Between January 2009 and October 2009, the price of copper has shot up 125%. However, inventories of copper, monitored by the Shanghai Futures Exchange, stood at 102,835 tonnes as on 30 October 2009, up from 17,822 tonnes at the start of the year. China’s copper imports more than doubled in the first nine months of the calendar year to 2.6 million metric tonnes. Even on the London Metal Exchange (LME), inventories of copper stood at 371,725 tonnes. Rising inventories on the LME indicate lack of recovery in demand outside China. Rising inventories, demand worries and a stronger dollar may weigh on the price of the red metal.
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Shopper’s Stop reported a significantly higher profit during the second quarter. Govind Shrikhande, president & CEO, explains to Pallabika Ganguly how he did it.
Pallabika Ganguly (ML): Shopper's Stop reported healthy numbers for the second quarter. Do you think the good show will continue in the next quarter as well?
Govind Shrikhande (GS): In the retail sector, the third quarter is always the best quarter because of the festivals, new-year celebrations and commencement of the marriage season which lasts till May-June next year. Last year, sales were affected following the terror attack on Mumbai. The slowdown continued till March this year. But the business environment has changed since then and I don’t see any problem in repeating our second-quarter performance. There are three key reasons for the improvement: first, the overall climate is definitely improving, as we can see from the revival across several industries, and consumer confidence is high; second, the European and US economies are showing signs of recovery; and third, Shopper’s Stop is a good brand and we have upgraded our merchandise and also launched many new brands. With an increasing, loyal customer base of around 14 lakh, I feel we will be able to do well in the coming quarters.
ML: How have you managed to cut operating expenses?
GS: During the first and second quarters, we were able to cut our operating costs by around 600 basis points. We achieved this through multiple measures. We reduced our employment cost by 15% to 18%, including a 15% salary cut of top management. We reduced our electricity consumption by 14%. We are also shifting to Tata Power from Reliance Infrastructure, which would help up to reduce our electricity cost. We have also cut down on advertising. Last year, we had to spend around Rs14 crore on our logo change, but this year, this cost was not there. Besides, we have also cut down our usage of office space by 15%.
ML: During the second quarter, Shopper’s Stop reported operating margins (OPM) of 7%, while there are several retailers across the country operating on a very thin margin. Will it improve?
GS: Instead of OPM, we prefer to use EBITDA (earnings before interest, taxes, depreciation, and amortization) to measure performance. Over the next 18 months, we should be able to achieve an EBITDA of 8.5%. When we talk about the margins of retailers across the country, we need to look at three relatively big segments: the hypermarkets & supermarkets where OPMs are below 20%, departmental stores where OPMs are 30%-35% and the electronics segment where OPMs are less than 10%.
ML: During the second quarter, your net profit rose 200% to Rs12.1 crore. What are the factors responsible for this growth?
GS: We worked on our depreciation policy, which gave us a swing of 500 basis points, while saving on operating costs and increasing cash margins. Earlier, we used to renovate our stores every three years. But after some research and analysis, we found that there is no need to renovate every store every three years—we can do it over a period of five to seven years. With an EBITDA of less than 5%, depreciation of 4% and interest cost of 1.5%, our overall net profit was impacted. Our auditors and board members then reviewed our depreciation policy and found that we were actually over-depreciating our entire assets. We realised that the competition was using a completely different method of depreciation and our depreciation rates were nearly two-and-a-half times higher. So, we revisited the whole policy and decided to apply depreciation rates as per the category. For example, computer and IT infrastructure gets outdated over a three-to-four-year period, so we adjusted our depreciation rate accordingly. We increased the depreciation period to seven years for furniture and to 12 years for ceiling & flooring. Earlier, we used to bundle everything into a three-to-five-year depreciation cycle.