High inflation, mounting interest costs and rising rentals have hit growth of the domestic retail sector. Retailers are facing a slowdown in roll-out plans, as developers are not being able to deliver stores on time. Despite these impediments, the sector still has enough headroom to grow over the long term.
Organised retail sales currently comprise around 4% of total sales in the domestic retail sector (annual sales $322 billion in ’06-07). The pace of organised sector’s sales growth is expected to increase at a much faster rate and its share in the total retail trade is likely to touch 16% by FY12. In its current stage, the unorganised retail sector will not be able to service the growing demand of the consuming class. The report says that the unorganised retail business is likely to grow at 10% per annum from $309 billion in FY07 to $496 billion in FY12. This will have a snowball effect on the organised sector. As a result, the share of organised retail is expected to grow at a rate of 45-50% per annum. This is what the big retailers are preparing for now.
Macro-environmental factors are putting a downward pressure on the sector’s margins. The March quarter (Q4) of FY08 registered a sharp slowdown in the sector’s sales on a quarter-on-quarter (q-o-q) basis, with sales slipping to 5.3%, vis-à-vis 12.4% in the previous quarter. Though it will not be prudent to compare the retail business on a q-o-q basis due to the seasonality factor, the situation worsened due to rising input prices. Despite this, the total expenses to sales have increased by a small 28 bps at 95.6%, as companies have been able to contain employee costs. But interest and depreciation costs still cause some concern.
Since the beginning of FY08, the wholesale price index has been rising at an average of 5.09%. This seems to be affecting the departmental store operators more than the value-format retailers. Food and grocery being essential items, a rise in their price leaves lesser income at the disposal of customers. A similar trend is observed in the international retail market as well. UK’s Experian National Retail FootFall Index fell by 2.6% in June, the fifth monthly drop this year. In the UK, large department stores outside city limits experienced much larger drops in footfalls, down 5.8%, compared to a 1.5% fall in city centers. This fall is significantly impacting retail sales because these visits have a much better conversion to sales ratio and generate much higher value purchases for retailers.
Pantaloon, the country’s largest retailer, has registered an 8.4% increase in its operating margins on account of efficient cost management. With 65% of its turnover coming from its value format, the company has managed to handle inflation by increasing its volumes. It has managed to increase the share of private labels, which, in turn, takes care of its margins. Shoppers Stop has managed to keep its same store sales higher, and also increased its average selling price. However, its interest costs and depreciation continue to be high. Similarly, Provogue’s costs continue to be on the higher side. What has been a surprise is the decline in sales for Trent. Despite opening a new store in the value as well as lifestyle formats, the company’s sales are seeing a slowdown, which is hitting margins. The newly listed players, Vishal Retail and Koutons, continue to be in an aggressive expansion mode. Sales have been growing on a q-o-q basis, but margins are expected to remain under pressure till the full roll-out takes place. In addition, increasing competition will impact the margins of retailers, as the target audience more or less remains the same.
Since inflationary trends are expected to continue in the near future, retailers will find new ways of luring customers. Product promotion, freebies, promotion of private labels and online discounts are some of the avenues they will resort to, because ‘customer is the king’. Ultimately, it will be the call of the consumer to choose the most ‘cheapest in prices’ player.