Brick and mortar food and grocery (F&G) retailers will ring up a robust ~20% revenue growth this fiscal - similar to the 20% growth logged last fiscal - riding on higher realisations due to commodity inflation, market share prised from the unorganised segment, and despite heightened competition from quick commerce¹ players.

This will lift revenue ~38% higher than the pre-pandemic (fiscal 2020) level. The largely non-discretionary nature of demand had kept the segment resilient even during peak pandemic in fiscal 2021, when revenue fell only 3%.

Operating margin is expected to sustain at the current level of 6.3-6.8% due to better economies of scale and gradual pass-through of inflation in input prices, notwithstanding a normalisation of store rentals. Credit profiles will also remain strong, characterised by healthy cash accruals and balance sheets.

An analysis of four retailers, which account for around a third of the organised sector’s revenue of ~Rs 130,000 crore, indicates as much.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “Low organised sector penetration of just 5% 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 Tier-III ones. Interestingly, the area under operations grew by ~40% over the past two fiscals 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% area growth this fiscal.”

The trading density (represented in sales/sq ft), however, will remain moderately lower than the pre-pandemic level this fiscal because of store additions. While store addition was healthy even during the pandemic years, closures at regular intervals and restrictions on operating hours delayed break-even for new stores. This resulted in trading density being 20% lower in the past two fiscals compared with fiscal 2020.

Organised B&M retailers are also facing stronger competition from quick-commerce entities delivering food and grocery in minutes. Both models are expected to co-exist. However, B&M retailers continue to hold sway as they cater to customers for their larger weekly/monthly grocery shopping, as opposed to quick commerce, which typically caters to smaller, unplanned purchases by customers who prefer the convenience of shopping from home. Besides, traditional B&M players are also looking to increase their online penetration, including by partnering with quick commerce players.

Operating margin is expected to remain largely stable this fiscal as retailers pass on the sharp increase in price of goods and continue with cost-optimisation measures. Notably, barring fiscal 2021 when the pandemic induced restrictions led to revenue degrowth and margins dropping to ~5.5%, margins have remained largely in the 6-7% range.

Says Shounak Chakravarty, Associate Director, CRISIL Ratings, “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). This will ensure debt protection metrics such as debt/Ebitda and interest coverage remain at healthy levels of 0.2 time and over 25 times this fiscal compared with 0.25 time and 22 times last fiscal.”

Further waves of the pandemic are not expected to materially impact operations, unless severe. That said, slower-than-expected ramp-up of newer stores and increased competition from unorganised and quick commerce segments would be key monitorables.

¹ App-based players without a B&M set-up and providing deliveries in under one hour