Green Shoots

Indian retail is set to script a turnaround after years of weak demand and sluggish growth.

By Tripti Kedia  
Saturday, February 4, 2017

The worst may be over for the $616 billion Indian retail industry. Since the global financial crisis of 2008, the sector has witnessed sluggish growth and the past six months have not been any better with several e-commerce portals shutting shop. The turnaround, especially for organised retail, however, maybe sooner than expected, despite the short-term demonetisation pangs.

If the big ticket initial public offering (IPO) of Avenue Supermart (DMart) does well, it is also expected to bring cheer to the industry. Says Ambareesh Baliga, a market analyst: "After a decade, retail is going to witness a Rs 1,800 crore-2,000 crore IPO and the robust business model of DMart will not only improve sentiments on Dalal Street, but will infuse enthusiasm and competition among its listed peers, too." However, a section of experts say it seems unlikely that any major e-commerce player would go public in the next 12-18 months.

But most industry observers are of the view that retail should be on a revival path with the Indian economy expected to bounce back in the second half of 2017, with a rise in demand and liquidity back in the system.

Impact of Demonetisation

After the demonetisation announcement on November 8, the 125,000-sq. ft South Avenue Mall in Jabalpur, Madhya Pradesh, for example, witnessed 70 per cent fall in sales in November, but in December sales increased 90 per cent month-on-month. Says Arvind Singhal, founder of management-consulting firm, Technopak: "Negative impact of demonetisation in retail and consumption is overblown. In the early part of November there were concerns, but by December the cash flow had begun and sales saw a bounce back."

Vishwa Mohan, Director, South Avenue Mall, Jabalpur, agrees: "In the early days, customers chose to go to unorganised players to spend their old currency notes, but consumers are now back and footfalls have increased." It is not just cities such as Jabalpur that felt the immediate impact of demonetisation.

Home-grown retailer Shoppers Stop, which has 74 stores across the country, witnessed similar trends. Says Govind Shrikhande, CEO and MD, Shoppers Stop: "Cash and credit component has changed, especially in our hypermart business. Our credit card sales jumped from 60 per cent to 80 per cent, and we have also acquired new customers. We hope to retain at least 40 per cent of them."

Therefore, the overall sentiment in the industry has improved. "Even though discretionary spending has taken a hit, there has been a slow recovery in consumer spending. The three big sectors that drive the retail industry are food and groceries, apparels plus accessories and consumer electronics. These continue to grow," says Anurag Mathur, Partner and Leader, Retail, PwC India, adding that fine dining, high-end jewellery and luxury apparels and accessories have seen limited spending.

Online Sales Spur

While brick-and-mortar stores felt the heat initially, e-commerce companies, too, bounced back in no time. "We have got tremendous response from customers in adopting electronic payment methods at delivery with 10x growth in electronic payments at the doorstep. We are back to growing over 100 per cent year-on-year," says Manish Tiwary, Vice President, Category Management, Amazon India.

Online retailer Big Basket, which has an active customer base of three million, has also shrugged off the negative impact of demonetisation, by posting 25 per cent jump in sales. Says Abhinay Choudhari, Founder, Big Basket: "We have 50,000 orders per day and our average basket is Rs 1500. Currently our gross margins are 23 per cent and our target for the near future is 26 per cent."

Growth All the Way

According to Technopak, private consumption constitutes 60 per cent of India's 2016 GDP of $2.1 trillion, of which retail forms 50 per cent. Industry observers, including Singhal and Mohan, are bullish and believe that if government finances improve, then the retail sector will get a boost.

Organised brick-and-mortar retail, which is largely concentrated in urban India, was 9 per cent of total retail in 2015/16 and is expected to touch 12 per cent by 2019/20. E-commerce, which is still developing for most retail categories, is expected to be a $60 billion market by 2020. In 2016, however, e-commerce gross merchandise value witnessed a flat year, compared to the two previous years, says a Credit Suisse report.

Reality Check

With significant markdown in valuations, companies are now moving towards consolidation and striving for profitability. "We are confident to break even in 2017/18 at the operational level and 2018/19 at the corporate level," says Choudhari of Big Basket. The company was set up in 2013.

However, sustained profitability in the e commerce sector is still two to three years away, as a lot of ground still needs to be covered in terms of logistics, user penetration and user loyalty. With Amazon and Uber aggressively investing in their India operations, and with players like Alibaba exploring the market, the case for intense competition is also building up.

But experts feel that there are concerns over unsustainable cost structures and geographical expansions adopted by several online players and they are not viable. "Going ahead, you will see a large amount of consolidation in the e-commerce space. Shoppers Stop has reduced many of its store sizes to 30,000-40,000 square feet to bring profitability at a faster pace. We are also looking to reduce debt by selling a part of our stake in hyper mart and raise funds within the next six months," says Shrikhande.

The DMart Model

While strategies are being revised, Mathur of PwC says that Avenue Supermart is among the few profitable retail companies that has a sound business model. The company, after over five years of profitable operations, is looking to stick to its core strategy of 'value for money' retailing by offering low prices every day. Majority of the products stocked are essential merchandise that form part of the basics rather than discretionary spending.

"DMart's healthy operating cash flow and efficient sourcing of goods that minimise procurement costs make it very attractive for retail investors to invest in its equity offering. But one will have to watch out for its valuation," says Baliga. Most retail companies that are currently trading on the exchanges, however, have disappointed investors in 2016. Stocks, including V-Mart and Shoppers Stop, have given over 25 per cent negative returns, while Aditya Birla's Fashion Retail declined 44 per cent and Future Enterprise slid 15.4 per cent.

However, the outlook for retail stocks in 2017 looks positive. Baliga says the organised market will do well with the gradual shift to cashless economy, and stocks of Titan, Future Retail and Shoppers Stop may give returns of 15-20 per cent.

According to a Boston Consulting Group report, global retailers in 2010/14 delivered an impressive annual median TSR (Total Shareholder Returns) of 21 per cent. In comparison, the average returns by Indian retailers was in single digits. Experts say, besides the challenging environment, the retail market in India is not very mature campared to developed markets.

Key Challenges

For the Indian retail sector to grow, the companies must realise that the Indian consumer is value conscious and digitally connected. There is a competitive landscape and low-cost models will be preferred both in traditional retail space and online.

Traditional retailing, which is deeply rooted in India, enjoys the advantage of low-cost structure compared to organised retail. Last-mile access gives them structural advantages, such as their ability to manage credit and faster delivery. It also benefits consumers, as often they do not have to pay taxes.

The key areas of inefficiencies, therefore, are logistics, real estate, employee cost and rapid geographical expansion. Abhinay Chourdhari lists getting blue-collar workforce as one of the top bottlenecks in the industry. Since it is at a fairly nascent stage, trained manpower is also scarce. There are also concerns over lack of retail space and sky-high prices.

Experts say restrictive zoning laws, rent controls and protected tenancies, also result in scarcity of real estate and high rentals. Rental as a percentage of sales in India is higher compared to global peers by 600-800 bps, according to a BCG report. "In Maharashtra alone one needs about 65 licenses and there is no transparency for rentals. Ease of doing business is constrained by regulation, both at the central and state levels," adds Mathur.

Besides, the retail sector will do well with a new FDI policy (that is under consideration, as announced in the Union Budget). If it's a nationwide policy that benefits the sector, it might give confidence to foreign players to invest for the long term. Regulatory barriers, if unlocked, can give the sector the much-needed impetus to improve profitability. Regulatory barriers, if unlocked, can give the sector the much-needed impetus to improve profitability.

The author is a Mumbai-based freelance journalist

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