The Hindu Business Line : Retail, wholesale SMEs record growth in business

Mumbai, Jan. 21 The good news is that small and medium enterprises in wholesale and retail trade are growing. But the bad news is that they have some catching up to do if they are to hold their own against bigger rivals in the organised sector.

According to data published by Reserve Bank of India (RBI Bulletin, January 2008), sales of private limited companies in the wholesale and retail trade registered a growth of 11.8 per cent during 2005-06. This of course pales in comparison with the growth rates of Pantaloons and Trent (to name just two examples of enterprises in the organised sector) at 72.3 per cent and 47.7 per cent respectively during the same period. The sales of Pantaloons during 2006-07 jumped by around 90 per cent, while that of Shoppers’ Stop rose by 40 per cent.

“The top line of these companies will see huge highs and the sales volumes will constantly increase as all of them are on an expansion mode,” said Mr Gibson G Vedamani, Chief Executive Officer, Retailers Association of India. He added that as modern retail penetrates more tier-II towns, the general top-line of big retailers would continue to remain high.

While sales volumes in general are up, the margins of these companies are highly volatile and at times have been negative. For instance, the net profit of Shoppers’ Stop for 2006-07 dipped by around 10 per cent as compared to the previous year, while the net profit of Pantaloons for the same period declined by 69 per cent. But Mr Vedamani dismisses this as a temporary phenomenon.

“Such volatility may be a company-specific phenomenon and part of the company’s evolution curve and high operating expenditure. If you see Shoppers’ Stop, its profit dipped when it was undertaking huge advertisement campaigns. For a small retailer, these expenses are absent. As the infant modern retail industry grows, the irregularities will disappear and the costs will average out,” he explained.

“Mega firms are much more stable than single-store firms,” he said.

According to Mr Harish Bijoor, Consultant, “The seasonal nature of the retail sector leads to volatility. The seasonality of purchase of garment and lifestyle retail is the highest.” He added that according to industry estimates, retail industry would overcome its volatility by 2016.

Mr Vedamani pointed out that the competition among retailers leading to slashing of prices has also led to squeezed margins. But some, through strategies like private label policies, are trying to counteract it, he explained.

‘Space for everybody’

“While apparel retail margins are at 30 per cent, those of food and grocery are at 16 per cent,” he said. But going forward, food and grocery will increase by 100 per cent, as currently there is minimal penetration in that segment, he added.

Will this growth by modern retailers erase small and medium enterprises? No, says Mr Vedamani, adding that as modern retail grows in India to take a 10 per cent bite of the retail cake in the next four years, the cake will grow in size creating more consumerism and hence space for everybody.

“The smallest retailer will become organised one day, like it happened in the jewellery industry, issuing cash memos and paying taxes,” he said.