Growth of the Indian retail industry, which includes biggies like the Future Value Retail (Big Bazaar), Reliance, Aditya Birla Retail, Landmark Group (Max) and Tata’s Infiniti Retail, is likely to slow down in 2013 due to the reduced purchasing power of consumers, the India Ratings unit of Fitch said.
It warned that consumers in India will no longer be able to keep spending the way they have been doing in the immediate past as prices are going up and salaries are only growing very marginally. Consumer prices rose, on the average, by 9.5% in 2012, putting a squeeze on the amount of money that the Indian salaried class had to spend on discretionary items.
With the entry of several big companies into the retail sector, the segment has seen high levels of investments as companies scramble to establish a strong mind share before foreign brands such as Wal Mart and Carrefour make their entry. The government allowed foreign companies to open their outlets in India last year.
Sales grew strongly in 2012, but were powered by discounts, India Ratings said.
“The trend is likely to continue in 2013, providing volume growth at the cost of margin. Retailers focussed on the luxury or premium segment may be worst hit than those focussing on other segments, with an expectation of a flat-to to-negative revenue growth rate,” it warned.
Retailers focused on the higher end include the US chain Reebok and Nike.
Consumer spending will remain affected by “rising inflation, marginal real wage growth and a weak macroeconomic environment.”
India Ratings highlighted the declining trend in Private Final Consumption Expenditure (PFCE). Private final consumption expenditure includes consumption expenditure of households and non-profit institutions such as trade unions, professional societies, political parties, churches, charities, sports clubs etc..
The trend “is even more worrisome since out of the last six quarters, four quarters had the lowest PFCE growth rate in the last 34 quarters. PFCE was at an eight-year low at 3.68% at end-Q213. India Ratings does not expect a meaningful improvement in PFCE in 2013,” it said.
As a result, not just retail, but most industries dependent on consumer spending will see “muted revenue growth” in 2013, the Fitch unit said.
Due to the heavy discounts, profit margins will decline. “Median EBITDA margins for the sector are likely to contract by 50 bps to 75 bps,” it said.
“New stores will generate returns only after 12-15 months and sales will remain slow at the existing stores. Inventory levels are likely to increase moderately in 2013 on account of slowing sales and new store openings that would require keeping higher inventory levels in 2013,” it added.
It also pointed out that the retail companies may not be able to attract investors from abroad very easily as they have not been set up to comply with the recently formulated foreign investment rules. The rules, for example, require 30% sourcing from small scale industries in India.
“Existing Indian retailers to significantly restructure their businesses before receiving such investments given the complex requirements of the FDI-related guidelines. In the immediate future, equity from domestic investors may drive deleveraging of existing players,” it said.
On the other side, a sustained reduction in consumer prices, a rise in real wages or a sudden spurt in government spending may turn things around for the sector, it said.
Wholesale prices are growing at about 7% per year, while retail prices are growing at 9-10% per year. Two years ago, wholesale prices were growing at 10% per year.