Retail

            Retail is a tough business. It has razor thin margins, complicated logistics and uses very high human capital. If you think managing domestic help is challenging then managing 50 floor people and that is just in one stone. Logistic is a country with poor infrastructure is a problem, then consider that perishable rot and or are stolen. Supplier networks are still forming which means erratic supplies and increased cost of quality assurance. The only saving grace is technology, strong use of data for inventory management and tracking for consumer buying habits are the only consistent advantage the retailers can look to. All this with a price sensitive and consumer, who makes it tough to pass on increased cost. The result is a 2-3% margin for the successful retailer. So what’s the allure? Scale Retailers once they sort out the operations can look to take that operation nationally where the size of the addressable market makes it a worth while business. Theoretically, even in developed markets the rate of bankruptcy in this business is high. Eddy Lampert, who some consider the smartest guy on wall street, did great initially with his K Mart purchase freeing capital and but stumbled when it came to operations of a large entity like sears/K Mart. Which make me skeptical about managements that are used to operating in 20-30% margin businesses being effective in it? Especially when the other secret source of successful retailers- strong arming suppliers is difficult without consolidated buying power. The much taunted sunrise sector also has no dearth of new entrants which is diffusing and buying power while rising real estate cost.

                      Allure is Wall Mart; a few years ago it became Fortune no 1, beating out, the oil majors, GE, GM, MSFT and every other company in the world. People took notice. Wall Mart success in large parts was due to its rear monopoly in centers with 100,000 people or less. The practiced this strategy to great success carpeting the hinterlands with stores much before it had national attention. It pretty much led the move to china sourcing; if Wall Mart were a country it would be China’s 5 largest trading partners! It moved to technology quickly and well.

                     In a country where there are restriction political focus on domestic sourcing with large number of entrant armed with prior successful strategies, it is difficult to see what could make them attractive businesses to own. Here off-course we are talking about consumer staples retailing; electronics and luxury retailing have slightly different economics, companies like Wall Mart / Carrefour have also not enjoyed universal success outside of their home countries. Carrefour, for its part used its market power to have its trade find its expansion, it has been successful in territories with under developed capital markets.