Losses widen even as sales grows for big retailers

24 Jan,2013

By Sagar Malviya


Big unlisted retail chains Reliance Industries’ Reliance Fresh, Aditya Birla Group’s More, Bharti Retail’s Easyday and Tata-owned Star Bazaar grew their sales in high double digits, but their losses too widened to take them farther away from the breakeven point.


According to their financial statements for 2011-12 filed with the corporate affairs ministry, these food and grocery retailers increased their combined losses 42% year-on-year to Rs 1,277 crore. Combined sales jumped 55% at Rs 6,560 crore.


“Our losses for FY12 have been impacted due to increased cost of funding and one-time store closure costs,” said Pranab Barua, apparel & retail business head at Aditya Birla Group, whose net loss increased 26%. “Since food and grocery retail is a thin margin business, the right rent-to-revenue ratio is critical for the success of the store and hence the success of the business,” he added.


High costs of real estate, paucity of skilled manpower and the lack of infrastructure like cold storages and efficient supply chains have all contributed to making organised retailing a high-investment, low return sector so far.


A recent report by India Ratings suggests that EBITDA margins for the retail sector are likely to contract by 50-75 basis points in 2013, while overall revenue is likely to grow 3-8% year on year across large retailers.


Experts, however, say that while all big retailers continue to be in the red, their losses as a percentage to sales would reduce going forward. “While few retailers are shutting stores, many are also expanding in profitable places.


Since they now have a critical mass, bargaining power has improved too, which will help in improving gross margins,” said Kumar Rajagopalan, chief executive of Retailers Association of India, an over 1,000-member strong industry body. He said food and grocery retailing takes at least 7-10 years to break-even.


More than five years ago, in the wake of a slowdown when they were on an expansion spree, most retailers were left saddled with a huge inventory, faced cash crunch due to higher working capital requirements and were unable to raise funds. This made most retailers cut costs aggressively. Some deferred expansion and some shut down shops, while all now focus on store-level profitability and supply chain issues.


For instance, one of the key tasks for Rob Cissell, the British CEO of the value retail format of Reliance Retail (RRL) since September 2011, has been growing aggressively by launching new stores and new formats, as well as by building a robust supply chain; and to do all this profitably.


Reliance Fresh losses increased 71% to Rs 274 crore in financial year 2012, while its sales grew 55% at Rs 3,860 crore. “The supply chain cannot be outsourced, it is the heart of the business. We are currently working with 15,000 farmers now but, like Walmart does in China, we want to work with a million farmers,” Mr Cissell said last year in an exclusive interaction.


Aditya Birla Retail’s Barua said the company has started getting positive results. “In the last nine months, our sales have grown in double digits with substantial improvement in store contribution over 2011-12,” he said. Birla Retail shut over three-dozen stores last year to increase productivity and cork losses from unviable stores across the country.


Bharti Retail and Trent Hypermarket widened their losses last year due to aggressive expansion. Bharti Retail, for example, opened 46 Easyday supermarkets and 12 Easyday Hypermarkets during calendar year 2011, taking its tally to 180 stores. While it helped the retailer to grow its sales 117%, its losses jumped 48%. Star Bazaar reported 32% jump in sales and 54% increase in net loss for the year ended March 2012.


Experts say that apart from store expansion, deep discounting too added to the retailers’ losses. “Sales in 2012 were driven by discount offers; and the trend is likely to continue in 2013, providing volume growth at the cost of margin,” said an India Ratings report.


Source:The Economic Times

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