After much decline, now Retail awaits ‘achche din’

06 Jun,2014

By Writankar Mukherjee & Sagar Malviya


Modern retail for consumer products slumped to its slowest ever sales growth as retailers shut stores, consumers cut back on discretionary items sold by supermarkets amid an economic slump and a fizzling out of the much-anticipated surge in FDI because of burdensome conditions.


The segment, which accounts for 7% of total sales, grew 8% in 2013, a sharp fall from 32% growth in 2012, according to market researcher Nielsen. In comparison, grocers, which contributed 72% to overall FMCG sales, grew 9%. Even chemists and other channels such as paanwallahs grew faster than modern trade despite having a higher base.


Nielsen said this was the first time modern trade slowed below double digits, with expansion plans being put on hold also contributing to the effect.


Inaction over FDI policy made way for retail downturn 3 years ago

“Most retailers went in for major store count expansion initially to capture higher market share so that they could look attractive to foreign operators and get higher valuation from them,” said Ruchi Sally, director at boutique retail consultancy Elargir Solutions. “However, this impacted profitability as major retailers had B2B background and little experience in a customer-centric industry such as retail. Hence, they had to scale down, especially when the FDI environment was uncertain.”


Tesco is the only foreign supermarket chain that is investing in India, through a joint venture with the Tata Group’s Trent Hypermarket. Apart from stringent terms attached to the policy, not all states allow FDI in multi-brand retail and the ruling BJP is not in favour of liberalisation of the sector.


Future Group CEO Kishore Biyani said the slower rate of growth is because of expansion being stalled in food and grocery retailing due to consolidation by the leading firms. He expects things to improve though.


“Strong growth is recorded from this quarter, which will trigger back growth generated from modern retail to FMCG sales,” Biyani said. Meanwhile, the new Narendra Modi government is seeking to revive the wider economy, holding out the prospect of consumers opening up their wallets a little more. The downturn for supermarkets began more than three years ago as government inaction over FDI policy dented retailers’ confidence. Most of them, weighed down by heavy losses, were waiting to sell off stakes to global players.


“With a sense of uncertainty in the retail sector where regulations are concerned, many major operators have put expansion plans on hold,” said Vijay Udasi and Vikram Dhunta of Nielsen India, who authored the study.


“Shoppers have pulled back on the number of visits they are making to modern retail stores, downgrading from 2.5 trips per month to about 1.5 in 2013.”


This forced several retailers to freeze or slow down expansion plans and in some cases shut unprofitable stores.


For instance, Future Group cut down its standalone Food Bazaar store count to 24 outlets as of March 2014 from 43 nearly two years ago. Bharti Retail, after opening more than 140 stores mostly during 2008-11, added just 60 more in the next three years. Reliance Retail, now the largest retailer in the country with 718 value format stores, shut more than 42 outlets last fiscal. Spencer’s Retail closed several unviable stores in 2012 and also exited the west, whereby its total trading area fell to 8.9 lakh sq ft in April 2013 from 10 lakh square feet in April 2012. In 2013-14, it added nine new stores to bring its current trading area to 10.5 lakh sq ft.


Nielsen’s numbers reflects this- the modern trade universe in India grew merely 0.4% with a sales volume decline of 2.2% in 2013.


Footfalls were low in modern retail last year compared with the previous few years, which had an impact on consumption, said Chitranjan Dar, ITC divisional chief executive (foods). ITC said in its annual result announcement recently that categories involving higher discretionary spends or with relatively high penetration levels were impacted the most last fiscal, as was the trend of premiumisation in most major categories. A senior official at a leading food and grocery retailer said premiumisation had been a major growth driver of food and grocery retailing and the hit on this added to the slump.


To be fair, several smaller brands rode modern trade to grow their business piggybacking on pan-India reach. For instance, Murtaza Mala, partner at Mala’s Fruit Products that sells jams and squashes, said his company has grown 10 times in the past six years thanks to large supermarkets. “Visibility at modern stores for our products also helped brand recall at kirana stores. While there is a higher margin pressure at modern trade, we can consider it as a marketing cost for our overall business,” said Mala.


At the same time, most consumer goods companies recruited more grocers across urban and rural India. Distribution was another key lever utilised by the top 10 companies allowing them to expand distribution in both urban and rural centres. In rural areas, they added about 1.8 lakh outlets collectively, said the Nielsen report.


Despite retailers’ cost-cutting efforts, India’s top 10 food retailers are estimated to have accumulated losses worth $2.20 billion in the fiscal year ended March 2014, according to a report by ratings agency Crisil.


Source:The Economic Times

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