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Simran Says: What is your risk appetite?
Posted On: 31-01-2011 00:00:00 11

In an interview with the media, Raghu Pillai was asked how Future group was managing lower prices given the wafer-thin margins in food products and groceries owing to high food inflation. He answered saying that the company had decided to sacrifice gross margins in sensitive items in the short run since ultimately, retailers take home rupees and not margins. Over the years I have realized that there are 2 kinds of growth strategies. The first is the Cost+approach. This approach focuses on a fixed minimum return per store. It’s a safe strategy. You anticipate the expenses, forecast sales and open the store only if it delivers the Ebidta (earnings before interest, depreciation and taxes) you want. Say you are looking for a 20% Ebidta then every new store must deliver a min 20% otherwise you will not consider the store. The second strategy would be to look only at the incremental Ebidta (in line with the Raghu Pillai approach listed above). This strategy recognizes that every additional rupee adds to bottom line. So if the first store is delivering 20% and the next store is expected to deliver 15% (assuming no cannibalization) then the second store can be considered since “ultimately, retailers take home rupees and not margins.” This is a far more aggressive strategy and leads to larger profits, but requires a higher risk appetite since the overall profit margin % becomes thinner.

 
 
 

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