BackModern retailers’ growth slows
In fiscal 2014, modern retail grew at 7%, while overall retail grew at 8%, according to Nielsen
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Mumbai: Modern retailers grew at a slightly slower pace than the overall retail market in financial year 2014, largely on account of a slowdown in the economy.
Modern retail accounts for just 11% of the overall retail market and has stagnated at that level for two years, market researcher Nielsen said. Despite the smaller base, modern retail has also been beset by problems related to profitability—they suffer high costs without being able to realise the supply-side benefits large retailers in other parts of the world do—and uncertainty over the future of foreign investment in supermarkets.
In fiscal 2014, modern retail, which consists of hypermarkets and supermarket chains such as HyperCity, Big Bazaar, Reliance Fresh, More and Spencers, grew at 7%, primarily on the back of same store sales growth. Overall retail, which includes kirana or corner stores, grew at 8%, according to Nielsen. Same store sales growth refers to comparable growth of stores that have had operations for over a year.
“The modern retail channel is looking at consolidating versus store expansion and are gaining significant growth from the existing stores, thus implying that the same store sales are strong," said Ranjeet Laungani, executive director, Nielsen India.
Nielsen’s growth numbers modern retail have surprised some experts, including Amitabh Mall, partner and director at consulting company Boston Consulting Group. Mall admits that modern retailers are not opening new stores but adds that same-store sales is strong. “Our own clients," he says, have grown at 10-15%." The lower numbers could be ascribed to Nielsen not including all the categories that are carried by modern retailers such as apparel, home and electronics, Mall said.
Others say the slower rate of growth was expected, given the tough macro economic environment and lack of clarity in policy for multi-brand retail.
“There has been consolidation and many big box retailers have rationalized their footprint to have more compact modern trade stores," said Damodar Mall, chief executive officer (value format) at Reliance Retail. Reliance, too, has seen some rationalisation (read store closures), but, by year-end will see an increase in overall space as compared with last year. “The rationalisation has made the portfolio healthier and more profitable" said Mall.
At Shoppers Stop Ltd which runs HyperCity there has been a net decline of 20% in overall space as the retailer reduced the size of some of its large stores spanning over a lakh square feet by more than half to improve profitability.
Last week, Shoppers Stop announced a new chief executive officer Vipin Bhandari, who was earlier at Max Hypermarket as chief operating officer, to replace Mark Ashman whose three-and-a-half year run as CEO ended in June.
“The hypermarket chain will be operationally profitable by the end of this fiscal year and profitable at the company level by fiscal 2015," said Govind Shrikhande, managing director, Shoppers Stop, who is also going slow on adding new stores and limiting expansion to just two stores this year to meet its target of profitability.
Aditya Birla Retail Ltd which runs super markets and the hypermarket chain More has also exited from Mumbai and Pune in the last two years as it looks at becoming profitable. The retail chain also changed its management team in December 2013 in order to streamline operations.
Most firms are still experimenting with business models.
In August, Max Hypermarket India Pvt. Ltd, part of Dubai-based retailer Landmark Group, parted ways with French retailer Groupe Auchan SA due to difficulty in complying with India’s foreign investment rules and strategic differences between the partners. Max has now signed a deal with Dutch food retailer Spar International BV, its partner before Auchan, for running Spar Hypermarkets in India.
“We have changed partners and seen a variance in our plans," said Viney Singh, CEO, Max Hyper market, who notes that at the industry level, too, there has been a lot of consolidation. Max Hypermarket plans to open five-six stores every year.
Reliance Retail has seen at least three shifts in strategy and two in leadership since inception in 2006. The firm continues to experiment with its value format. Last year, it once again changed track to focus on the small store format of Reliance Fresh in its 3,500-9000 sq. ft stores as it moved away from the big box format which it was bullish about a few years ago.
“Our grocery retail strategy will be led by Reliance Fresh," said Damodar Mall who plans to add 15 Reliance Fresh stores in September, setting the pace for the coming months.
The multiple management and operational changes have paid off for Reliance Retail as it turned profitable in 2013-14. In fiscal 2014, Reliance Retail’s revenues rose 34% to ₹ 14,496 crore from ₹ 10,800 crore a year ago. Net profit for the year stood at ₹ 182 crore, said a 19 June report by Edelweiss Securities Ltd.
Also, despite a new government coming to power, lack of clarity in foreign direct investment policies for multi-brand retail continues, causing global retailers to put their India plans on the back burner. Carrefour SA exited the country last year; Auchan in August.
To be sure, there is more optimism following the new government’s taking office. The gross domestic product for June quarter was 5.7%, the highest growth in the last years.
But, for the consumer, the ground realities haven’t changed, said Anil Talreja, partner, Deloitte Haskins and Sells. “The sector remains cautious. It is still bit too early to know what is happening in modern retail. We need to wait and watch."
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