Inflation Hurting the Margins of Retailers


April 14, 2008

By Sachin Dave & Vikas Kumar
14 April 2008, BANGALORE

Indian retailers are a worried lot these days. There has been a decline in margins and it’s one of the lowest ever, avow some retailers. As inflation touched a 41-month high, chains across the country, especially the smaller players, have been trying every trick in the book to attract consumers, and keep them coming in, even as they struggle to grow profitably.

The first and most critical area has been margins, and retailers have been bargaining harder with their suppliers. Says Pushpamitra Das, CEO of Wadhawan Food Retail that owns the Spinach chain of food and grocery stores in Mumbai, "Margins of all retailers have been affected and that includes us as well.

So we are trying to negotiate hard with our suppliers so that we can get goods at cheaper rates and pass the benefits to consumers." There has of course been a hit on margins as well, and that’s bringing in greater focus on supply chain efficiencies and vendors, adds Das.

"In our business supply is an important issue and we are now going to vendors who offer us a combination of the best price and quality." Spinach, like other stores, has been keeping a close tab on its competitors’ pricing on a daily basis, and adjusting their rates accordingly, if required. However, lately most retailers have ended up charging almost identical prices for groceries.

Data released by the Department of Consumer Affairs shows that retail prices of grocery products has reached a 39-month high. While sugar and oil increased by 11%, gram rose by around 3%, and vegetables such as onion have become dearer for consumers by 11%.

In manufactured items, sunflower oil shot up by 9% and vanaspati ghee (butter) went up 4%, while butter, mustard oil, sugar and groundnut oil became expensive by 1% each. And while the government took some significant steps to counter rising food prices, such as scrapping of customs duty on crude edible oil, reduction of duties on refined edible oils, and banning exports of non-basmati rice, among others, retailers are having to do much more to survive this bearish phase in consumer spends. Unable to reduce fixed costs, retailers are trying to control variable costs and thereby bring the total operating costs down.

Says Andrew Levermore, CEO of the K-Raheja group owned Hypercity, "Many products have become costlier and some customers are either buying less or postponing their purchases, affecting our sales directly." And while smaller players are finding the going tough, large players like Future Group’s Pantaloon Retail seem less ruffled. Kishore Biyani, CEO of Future Group, says, "Demand for low end products has seen a dip while high end products, which are not price sensitive haven’t been affected that much. We have still managed to give the best deals to our consumers in all segments." That may have to do with the leverage that more established chains like Pantaloon have with suppliers and manufacturers.

However, protecting margins can work only up to a point, says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy firm based in Gurgaon. Eventually, with the prospect of thinning bottom lines, retailers need to work on making their businesses more productive and efficient. "There is a need to shift focus from expansion to optimising store operations," he says.

Meanwhile retailers are working on sustaining business through innovative promotional offers. Cross category promotions are now catching up where discounts are being offered on grocery purchases, redeemable against purchase of apparel and household products. Says RC Agarwal, CMD, Vishal Retail, "Most of us are now depending on promotional schemes. Even consumers have become more conscious and they would only go for the retail outlet which offers the best deal, in terms of offers and price."

Many brands on the other hand have marginally reduced the weight of their SKUs than increase prices. When asked whether the retailers have followed the same path for their in-house products, retailers deny any such measure for their private label brands.

Explains R Subramanian, managing director, Subhiksha, "I think on an average there has been a decrease of around 10% in the sales of grocery but year-on-year we have grown."