The Indian retail sector is going through a rough patch currently. While falling real estate costs provide some relief, slowing same store sales growth and a capital crunch have impacted growth prospects and profitability.
Q4 FY08 Same Store Sales growth for the Indian retailers turned negative for the first time. The problem was sharper in the high-end products (lifestyle retail) versus items of daily consumption (value retail). Shoppers Stop saw its SSS growth fall in the quarter.
The credit crunch has also hit the sector hard with debt funding becoming difficult (and expensive) and no appetite for equity raisings. Pantaloon’s operations can support growth of around 1m – 2m sqf per year with limited external funding in our view. Shoppers Stop, on the other hand, cannot do without external funds. Subhiksha is on the verge of bankruptcy while Vishal Retail has drastically scaled down its ambitions.
Falling Realty Costs Provide Some Relief: The last three years saw a sharp rise in retail rents due to supply-demand dynamics. With more supply coming through and a slowdown in store opening plans by most retailers, rents have started falling. We expect this to continue and average rents to fall at least another 25% over the next 12 months.