India’s grocers ringing up the losses

Accumulated losses of food retailers in India are estimated to have crossed Rs13,000 crore ($2.2 billion) in the last fiscal.

The losses were caused by large-scale expansions even as business models were being fine-tuned, said research company Crisil.
To reduce the bleeding, retailers have undertaken several initiatives, but these will yield results only gradually. Consequently, while losses will mount by about 30 per cent over the medium term, they are likely to peak in 2017 Crisil foresees at least half of the 10 players breaking even by then.
“These losses reflect the challenges in food and grocery retailing vertically. Compared with other formats, food retailing is a very local business where optimal supply chains are critical to lower costs,” said Crisil president Ramraj Pai.
“Players, therefore, need a lot of time and investment to perfect the model and positioning (such as the location, store size, choice of products and development of private labels), and to scale up to achieve critical mass,” he suggested.
Food retailing is appealing because, despite constituting more than two-thirds of a total Rs25.3 trillion of sales in India, its penetration is a minuscule 2.3 per cent – the lowest among all retail sectors. Also, it is difficult to be a leading player in organised retail in India without being present in food.
With losses higher and time to break-even well beyond initial estimates, retailers are under pressure to streamline operating models.
“Retailers are now moving away from large-scale expansions and streamlining models to achieve faster break-evens. Exits from unprofitable categories, right sizing of stores, closure of unviable and non-performing stores, focused and calibrated expansion and a renewed focus on private labels are some of the initiatives which the analysed retailers are undertaking to achieve faster break-even,” said director Anuj Sethi.

Losses for the analysed retailers are likely to peak at Rs17,000 crore (nearly $3 billion) by 2017 and are expected decline thereafter as the twin benefits of size and optimised models will kick in.

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