There is no immediate respite on the horizon for the country’s organised retailers, with growth likely to remain weak for the third consecutive year, although the final figure for 2013-14, at 11-12 per cent, would be marginally better than 10 per cent recorded in 2012-13.
What’s worse, muted consumer sentiment is likely to result in only moderate improvement in retailer revenue growth in 2014-15 too. Consequently, the focus has shifted from network expansions to store-level profitability. Added to this is uncertainty on foreign direct investment (FDI) and the burgeoning threat from online retail.
Within organised retail, the toughest nut to crack will be food and grocery, although low organised retail penetration (ORP) has made the food and grocery vertical ‘too big to ignore’ for organised retailers. This vertical is among the most challenging, as food and grocery products fetch the lowest gross margins, which is why this vertical takes the longest to attain a break-even at the store level and profitability is impacted.
Keeping in mind already announced expansion plans, we expect the food and grocery vertical to grow by 9-11 per cent over 2013-14 and 2014-15, compared with 6-7 per cent in 2012-13 (due to the weak macro-economic situation, retailers went slow on expansions in this vertical and many convenience stores and supermarkets were also shut down). In fact, to beat the slowdown blues, we believe that retailers will focus more on hypermarkets. Within hypermarkets, players have been tweaking their operating models and focusing on smaller store sizes (compact hypermarkets) and altering product mixes to improve profitability.
Yet another vertical that organised retail will find challenging over the near-term will be consumer durables, mobiles and IT (CDIT). During 2013-14 and 2014-15, we expect the CDIT vertical’s revenues to grow at a CAGR (compounded annual growth rate) of 14-16 per cent on the back of expansions mainly by players with deep pockets.
A strong presence of manufacturer brands limits retailers’ average gross margins to 12-14 per cent. In the high volume mobile phones category, retailers’ gross margins are even lower at 5-8 per cent.
So, it is no wonder that sustaining a modern retail format on such low gross margins and continuing expansions in this vertical is a difficult proposition.
One segment that will provide some solace to organised retail will be apparel retailing as both exclusive and multi-brand outlets are planning expansions.
The beauty and healthcare products vertical (which includes jewellery, watches, eyecare, accessories, pharma retail) will experience the fastest growth among all verticals — 16-17 per cent over 2013-14 and 2014-15. Increasing aspirations of the youth will drive demand for these products, while robust expansions will support growth from the supply side. Book and music, which was one of the earliest verticals to take off in organised retail in the country, is today a pale shadow of its former self due to the threat from online retail. This is because the online retailing model has more advantages in terms of the variety that it is able to offer to customers.
Also, as online retailers have lower overheads, they are able to offer higher discounts. As a result, we do not anticipate large expansions by existing players or the entry of new players in the retailing of books through offline stores. However, some book retailers are diversifying their product mix to include games, toys, stationery, gift items and accessories, which offer higher margins. Consequently, over 2013-14 and 2014-15, we expect growth to improve slightly to 6-7 per cent.
The issue of foreign direct investment (FDI) in the sector also appears to be going nowhere at present, with most foreign retailers waiting for the outcome of the elections and the next government’s views of FDI in the sector. The threat from online retail too has intensified manifold over the past three years and is posing very challenging questions over the strategies and profitability of brick-and-mortar retailers. All in all, these are tough times for organised retail.
The author is Director, Crisil Research, a division of Crisil