TOP FOOD RETAILERS ACCUMULATE RS 13,000 CR LOSS IN FY14: CRISIL
Top 10 food retailers, including Reliance Fresh, Aditya Birla Retail, Wal-Mart India and Bharti Retail, have registered accumulated losses of over Rs 13,000 crore in the last fiscal, according to ratings agency Crisil. “Accumulated losses of food retailers are estimated to have crossed Rs 13,000 crore in the last fiscal, an analysis by CRISIL Ratings of top 10 food retailers that are in gestation phase showed,” a Crisil statement said adding that these retailing reported revenue of around Rs. 23,500 crore in the last fiscal. The companies analysed by Crisil are Max Hypermarket, Hypercity Retail, Aditya Birla Retail, Metro Cash & Carry India, Trent Hypermarket, Reliance Fresh, Heritage Fresh, Spencer’s Retail, Bharti Retail and Wal-Mart India. Commenting on the findings, Crisil Ratings President Ramraj Pai said: “These losses reflect the challenges in the food and grocery retailing vertical. 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 and to scale up to achieve critical mass,” he added. Modern retailers find food retailing in India appealing for two reasons. One, food and grocery account for about two-thirds of the total retailing market worth Rs. 25.3 trillion in India. All other verticals, including apparel, electronics, footwear and jewellery make up the balance. Organised food retail has just a minuscule 2 per cent market penetration. By contrast, the penetration rate in consumer durables is 27 per cent, apparel/footwear each at 18 per cent, and jewellery 14 per cent. “If a retailer aims to be among the top five in India in the next 5-10 years, it is difficult without being in food. Globally, food & grocery contribute to over 50 per cent of topline for the likes of Wal-Mart Stores Inc and Tesco Plc.,” Crisil said. The rating agency said retailers were re-working on their operating model to cut down on losses. “Retailers are now moving away from large-scale expansions. 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,” Crisil Ratings Director Anuj Sethi said.
As per the rating agency, globally, major retailers generate 20-30 per cent of revenues from private labels. In India the proportion is urrently negligible. However, the ratings agency said these initiatives would take time and investment to yield results. Crisil believes these retailers will continue to expand, backed by promoters. “We estimate as of March 31, 2014, the 10 retailers have invested about Rs 19,000 crore 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,” it added. Crisil said two large players that managed to become profitable were Future Value Retail Ltd (Future Value) and Avenue Supermarts Ltd. “Future Value (formats include Big Bazaar and Food Bazaar) has had the first-mover advantage. It expanded in a low-cost environment and attained critical mass before the real estate boom led to costly lease rentals. Competition from other organised players was also less then,” it said. Crisil said Avenue adopted a low-cost business model including operating out of own stores (under the ‘D-Mart’ brand), thereby saving on rentals. As a result, new stores broke-even faster, and gestation losses were lower.