Brick & Mortar Retail to see 13-15 per cent growth: CRISIL

A 24 per cent increase in the compound annual growth rate to about Rs. 70,000 crore has been recorded in the last five fiscals for B&M retailers.

Global analytical company CRISIL has released a study which states that organised brick & mortar (B&M) retailers will continue to grow, even as the gross merchandise value of e-tailers surge. A 24 per cent increase in the compound annual growth rate to about Rs. 70,000 crore has been recorded in the last five fiscals for B&M retailers. Performance of 24 such organised retailers was analysed for the study.

While online retail is expected to continue growing fast and capture an ever-larger pie, CRISIL sees revenues of organised B&M retailers rising at a respectable 13-15 per cent over the medium term as they proactively adjust business models and improve productivity, and thus ensure their credit profiles remain stable.

Going forward, the resilience of large organised B&M retailers will depend on their presence across product categories. While segments like selling books, music and consumer durables will be impacted considerably more, apparel and food & grocery (high involvement) are expected to be more resilient. The report suggests that as a business, the food & grocery segment offers opportunity, given its massive size (64 per cent of overall retail market) and extremely low penetration of organised retail (2.6 per cent).

Anuj Sethi, director, CRISIL Ratings, says, "Organised B&M retailers have been countering the online onslaught of the last five years by re-purposing themselves using a four-pronged strategy: by going for an 'omni-channel' model (offering an online experience to complement physical stores), expanding away from metros and Tier I to Tier II and III cities (to tap an expanding middle-class and rising purchasing power), pushing private labels (to meet consumer demand for affordable products and to protect margins) and through consolidation (which has afforded scale, geographical reach and efficiencies)."

The study also states that these retailers have been able to improve the quality of their private labels by investing in building design capabilities. Today, private labels contribute almost 20 per cent to total revenues, which is an admirable increase of 600 basis points (bps) in the last five years. It expects to see them sharpening this focus by improving store advertising, placement strategy and tying up with online marketplaces.

Amit Bhave, director, CRISIL Ratings, says, "Focus on initiatives such as re-orienting store profiles and well-thought-out expansions have enabled organised B&M retailers to reduce gestation losses and generate store-level profits faster. We believe large retailers with a strong back-end infrastructure will increasingly take the inorganic route to enhance market position and ensure growth."

As for credit profiles, CRISIL Ratings believes that focus on productivity will help large organised B&M retailers stand in good stead. After their debt-funded expansion phase ended in fiscal 2012, they have focussed on profitability, which has led to a sustainable improvement in their credit quality.