Brick and mortar food and grocery retailers will register a revenue growth of around 20 per cent this fiscal year 2022-23, sustaining the same growth rate seen in the previous year. This is despite the heightened competition from quick commerce players, CRISIL said in a research note. This will lift revenue by almost 38 per cent higher than the pre-pandemic level, ie, fiscal 2020, when revenue fell 3 per cent. Furthermore, the area under operations too grew over the past two fiscal years. “Interestingly, the area under operations grew by ~40% over the past two fiscal years as players continued with their expansion plans even during the pandemic, taking advantage of lower real estate prices. The momentum is expected to continue with ~10-12 per cent area growth this fiscal,” said Naveen Vaidyanathan, Director, CRISIL Ratings.
An analysis of four retailers, which account for around a third of the organised sector’s revenue of around Rs 130,000 crore, indicated that operating margin is expected to sustain at the current level of 6.3-6.8 per cent due to better economies of scale and gradual pass-through of inflation in input prices, notwithstanding a normalisation of store rentals. “Low organised sector penetration of just 5 per cent within the overall F&G retail market provides the players ample growth opportunities. Apart from deepening their presence in metro and tier-I cities, the retailers are also expanding fast into tier-II and -III ones,” said Naveen Vaidyanathan, Director, CRISIL Ratings.
How are sales per sq ft at food and grocery retail brands?
While the expansion plans stayed on track, the trading density (represented in sales/sq ft), CRISIL maintained, will remain moderately lower than the pre-pandemic level this fiscal because of store additions. Breakeven was further delayed due to closures at regular intervals and restrictions on operating hours, etc., during the pandemic years. This resulted in trading density being 20 per cent lower in the past two fiscals compared with fiscal 2020.
Competition from quick commerce players
Besides this, organised brick and mortar retailers are also facing strong competition from quick-commerce companies delivering food and grocery within minutes. While both these models are ideally expected to co-exist, brick and mortar retailers continue to hold their own as they cater to customer’s larger shopping needs (weekly or monthly grocery needs), as opposed to quick commerce which caters to mostly unplanned purchases.
Operating margins to remain stable
Operating margins of food and grocery retailers are expected to remain largely stable this fiscal with retailers passing on the sharp rise in prices of goods and are also continuing with cost-optimisation measures. Margins, it said, have remained largely in the 6.0- 7.0 per cent range, except for the fiscal 2021 when there was revenue degrowth due to pandemic induced restrictions. “Credit profiles of F&G retailers will also remain stable, supported by strong cash-generating ability and low debt on balance sheets. Although players are expected to continue with their expansion plans, these will be funded largely from internal accruals and large liquid surpluses (estimated at ~Rs 1,500 crore as on March 31, 2022),” said Shounak Chakravarty, Associate Director, CRISIL Ratings.