Accumulated losses of food retailers are estimated to have crossed Rs 13,000 crore in the last fiscal, as revealed in an analysis by CRISIL Ratings conducted for the top 10 food retailers (in gestation phase). They accounted for 40 percent of segment revenues of around Rs 23,500 crore last fiscal.
The losses were caused by large-scale expansions even as business models were being fine-tuned. To reduce the bleeding, retailers have undertaken several initiatives, but these will yield results only gradually. Consequently, while losses will mount by about 30 percent over the medium term, they are likely to peak in 2017 as we foresee 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.
Commenting on the findings, Ramraj Pai, President – CRISIL Ratings, 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 (such as the location, store size, choice of products and development of private labels), and to scale up to achieve critical mass.”
Food retailing is appealing because, despite constituting more than two-thirds of a total Rs 25.3 trillion of sales in India, its penetration is a minuscule 2.3 percent — the lowest among all formats. Also, it is difficult to be a leading player in organised retail in India without being present in food. Globally, food and grocery contribute to over 50 percent of topline for the likes of Wal-Mart Stores and Tesco.
The study found that with losses higher and time to break-even well beyond initial estimates, retailers are under pressure to streamline operating models. Anuj Sethi, Director – CRISIL Ratings, stated: “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.”
CRISIL Ratings believes that while these initiatives will take time and investment to yield results, players will continue to expand, thereby adding to the losses. Losses for the analysed retailers are likely to peak at Rs 17,000 crore by 2017 and are expected decline thereafter as the twin benefits of size and optimised models will kick in.
CRISIL Ratings claims to be India’s leading rating agency.