India’s $670 billion retail market is heading for a dream run

Good time to invest.
Good time to invest.
Image: Reuters/Amit Dave
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India’s retail sector, particularly the groceries and budget apparel segments, is poised to hit a purple patch.

A host of factors—a shift towards organised retail, improved business models, changing demographics, and rising per capita income—may lift the sector’s profitability to a different plane.

“Indian organised retail sector has seen a dream run in the past 1.5 years,” analysts at the brokerage firm Jefferies said in an April 12 note, citing various policy and macroeconomic factors. The improving prospects are evident in the stock prices of listed retail firms, which have been major wealth generators in the last year.

Shift from unorganised retail

India’s $670 billion retail market is still mostly unorganised, with nearly 93% of it happening through small mom-and-pop stores or stand-alone outlets.

The shift to organised large-format chains has been on in the last decade, but only at a snail’s pace. But that’s changing now. ”Demonetisation and implementation of GST (goods and services tax) have been tailwinds for organised retail in India, allowing them to gain share from unorganised trade,” according to Jefferies.

This has boosted the sales of almost all organised players. Value fashion retailer V-Mart expects double-digit growth in same-store sales by March 2019, compared to an average of 7.5% in the last four years. Same-store sales are the total revenue from stores that have been open for the previous one year; it is a preferred measure of growth for retail chains.

Departmental store chain Shoppers Stop, too, sees 12% growth in same-store sales for financial year 2019, nearly double that of the last four years’ average.

Mumbai-based Avenue Supermarts, which runs the hugely popular chain, D-Mart, has pegged its same-store sales growth figure at over 20% for financial year 2018, according to estimates by brokerage firm Edelweiss Securities. The average growth for the retail chain has been over 22% in the last four years, according to Jefferies.

Meanwhile, Future Retail, which runs the Big Bazaar stores, has seen its stock price nearly double in the past year following sustained quarterly growth of over 10% in same-store sales during the period.

Better business model

However, not everyone is chasing sales growth. Many are also increasing their profits by optimising the business and rectifying mistakes.

Over the last five years, said the Jefferies note, retailers have “retooled their business models after a decade of learning, instead of reckless expansion…with an increased focus on improving store economics, while staying focused on costs, return ratios and balance sheets.”

Departmental store Shoppers Stop, for instance, has shut at least five loss-making stores over the last year to reduce its debt and improve profitability. In February this year, Aditya Birla Fashion announced the closure of a handful of its Forever 21 stores to cut losses. Tata Group and Tesco-backed Star Bazaar, a chain of hypermarkets, announced in May 2017 that it planned to reduce store sizes and focus on smaller outlets. Meanwhile, since 2012, Future Group, has been focusing on lowering its debt.

Improved macro-cues

As retail majors benefit from this course correction and the government pushes for organised trade, there is a third growth lever waiting to kick in. And that may be the real accelerator.

India’s gross domestic product (GDP) per capita is about $1,800. According to Jefferies, the $2,000 level is a critical threshold. “We have seen significant boom in the discretionary spends once it crosses $2,000 in other countries,” the report said citing China, Russia, and Brazil.

China, for instance, crossed the $2,000 threshold in 2006. Since then, retail sales in the country have tripled. Similarly, in Russia (since 2001) and Brazil (since 1986), retail sales have doubled, the report highlighted.