Retail Dude

“It was the best of times, it was the worst of times”…Charles Dickens’ Tale of Two Cities is an apt description of the world of retail as we see it over the next few years. A combination of excess expansion, destruction of consumers’ balance sheets, limited credit availability, and lower disposable income growth will combine to pressurise consumer spending growth near term and perhaps for years to come. Having said this, failing to view the different segments and different economies individually would be punishing this sector unfairly.

While discount retailers are doing much better than mall anchor groups due to its strong fundamentals, the most sensitive to macro economic factor is Softline retail. Retail food and Drug have seen lower sales due to weakened customer; branded apparel and footwear are at the safest position due to their low capital intensity and high margins to absorb any pricing pressure. Lastly, restaurants seems to be effected in the short run as more and more customers would prefer eating at home than going outside with tight budget condition. 

India is the fifth largest retail destination globally. It is estimated to grow at 9% CAGR by 2010 and 8.5% CAGR by 2015. Organized retail which constitute 5% of total market is expected to increase to 14- 18% of total retail by 2015. The question that arises is after the current currency crises, followed by sub-prime crisis, are these figures still relevant? Is Indian retailers’ pocket still big enough to absorb this credit crunch and continue the expansions in terms of store area, brands, products, etc? Is India still attractive to foreign retailers?

If we look at the past two month’s retail news in India we see no sign of retail industry slow down. FMCG companies posting a robust growth of 17 – 18%, foreign brands making their foray into Indian market, companies posing high investments plans, further brand expansion and more and more foreign chains collaborating with Indian retailers are few to mention about. Although, this leads to growth in the top line but due to increased promotional and marketing activities the bottom line is shaken. 

As we have noted before, what is sometimes thought of as a difficult time for the economy in 2001-2002, was actually a period where personal consumption expenditures rose 2.5% annually (it was not a consumer led recession). We are now faced with the likelihood of annual decreases in consumer spending. Job cuts, high inflation coupled with increasing interest rates and weakening rupee will definitely lead to a slower growth rate in economy and hence retail in the short term but in the long run the industry will continue to grow at a rate higher than its neighborhood countries such as china, brazil, etc.

In coming months and years what needs to be focused on is the changing strategy of some of the big giants and how effectively they cope up their marketing and operational strategy with changing global environment. Will retail be another sector seating on the lap of recession or will it pull the economy out of it?

- Roli

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