Consolidation, profitability, sustainable growth and asset utilization are the buzzwords for Indian retailers in the current fiscal. This is in stark contrast to the past few years, when everyone opened more stores, preferring sales growth over profitability.
To achieve this, there were also regular efforts to raise capital. In the July-September quarter, some of the newfound discipline is evident in the performance of the big retailers. Pantaloon Retail (India) Ltd’s stand alone sales, for example, rose by 17.6% to Rs1,777 crore, but operating profit grew by 22.8%. If not for higher interest and depreciation costs, profit growth would have been higher. Pantaloon has focused on lowering overheads, better supply chain management and improving the merchandise mix to yield higher margins.
The results of Shopper’s Stop Ltd also show a visible improvement in profitability. There has been an increase in customer entries but the conversion ratio is lower, which has been offset by a higher per-customer ticket size. It has also lowered its overheads considerably and operating margins rose to 6.5% in the September quarter from 1.8% a year ago. Operating profit margins are expected to remain stable after the quick rebound and sales growth will have to drive profit growth from here onwards.
The retail environment appears to be improving but the big question is: by how much? Same-store sales growth has been subdued so far this year. The current quarter is a crucial one for retailers, as the festival season peaks during this period. Performance in these three months will set the tone for the next few quarters, too.
One crucial aspect is the level of debt on retailers’ books to finance expansion plans.
Pantaloon stands out with a consolidated debt of nearly Rs3,800 crore. It has set in motion a restructuring plan to hive off some non-related businesses and spin off its Big Bazaar and Food Bazaar formats into a subsidiary. Its ultimate objective will be to lower debt, which is weighing down on performance.
A recent Nielsen global consumer confidence survey showed Indians as being the most optimistic, especially about job prospects and personal finances. Retailers will be hoping that this optimism translates into higher spending at their stores.
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