According to CRISIL while food retailers' losses will mount by about 30%, peaking in 2017 when at least half of the 10 players would break even
Large-scale expansions have caused Indian food retailers an accumulated loss of Rs13,000 crore in last fiscal, says ratings agency CRISIL in a report. Among the main food retailers are Aditya Birla Retail Ltd (more), Bharti Retail Ltd (easyday), Heritage Foods (India) Ltd (Heritage), HyperCITY Retail (India) Ltd (HyperCITY), Max Hypermarket India Pvt Ltd (Auchan), METRO Cash & Carry India Pvt Ltd (Metro), Reliance Fresh Ltd (RelianceFresh, RelianceSuper, RelianceMart, RelianceMarket), Spencer's Retail Ltd (Spencer's), Trent Hypermarket Ltd (Star Bazaar) and Wal-Mart India Pvt Ltd (Best Price).
"To reduce the bleeding, retailers have undertaken several initiatives, but these will yield results only gradually. Consequently, while losses will mount by about 30% over the medium term, they are likely to peak in 2017 as we foresee at least half of the 10 players breaking even by then. What keeps them going is the backing of intrepid promoters who foresee immense potential in India," it said in a report.
Food retailing is appealing because, despite constituting more than two-thirds of a total Rs25.3 trillion of sales in India, its penetration is a minuscule 2.3% -- the lowest among all formats. Also, it is difficult to be a leading player in organised retail in India without being present in food. Globally, food & grocery contribute to over 50% of top line for the likes of Wal-Mart Stores Inc and Tesco Plc.
With losses higher and time to break-even well beyond initial estimates, retailers are under pressure to streamline operating models. Anuj Sethi, director of CRISIL Ratings, “Retailers are now moving away from large-scale expansions and streamlining models to achieve faster break-evens. Exits from unprofitable categories, right sizing of stores, closure of unviable and non-performing stores, focused and calibrated expansion and a renewed focus on private labels are some of the initiatives which the analysed retailers are undertaking to achieve faster break-even.”
CRISIL said it believes that while these initiatives will take time and investment to yield results, players will continue to expand, thereby adding to the losses. Losses for the analysed retailers are likely to peak at Rs17,000 crore by 2017 and are expected decline thereafter as the twin benefits of size and optimised models will kick in.
Ramraj Pai, president of CRISIL Ratings, said, “These losses reflect the challenges in the food and grocery retailing vertical. Compared with other formats, food retailing is a very local business where optimal supply chains are critical to lower costs. The business also has the lowest gross margins in retailing, which leads to longer gestation periods. Players, therefore, need a lot of time and investment to perfect the model and positioning (such as the location, store size, choice of products and development of private labels), and to scale up to achieve critical mass.”
CRISIL feels that these retailers will continue to expand backed by promoters with the wherewithal for a long ride. "We estimate as of 31 March 2014, the 10 retailers have invested about Rs19,000 crore for store additions and loss funding – through direct equity infusions, loans from banks and promoters. These are likely to continue and will help multiply the topline," it added.
Losses reflect difficult challenges
CRISIL said the biggest challenge for food retailers is weaning customers away from well-established local kirana stores – or mom & pops. This can be overcome only by getting a grip on local tastes and preferences. Consequently, food retailing in India is a more nuanced business than say durables or even apparel – what works in one region/locality may not work in another.
According to the rating agency, the second challenge is economics:
1. Customers are more price-sensitive. Therefore, developing an optimal supply chain that translates to lower cost of procurement is crucial
2. Also, food & grocery has inherently low gross margins. In fact, this is among the lowest in the retailing sector. Consequently, players need to scale up by increasing stores to achieve profitability. High real estate costs add to the expansion risks Players therefore need a lot of time and investment to perfect the model and positioning (such as the location, store size, choice of products and development of private labels), and to scale up to the required critical mass.
Not surprisingly, gestation period in this vertical is among the highest in retailing, the ratings agency added.