2011 In Retrospective
Judging by feedback obtained from a cross-section of Indian retail players, it emerges that most retailers perceived 2011 to be a flat year. In fact, many retailers experienced decelerated sales – the affected segments included the apparels and footwear industries, which – on the whole – grew by only 9% as compared to the 12% of the preceding year.
Stagnation was evident in many stores in the larger cities, and these dynamics were evident in the reduced demand for organized retail spaces for expansion. Smaller retailers in the unorganized sector fared marginally better, with regional players taking the smallest hit.
That said, certain apparel retail segments like women’s Western wear did grow from 15% to 25% in 2011. The home furnishing and interior décor also saw encouraging sales, with moderate expansion by players in this segment seen in many cities
Health care products did reasonably better, with the wellness category showing greater growth than baseline pharmaceuticals. Hypermarkets also saw reasonable growth, especially in the food segment. Likewise, electronics saw healthy growth and reasonable absorption of additional organized retail real estate.
In terms of regions, retailers in East and North India saw better growth than the South, with West India being the worst hit. In terms of cities, Tier 2 was more buoyant than Tier 3, with Tier 1 cities displaying the lowest growth rate. In fact, it is now apparent that cities like Pune and are significantly over-retailed. Mumbai and Bangalore show more promise for cautious expansion in the current year.
In general terms, many retailers in 2012 are stuck with unsold stock from Q4 2011. This fact will spawn a lot of earlier-than-usual sales, with a definite impact on profit margins. We expect various cost-saving measures by retailers to kick in from April 2012 onwards.
Prospects For 2012
Retail performance and therefore expansion in terms of real estate is heavily wired into the country’s macro-economic performance. Economic growth for 2012 is pegged by most retailers at 6.8–7.2%, and inflation is likely to level off at 6-7%. Most retailers expect a flat year in terms of profit margins, growth and expansion.
This sentiment applies most to the first quarter, with 4Q2011 promising a reduced off-take as a result. Inventory pileup will necessitate sales to start from January itself. Food sales will be the early indicator of mood for next 2-3 quarters.
Hopes are being pinned on the Union Budget which, if favourable to retail, would indicate at least marginal growth in the second half. Capital will be an issue for many retailers in 2012, and increased consolidation of operations is almost a certainty in some categories. Many new store launches will be postponed and retailers will focus on making their existing stores more profitable.
Most retailers feel that prices will need to be corrected and more entry-level product require to come in during the year. They will monitor cash flow carefully, which means that new store launches will be scarcer than in 2011. Expansion will be non-aggressive at best, with the highest demand for retail spaces coming from consolidation rather than actual growth. We are likely to see a lot of exits from non-viable stores during the current year.
The author, Shubhranshu Pani is Managing Director – Retail Services, Jones Lang LaSalle India
