Food and grocery chains may be the first casualty of the slowdown among retailers in India and some of them may have to either shut operations or seek mergers with rivals, experts said.
These stores will find it difficult to survive the pressures of the slowdown because the margins in their category of business are the lowest among all retail formats, said Anand Raghuraman, partner & director, The Boston Consulting Group.
Generally, food and grocery retail stores such as Subhiksha and others operate on a margin of as low as 2-3 per cent compared to 10-15 per cent margin of apparel stores. Retailers, who sell their private labels through their stores, earn as high as 30 per cent margin on some of the products.
Subhiksha, the food and grocery format chain promoted by R Subramaniam, has already exited the fruits and vegetables business. The retailer has also deferred its plans to enter consumer durables business owing to severe cash crunch and slowdown in the economy.
Indian retailers are freezing their expansion plans, including resizing existing operations, to save costs as lower than expected economic growth is curbing consumer spending. Several companies, including Jet Airways and Kingfisher Airlines, have already announced salary cuts for employees. Several overseas lenders and banks have cut jobs across their operations resulting in layoffs in India too.
Yet another factor working against the food and grocery retailers is the inefficiencies in the system.
"In India, the power still lies with suppliers," said Raghuraman. Retailers, who have started operations in the past few years, are still struggling to get higher discounts from established companies as their purchases contribute less than 5 per cent of a fast moving consumer goods (FMCG) company.
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Retailers led by Biyani are already seeking to collaborate with rivals to enhance bargaining power with suppliers to improve margin. But the brighter said of the shakeout, if any, is that the industry will be more efficient.
Meanwhile, Raghuraman said a large number of the 500-800 hyper malls announced by companies may not be started as the domestic market was not yet ready for that many stores. "The sales per square feet is not sustainable," he said.