Despite e-tail boom, organised retail to see 13-15% growth

An analysis of the performance of 24 large organised "brick and mortar" (B&M) retailers – 18 of them rated by Crisil – shows that in the last five fiscals, their revenue has risen at a strong 24 per cent compound annual growth rate to about Rs 70,000 crore, while profitability metrics have improved  steadily.

This, even as the gross merchandise value of e-tailers surged at a dizzying 60 per cent to about Rs40,000 crore, driven by aggressive promotions and increasing trust in – and convenience of – online

While online retail is expected to continue growing very fast and capture an ever-larger pie, CRISIL sees revenues of organised B&M retailers rising at a respectable 13-15 per cent over the medium term as they proactively adjust business models and improve productivity, and thus ensure their credit profiles remain stable.

Going forward, the resilience of large organised B&M retailers will depend on their presence across product categories. Those in the standard format – selling books, music and consumer durables – will be impacted considerably more, so their like-to-like growth will be significantly moderated.

On the other hand, those into apparel and food and grocery -- where the product is either a high-involvement purchase or requires substantial investment in supply chain -- are expected to be more resilient.

As a business, the food and grocery segment offers ample opportunity given its massive size (64 per cent of overall retail market) and extremely low penetration of organised retail (2.6 per cent).

Anuj Sethi, director, Crisil Ratings, said, ''Organised B&M retailers have been countering the online onslaught of the last five years by repurposing themselves using a four-pronged strategy:

• By going for an 'omni-channel' model (offering an online experience to complement physical stores),
• Expanding away from metros and Tier I to Tier II and III cities (to tap an expanding middle class and rising purchasing power),
• Pushing private labels (to meet consumer demand for affordable products and to protect margins) and
• Through consolidation (which has afforded scale, geographical reach and efficiencies).''

What's remarkable is that these retailers have been able to improve the quality of their private labels by investing in building design capabilities. Today, private labels contribute almost 20 per cent to total revenues, which is an admirable increase of 600 basis points (bps) in the last five years.

In the future Crisil expects them to sharpen this focus by improving store advertising, placement strategy and tying-up with online marketplaces.

Amit Bhave, director, Crisil Ratings, said, ''Focus on initiatives such as reorienting store profiles and well-thought out expansions have enabled organised B&M retailers to reduce gestation losses and generate store-level profits faster.

"We believe large retailers with a strong back-end infrastructure will increasingly take the inorganic route to enhance market position and ensure growth.''

As for credit profiles, Crisil Ratings believes focus on productivity will help large organised B&M retailers stand in good stead. After their debt-funded expansion phase ended in fiscal 2012, they have focused on profitability, which has led to a sustainable improvement in their credit quality.

This is reflected in the rating actions for Crisil's retail portfolio, where upgrades have outnumbered downgrades for the past three years.