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Retail: Outlook for 2008 - Views on News from Equitymaster
 
 
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  • Jan 7, 2008

    Retail: Outlook for 2008

    For the vibrant retail sector, the year 2007 was mixed as the booming sector witnessed tribulations in the middle of the year due to unanticipated cost pressures such as service tax on rentals and high power costs apart form the usual problems of delays in store opening and high manpower attrition.

    However, the sector has not yet lost its glimmer. The retail sector is growing at a hasty pace, fuelled by a strong economy, favourable demographics, rising disposable income level and rapidly changing lifestyles and consumer aspirations of an ever-burgeoning middle class. Retailers are taking benefit of this growth and accordingly are aiming to expand. This fast-paced growth is aided by mall development, fuelled by the government bodies' initiative of releasing real estate space for retail development in prime areas.

    As per estimates made by ASSOCHAM, US$ 300 bn retail sector, which has been notching YoY growth of almost 35% to 40%, is expected to surpass US$ 365 bn in CY08. Growth prospects are likely to face hurdles owing to factors such as restrictions on FDI (foreign direct investment), the lack of a uniform tax structure across states and increasing pressure on infrastructure in key consumer markets (logistics issue).

    Execution risk: Earlier there was a shortage of quality real estate, however, with the mall mania catching up and recent initiatives by the government that has released land for development is likely to aid the growth of the retail sector. In 2008, 150 new malls are likely to be added taking total operational space from 40 m sq ft in 2007 to over 60 m sq ft in 2008 and in turn fuelling growth of the retail sector.

    However, considering the delay in land acquisitions and clearances, timely delivery of the agreed retail space by builders and the roll out of the retail space to maximize efficiencies on a per sq feet basis will be the most important factor to watch out for.

    Regulatory issues: Despite the regulatory reforms improving the economy's trade prospects -some major barriers still exist, with tariff rates being the highest in the world. The issue of FDI (51% FDI is allowed in single brand retailing) has been debated time and again and the policy makers are exploring areas where FDI can be invited without hurting the interest of local retail community. If this happens it will not only bring the required capital but also better technology and industry best practices, which will help retailers to further scale up their business, while extending benefits to consumers.

    New entrants: The Indian retail industry is highly competitive. The untapped scope of retailing has attracted new entrants (business houses and international players if foreign participation is further liberalised), which are expected to intensify the competition.

    Pricier growth: The costs of operation are rising on account of increasing competition and sky rocketing rentals and property prices, rising freight and fuel expenses resulting into increased selling and distribution expenses. Employee costs have also been moving upwards, attributed not only to the expansion of outlets, but also due to pay hikes and high attrition rates. In order to curtail the high attrition rates, players have to review salaries/wages on a time-to-time basis. The scenario is likely to continue in the current calendar year exerting pressure on margins. Sky rocketing rentals are forcing retailers to come up with a multi-pronged strategy that includes trying out new formats, opting for a revenue-sharing model with developers and venturing into Tier II and Tier III cities.

    Basically retail is a volume game. With the competition intensifying and the costs scaling up, the players who are able to cater to the needs of the consumers and grow volumes by ensuring footfalls, while being able to reduce costs as well as withstand a downturn or face competition.

    To conclude...
    As far as modern retail trade is concerned, the customer is far more ready than what the companies and industry has to offer, with signals emerging from both metros and non-metros. There is immense opportunity, as consumption levels are extremely low and aspiration levels high. The year 2008 may witness lot of activities such as acquisitions, joint ventures, expansion and capital raising to fund expansion plans. Further, the players will try to strengthen their back-end activity to ensure smooth functioning and to support the growth of the business.

    The rising electricity charges, newly imposed service tax on rentals and attrition levels are bound to exert pressure on operating margins. However, considering the low penetration levels, changing lifestyle, rising disposal income levels and changing consumer mindset regarding credit, retail sector is expected to continue to grow at 35% to 40% per annum over next three to four years.

     

     

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