Indian food retailers have accumulated losses estimated at over Rs13,000cr (US$2.2bn) over the last fiscal year, according to an analysis of the top 10 burgeoning food retailers in the country.
Together, the companies in the study, by Crisil Ratings, account for around 40% of the overall segment, which was worth around Rs23,500cr (US$4bn) last year.
The losses are expected to grow as much as 30% over the medium term, and are likely to peak in 2017, when at least half of the companies will have broken even.
What keeps them going is the backing of intrepid promoters who foresee immense potential in India, said Ramraj Pai, president of Crisil. “These losses reflect the challenges in the food and grocery retailing vertical,” he said.
“Compared with other formats, food retailing is a very local business where optimal supply chains are critical to lower costs. The business also has the lowest gross margins in retailing, which leads to longer gestation periods.
“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.”
Although it makes up two-thirds of India’s Rs25.3tn retail industry, food retail accounts for just 2.3% of penetration, making it very attractive to disruptive entrepreneurs. Moreover, retailers find it difficult to lead the organised retail market without being present in food.
Globally, food and grocery contributes to over 50% of topline for the likes of Wal-Mart Stores Inc and Tesco.
However, with losses higher and time to break-even well beyond initial estimates, retailers are under pressure to streamline operating models, said Crisil’s Anuj Sethi.
“Retailers are now moving away from large-scale expansions and streamlining models to achieve faster break-evens.
“Exits from unprofitable categories, rightsizing of stores, closure of unviable and non-performing stores, focused and calibrated expansion and a renewed focus on private labels are some of the initiatives which the analysed retailers are undertaking to achieve faster break-even.”
In its report, Crisil said that while such initiatives would take time and investment to yield results, companies will continue to expand, thereby adding to their losses.
Retailers will continue to expand backed by promoters with the wherewithal for a long ride, it noted.
“We estimate the 10 retailers have invested around Rs19,000cr (US$3.2bn) 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.”