Wednesday, August 31, 2011: 11:12:07 PM

Retail Trend

Retailers hit by rising rates

Inflation rates, hike in rental and interest rates pinching both big and small retailers

Analysts have predicted some hard times ahead for retailers. The high inflation rates and policy measures by the Reserve Bank of India have curbed the spending power of the Indian consumer and the result has been directly reflected in the revenue figures of retail players.

Considering that the retail space is highly sensitive to the economic mood of the nation, which in turn is reflected through the buying patterns of the common consumer, it is clear that the hike in interest rates and the stubborn inflation has impacted consumption. Retail giants such as Shoppers Stop and Pantaloon Retail have also witnessed a dip in margins in the previous quarter ending June 30, 2011. Analysts predict that the trend is likely to continue till another two quarters. High cotton price and increase in excise duty have also forced retailers to increase their prices by close to 20%.
Factors behind dwindling margins
Pantaloon Retail not only saw a slowdown in growth but also witnessed a massive increase in the interest cost for the servicing of its debt. A reported hike of close to Rs 220 crore in debt bears testimony to the impact on the margins of the retailing giant.
Adding to the woes of the retail sector, rental costs have also seen a steady increase over the last few quarters. With big retailers occupying millions of square feet of retail space over the last year, the increase in cost is quite expected. Some of the major commercial locations, which have had a thriving retail industry like Gurgaon and central Mumbai saw hikes in rental cost by around 15-20%. In spite of this, large retailers like Pantaloon Retail have booked more than 2 million sq. ft of retail space in the present financial year. Reports indicate that the retailer believes that such booking of retail space would provide it a competitive advantage in the long run. Shoppers Stop has also not lagged behind in terms of space booking and has reportedly booked space for the next 3 years. Booming real estate prices therefore have forced the companies to cushion themselves for such hikes in the future.
Prof A Ramaswamy Iyengar, faculty – Retail at Welingkar Institute of Management Development and Research, Mumbai, explains, “Though there is boom in the retail space in India, retailers will have to tread cautiously as the costs are rising and the consumers are looking for more value for money products and services.”
Impact on the smaller retailer
As for the smaller retailer, the effect of inflation is more pronounced than ever. Lilavati Gupta, proprietor of Gupta Food Products, a small-sized food products supplier and seller in Varanasi, says, “We can ourselves relate to the consumer when they complain of the high prices. I have seen several customers cut down on their daily consumption of commodities. It is definitely a worrying trend.”
While earlier spikes in the interest rates and inflation had little impact on the larger retailers, the present volatility of the Indian market has impacted large as well as small retailers more strongly than ever before. While the larger players have the capital base to brace for the future, smaller counterparts are likely to hang in the balance till rates are moderated.
Tias Chakraborty

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