Accumulated losses of food retailers are estimated to have crossed Rs 13,000 crore in the last fiscal, an analysis by Crisil Ratings of the top 10 food retailers that are in gestation phase has noted. No other industry, be it apparel, consumer durables or footwear, has witnessed haemorrhaging of this magnitude.

Last fiscal, they accounted for less than 40 per cent of segment revenues of around Rs 23,500 crore.

The losses were caused by large-scale expansions, even as business models were being finetuned. To reduce the bleeding, retailers have undertaken several initiatives, but these will yield results only gradually, said the Crisil note.

Consequently, while losses will mount by about 30 per cent over the medium term, they are likely to peak in 2017, with 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, the Crisil note has said.

With customers turning more price sensitive, developing an optimal supply chain that translates to lower cost of procurement is crucial. Food and grocery has inherently low gross margins, and is among the lowest in the retailing sector.

Consequently, the note has added that, players need to scale up by increasing stores to achieve profitability and that high real estate costs add to the expansion risks.

Food and grocery accounts for about two-thirds of the total retailing market worth Rs 25.3 lakh crore in India, according to the note. All other verticals, including apparel, electronics, footwear and jewellery, make up the balance.

Noting that organised food retail has just a minuscule 2 per cent market penetration, as compared to the penetration rate in consumer durables at 27 per cent, apparel at 18 per cent, and jewellery at 14 per cent, the note said if a retailer aims to be among the top five in India in the next 5-10 years, it would be a difficult place to be in without being present in food.

Globally, top retailers such as Wal-Mart Stores Inc and Tesco Plc generate over half of their revenues from food and grocery. Additionally, food and grocery is more resistant to cyclicality and competition from the fast-growing e-commerce segment, compared with other retailing verticals.

Moreover, the note adds that food retailers who have attained sufficient scale and are profitable will be better placed to take on large foreign entrants. For example, in China, local players had scaled up well before the gates were thrown open fully to foreigners in 2005. Currently, only

1 of the top 5 retailers in China is a foreign player, and all major retailers have a significant share of revenues from food and grocery.

Many Indian retailers who had undertaken aggressive expansion in 2005-2010, realised that the stores were opened in unviable locations and had also explored different formats which did not do well. The RP-Sanjiv Goenka group’s Spencer Retail closed 64 convenience stores in the three years ended 2012-13, Landmark group closed two Max Hypermart stores and Aditya Birla Retail closed 40-50 More supermarkets, citing poor performance.

Related Topics
comment COMMENT NOW