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Retail sector: SWOT analysis Part IV - Views on News from Equitymaster

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Retail sector: SWOT analysis Part IV

Nov 14, 2008

In one of our previous articles, we had discussed about the opportunities that exist for the retail sector. In continuation with our SWOT analysis of the retail sector, we shall conclude the same by highlighting the threats confronting the sector.

  • Read - Retail sector: SWOT analysis - Part III

    Quality real estate space: Availability of the right location at a reasonable price to build or lease retail space is a major concern. A location that will provide high visibility and easy access generally holds significantly more value than lower cost sites that yield fewer footfalls. The lack of quality retail space adds on to costs and in turn impacts margins of the players. Even if the players are able to zero in on the right location at a fair price, the untimely delivery of the agreed retail space by builders can impact roll out of the retail space. Delay in store roll out is likely to hurt growth prospects.

    Foreign direct investment (FDI): Currently, 51% of foreign investment through the automatic route in a single brand is allowed. However, foreign players are now taking the joint venture and the franchise route to mark an entry into India. 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). While FDI is expected to bring along required capital, better technology and industry best practices, it is likely to further intensify the competition.

    Economic slowdown: The growth of the retail sector is linked to consumer spending within an economy. The disposable income in the hands of the people determines the spending habits of the consumers. With economic slowdown the same gets impacted. Economic slowdown deters the growth of the retail sector. One must also note that, lifestyle and luxury retailing segments are the first ones to feel the pinch of an economic slowdown. Value retailing also gets impacted but the magnitude of the same differs as this format of retailing caters more to necessity goods at a fair price.

    High cost of funds: A considerable amount of capital needs to be infused in the business to acquire fixed assets to set up stores and also for working capital needs to ensure smooth functioning of the business. By improving working capital cycle retailers can reduce dependence on long-term funds. However, considering the growth phase, the need to book inventory before store roll out and inefficient supply chain system, retailers need to pump in funds. High gearing exerts pressure on the wafer thin margins of the retailers. Dilution of equity and costlier mode of funding therefore restricts the returns to shareholders.

    The current scenario of high interest rates coupled with slowdown of economic activity acts as a double-edged sword. The growth prospects of the retail players eventually depend upon the segment in which they operate and the size of operations. However, a leveraged retail player is more likely to be severely impacted.

    To conclude...

    Currently, the retail sector in India is in a nascent stage. Even the oldest and the largest players are testing markets, learning lessons and progressing. Retail industry is highly co-related to consumption patterns that decide spending. The growth prospects are indirectly related to economic growth. Further, it is a working capital intensive industry. Curtailed spending on account of economic slowdown leads to lower volume offtake and inventory pile up. Working capital management becomes an issue and paying off debt obligations with reduced cash inflows erodes returns to shareholders.

    There are many lessons that India can take from other countries, which have moved along the path of the retail evolution. The retail sector has proved to be of immense significance from macro-economic point of view on account of sector’s capability to give strong growth momentum by creating multiplier effects on other sectors. On a going concern basis, considering the low penetration levels and changing attitude of consumers, the sector holds immense potential. There are opportunities that players within the sector can bank upon. However, considering the sector prospects in near to medium term, the players who have been aggressive in their expansion plans and have leveraged their balance sheet to achieve the same, could face difficulty in thriving during the current slowdown.

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