Close to a dozen organised food retailers in India are estimated to have crossed accumulated losses of about Rs 13,000 crore by the end of fiscal year 2013/14, according a report by ratings agency Crisil.
"To be sure, no other retail vertical (such as apparel, consumer durables and footwear) has witnessed haemorrhaging of this magnitude," states the report. The losses at the 10 retailers, who accounted for about 40 per cent (Rs. 23,500 crore) of organised retail sales in fiscal 2013/14, are likely to peak at Rs 17,000 crore by 2017, and Crisil foresees at least half of them would break even by then.
Despite an increasing number of people taking to organised food retail, there is still heavy competition from local kirana-based stores, who are also moulding themselves to suit the needs of the modern consumer.
The report agrees, and adds that organised retail can work around this by getting a grip on local tastes and preferences. "Compared with other formats, food retailing is a very local business where optimal supply chains are critical to lower costs," says Ramraj Pai, President - CRISIL Ratings, adding that the longer gestation period is also due to gross margins that are the lowest in the retailing industry. The report states that the organised retail accounts for 2.3 per cent of the food and grocery retail business.
"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," suggests Pai.
Several retail companies are taking steps such as moving out of non-profitable categories, cutting down on store sizes and closing non-performing stores. They are also slowing down on store expansion and increasing their focus on private labels. "But these initiatives will take time and investment to yield results. In the meantime, players will continue to expand, adding to the losses," states the report.
According to the report a retailer would have to be in the food retail business if it aims to be to among the top five in India in the next five to 10 years. "Even globally, top retailers such as Wal-Mart Stores Inc and Tesco Plc generate over half of their revenues from food and grocery," the report says, adding: "Food and grocery is more resistant to cyclicality and competition from the fast-growing e-commerce segment, compared with other retailing verticals."
Crisil also notes that food retailers who have reached sufficient scale and are profitable will be better placed to take on large foreign entrants. According to the report, the only two companies who have managed to get the act slightly right are Future Value Retail Ltd (Big Bazaar and Food Bazaar), and Avenue Supermarts Ltd (D-Mart).
While Future Value, which had the first-mover advantage, expanded in a low-cost environment and attained critical mass before the real estate boom led to costly lease rentals, Avenue adopted a low-cost business model and saved on rentals by operating out of its own stores. Business Today wrote in February about how stockbroker Radhakishan Damani built a retail business.
"As a result, new stores broke-even faster, and gestation losses were lower. What we also note is that both players have a strong value positioning; they are able to offer a wide range of products at lower prices than most of competition," states the report.
Crisil says that going ahead these retailers will continue to expand backed by promoters with the wherewithal for a long ride. "We estimate as of March 31, 2014, the 10 retailers have invested about Rs. 19,000 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."