X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Retail sector: From sunrise to sunset? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jan 15, 2009

    Retail sector: From sunrise to sunset?

    Pegged to be the sunrise sector until a couple of months back, the global economic slump has hurt the booming retail sector's growth prospects like never before. The retailing business is linked to not just the consumption patterns and changing preferences of consumers but also to availability of disposable income in their hands. The same gets impacted as the economic growth decelerates. In this article, we take a look at factors that impacted growth of retail sector in CY08.

    Reduced footfalls, lower volumes: The economic slowdown led to frozen recruitments, loss of jobs and negligible salary hikes. Insecurity about the near future impacted the customers' ability to spend. This had an indirect but severe impact on the take offs for retailers who witnessed one of the worst topline performances even during the peak festival season.

    Cost pressure refused to abate: To tap the available potential and increase penetration, retailers had lined up huge capex plans. With the increase in number of store roll out all cost heads such as personnel cost, rentals etc. tend to increase. With increased scale of operation economies of scale are expected to filter in. However, on account of inflationary pressures in the recent past, the cost of operation was on a higher side. Also, in case of retail business, rent is one of the major costs comprising around 10% of sales. The increase in demand for retail space and higher construction costs inflated the rental rates that exerted further pressure on margins.

    To fund their ambitious expansion plans, retailers either opted to raise capital by diluting equity or leveraged their balance sheets. The move to expand scale of operation, expand customer base and extend reach across geographies further exerted pressure on the wafer thin margins in the form of increased finance and replacement cost (depreciation).

  • Also read - FMCG: Braveheart of 2008

    The way forward...

    Correction in realty prices may provide some relief: With the availability of retail space exceeding demand in recent months, rentals have come down by 25% to 30% in select areas. This may provide some relief to the retailers. Long term expansion plans can now be accelerated. But the question remains as to whether they have sufficient funds to bank upon the available opportunity?

    Changing strategies: The retailers are changing their strategies to attract more customers, improve efficiency and reduce costs. Apart from venturing into different formats and segments, they are also integrating services to improve customer service and contain costs with efficient logistics and sourcing facilities in place. These moves are directed towards mitigating competitive price pressures and improve stock turnaround time. It has also been observed that retailers are opting for private labels as a differentiating factor to provide cushion to declining profitability. To improve reach while containing costs, retailers are also trying out smaller size formats, franchisee route etc.

    Conversion ratio less likely to recuperate: While cost pressures such as rentals have eased, the numbers of footfalls and conversion ratio have also dropped. The same may not improve in near future on account of increased employment insecurity and poor spending power. The retail players are now busy liquidating their inventory. As increase in cash flow will provide finances to the companies to carry on their operations smoothly and also move ahead with their outlined plans. This may also help them shore up the return on invested capital.

    To conclude...
    Currently, the retail sector in India is in a nascent stage. Having said that, a prolonged economic slowdown can severely impact the growth of the sector going forward. The same has been visible as players in the sector have reported dismal numbers during the last quarter ended September 2008. Meanwhile, players who raced to capture the available potential and had lined up huge expansion plans to tap the potential market are also in trouble.

    The present retail environment is very challenging. Though near to medium term outlook is not so heartening, the long term growth prospects of the sector are intact. The same is on account of expectations of revival in economic growth. There is immense opportunity, as consumption levels are extremely low and aspiration levels are high. Consumers are now showing a growing preference for organised retail that will result in increased penetration. With the change in the economic cycle, the sector will find takers over the long run.

  • Also read - Is Satyam a cigar butt?

     

     

    Equitymaster requests your view! Post a comment on "Retail sector: From sunrise to sunset?". Click here!

      
     

    More Views on News

    Titan: Jewellery Business Lights up the Quarter (Quarterly Results Update - Detailed)

    Aug 10, 2017

    However, growth at these levels are unlikely to be sustainable.

    Avenue Supermarts Ltd. (IPO)

    Mar 7, 2017

    Equitymaster analyses Initial Public Offering (IPO) of Avenue Supermarts Limited.

    Titan: Beating the Demonetisation Blues (Quarterly Results Update - Detailed)

    Feb 14, 2017

    Titan Industries declared its results for the third quarter of financial year 2017 (3QFY17). While topline growth was 14.7% YoY, net profit grew by 13.1% YoY during the quarter. Here is our analysis of the results.

    Titan: Margin Improvement Saves the Day (Quarterly Results Update - Detailed)

    Nov 16, 2016

    Titan Industries declared its results for the second quarter of financial year 2017 (2QFY17). While topline growth was flat, net profit grew by 23.5% YoY during the quarter. Here is our analysis of the results.

    Titan: High Gold Prices Spoil the Show (Quarterly Results Update - Detailed)

    Aug 9, 2016

    Titan Industries declared its results for the first quarter of financial year 2017 (1QFY17). The company reported 3.3% YoY increase in sales, while net profit fell by 16.3% YoY during the quarter.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
  •  

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    COMPARE COMPANY

    MARKET STATS