said by phone. That inability “will undercut their traditional stores. The policy is to beggar thy neighbor, but we don’t know how many of them will survive.”
The company reported a group profit of 424 million rupees ($6.7 million) in the year through March 31, after two years of losses, according to data compiled by Bloomberg. Sales grew 13 percent from a year earlier.
Shoppers Stop’s plans to get investment from overseas have stalled because of the government’s policy and restrictions.
While India allows foreign retailers to own majority stakes in stores selling multiple brands, conditions many consider onerous have prevented most companies from seeking licenses. Tesco Plc, the U.K.’s largest supermarket company, in December 2013 proposed to invest $110 million in Trent Hypermarket Ltd., a unit of Tata Group.
Foreign companies are required to have a local partner to run supermarket chains in India. Such joint ventures will have to buy 30 percent of manufactured products from small- and medium-sized local businesses with less than $2 million invested in factories and machinery.
The retailer also battled a directive last year from the government to label products such as lipsticks to indicate if they have ingredients extracted from animals or plants.
“Government regulations aren’t helping,” Shrikhande said. “Overseas players haven’t been able to interpret the rules. The government should relook and reframe the policy.”