Despite significant evolution of the retail industry in the past five years, the sector’s biggest worry remains profitability, according to a report published by PwC India at the ongoing India Retail Forum in Mumbai.
The report enumerates that margins of 12 BSE listed companies dropped from 5% in 2011 to 2% in 2014.
Experts said that the main reason for such shrinkage is because revenues of companies have been hit in the past few years from online rivals. “Companies have to reinvent themselves, differentiate their products from the existing mom-and-pop as well as online marketplaces, keeping in mind the changing dynamics of consumer behavior, which is rapidly adapting to new technology” said Anurag Mathur, head of retail and partner at PwC, India.
Because online companies are now penetrating Tier II and Tier III cities, several brick-and-mortar players are also expanding either to new geographies or to new micro-markets within cities.
The report said that such a strategy comprises 28% of a retailer’s key focus areas; organized stores are dedicating 14% resources towards revamping existing stores to improve SSS or same store sales growth. These factors are ultimately escalating employee costs and real estate expenditure, which adds up to 53% of a retail company’s cost on an average.
Still, rampant expansion will not help, caution experts. “People can now access a variety of selections online as well as curated selections, which will be tailored for them. So stores have to churn their inventory at a faster pace and focus on the quality of merchandise and experience they are providing,” Mathur added.
Some point out that several companies are now charting a course of growth, without paying attention to profitability, which in the long run could be detrimental, “Profitability is built when people come back and keep buying, that durability is important. There has to be a visibility to profitability from the investments that are being made to scale up,” said Atul Goel, managing director of E-City Ventures.
The report stated that one of the most topical trends of the sector is that consumers are not only demanding a frictionless experience but also a real experience. They continue to remain fickle, going after the next big discount or the next new thing. In such a context, the modes of omni-channel become more relevant. While for brick-and-mortar, the gross margin is 20-22% and the operating margin is 2-4%, the gross margin for online retail is in between -3% and -8% and operating margin is in the range of -15% to -18%, PwC said.