Moneycontrol PRO
Upcoming Webinar:Watch a panel of experts discuss: Challenges of continuously evolving regulation for Cryptocurrency, on 7th July at 3pm. Register Now
you are here: HomeNewsBusiness

Is the Reliance Retail-Future Group deal a sign of things to come?

While the deal has infused some action into a retail sector battered by the COVID pandemic, experts believe the tough operating environment could lead to more consolidation in the sector

August 31, 2020 / 09:42 PM IST
Representative Image

Representative Image

Under a complete lockdown with no business for almost three months since the end of March, the organised retail sector, brought down on its knees, has been struggling to get back on its feet. The deal between two giants, Reliance Retail and Future Group, which came about because of the latter’s massive debt burden, is expected to shake things up in the sector.

Experts expect to see some level of consolidation in the sector as the difficult economic environment forces players to take a hard look at their survival options. In the good times, the retail industry contributed about 10 percent of the country’s GDP. Now, with shops shut and people watching their spends amid layoffs and pay cuts, the sector is staring at a contraction.

Even after the various Unlock phases, business hasn’t really picked up for brick and mortar retail outfits. In places such as Maharashtra, while malls have opened, footfalls remain low due to fears over infection and purse strings tightening amid pay cuts.

An analysis by ICICI Securities in March, well before the true extent of the pandemic in India was known, estimated that mall operators would lose 20-25 percent of their annual revenue, assuming that a rent-free period was given to retailers.

According to the Retailers Association of India, non-essential retail sales plunged 80 percent in May after falling 50 percent in March. Essential retail was down 40 percent in April and may slide further given its current run rate, RAI said.

Consolidation on the anvil?

Given this reality, most retail experts believe that there will be a lot of consolidation in the retail space in the medium term, with many smaller and mid-size retailers succumbing to the tough operating environment.

Kumar Rajagopalan, CEO, Retailers Association of India (RAI) said: “Consolidation and new creation keeps an industry interesting and healthy. COVID has also got retailers focussed on collaborations and omni-channel retail play. Various category retailers find ability to grow thanks to collaborations and mergers.”

“We are in the process of evolution as far as organised retail is concerned. So there is enough and more opportunity and headroom for new organisations and new enterprises. At the same time, organised retail has been here for 10-15 years and even more, so that allows for some bit of consolidation. We can see a bit of both in the near future,” said Sanjay Vakharia, CEO of Spykar.

However, some retail industry bigwigs are of the view that such mergers will create a monopolistic market.

“Such deals [Reliance Retail-Future Enterprises] will also create a monopolistic market, which may not be healthy for the industry in the long term,” Lalit Agarwal, Chairman and Managing Director of VMart Retail said.

According to a CLSA report, the Future Enterprises deal strengthens Reliance’s position as India’s largest retailer by expanding its retail outlets by 15 percent and retail footprint and warehousing area by over 80 percent. This will also increase Reliance’s market share in the organised retail sector to 17.8 percent.

“With this deal, Reliance will grow by leaps and bounds and will definitely gain an edge over other retailers in the country as it has now become the largest retailer in India,” said Susil Dungarwal –  Chief Mall Mechanic Beyond Squarefeet Advisory Pvt. Ltd. and Beyond Squarefeet Mall Management Pvt. Ltd.

Job losses

The retail sector, which includes high-street fashion as well as small stores, employs about 6 million people across India.

In June, the Retail Association of India had warned that a significant number of employees working in India’s modern retail sector could likely lose their jobs in the subsequent four months if the government did not intervene. The association had said that small retailers are expecting to lay off 30 percent of their manpower.

Data compiled by Moneycontrol, based on industry estimates, indicate that 200,000 jobs have been lost in the retail sector overall. This includes 20 percent of workers who have gone home and are unwilling to return.

Some revival in the short-term

Speaking to Moneycontrol, Govind Shrikhande, Former MD, Shoppers Stop, said: “We expect the sector to come back on track in the next 15-18 months. This is year is an aberration due to Covid. But otherwise, organised retail will grow faster compared to the unorganised retail as it gives value to customers.”

Vakharia of Spykar agrees: “The next 18 months seem to be a challenge as far as organised retail is concerned. My belief is that come September 2021, we should be back at 2018-2019 growth levels.”
Himadri Buch
first published: Aug 31, 2020 07:56 pm
ISO 27001 - BSI Assurance Mark