Deloitte India sees consolidation in retail space, says non-essential retail growth will revive only after December
Retailers who do not adopt effective omni-channel models and provide a differentiating consumer experience are likely to face either consolidation or failure, says Anand Ramanathan, Partner, Deloitte Indiaby Himadri Buch
Liquidity issues, funding challenges and lower valuations amid the Covid outbreak will lead to bigger corporations acquiring or acqui-hiring smaller and mid-size startups in the retail space, particularly those that are finding it tough to survive in the tough economic environment, says Anand Ramanathan, Partner, Deloitte India.
In an interaction with Moneycontrol, Ramanathan, an expert with vast experience tracking the retail industry, said: “These conditions will result in the merging of two small to medium-sized firms to survive and take on big players. Recently, the pharma retail sector witnessed a consolidation of two mid-sized online retailers as pharma retail may get more competitive with the entry of established players in online retail.”
Indeed, e-Pharma retail has become the new battleground for giants Amazon, RIL, Flipkart.
In August, Reliance Industries acquired a majority stake in Vitalic Health and its subsidiaries, including Netmeds, through Reliance Retail Ventures Ltd, for Rs 620 crore. During the month Pharmeasy proposed a merger with rival Medlife, in a deal said to value the combined entity at over a billion dollars. Other deals are said to be brewing within this niche segment.
Beyond pharma, more deals are expected to be finalised in the coming months in the overall retail segment as the challenging operating environment forces rivals to look at each other with newfound love.
A struggle for survival
Ramanathan said that during the lockdown, lifestyle and fashion retailers (apparel, consumer durables, jewellery, accessories and footwear, among others) suffered revenue losses while food and grocery retailers saw an uptick in demand. However, despite Unlock 1.0-3.0 opening the economy, sales remained tepid.
“Overall consumption has gone down due to less discretionary spending and closure of malls and retail outlets. In July and August, malls were not operational fully and sales in high-street stores for fashion had declined as shoppers remain cautious about venturing out,” Ramanathan said.
Several stores closed due to a cash crunch caused by high fixed costs (rent, salaries, and in some cases debt) combined with negligible sales during the lockdown followed by intermittent/weekend lockdowns.
Ramanathan says the lockdown resulted in wage cuts and job losses due to loss of revenue, culminating in migration of workers. Losses in the workforce in the retail industry will delay a faster rebound as the economy recovers.
Aditya Birla Fashion Retail Ltd (ABFRL)’s revenue declined 85 percent YoY to Rs 3.2 billion owing to the Covid-19 lockdown, while EBITDA loss (including other income) stood at Rs1.8 billion in Q1FY21. Its lifestyle business revenues declined 81 percent YoY to Rs 1.9 billion.
GDP contracted 23.9 percent in the first quarter of FY21 and the retail segment suffered significant revenue losses during the quarter.
“Due to these factors, consolidation in the retail space in the medium term is expected, with many smaller and mid-size retailers succumbing to the tough operating environment. Various category retailers can find the means for survival and growth through collaborations and mergers,” Ramanathan said.
Consolidation, M&As, Benefits
According to Deloitte India, M&A activities are expected to pick up in the near term with the usual recession deals like distressed sales and acquisition of select premium assets.
“Recently, we have seen a large retail company acquire the retail assets of a major retailer with a presence across fashion, food, grocery etc,” Ramanathan said. In August, Reliance Industries acquired the retail business of Future Group for Rs 24,713 crore.
Ramanathan added that strategic consolidation can also be foreseen to gain business model innovation in various areas such as supply chain, customer access, product disruption, access to technology or to plug gaps in existing services.
Mergers & Acquisitions in the retail sector can lead to an improvement in productivity, profitability, cost-optimisation by synergising sourcing, logistics, shared services of the merged company, and economies of scale, Ramanathan said.
M&As can help companies through better sourcing, lower marketing costs, private labels, geographical expansion, and effective use of technology.
“Consolidation of the buying function will entail higher bargaining power in sourcing raw materials, while access to a larger base of consuming data and deriving common consumer insights can lower the marketing cost,” he explained.
Private labels sales can increase, providing customers get value for money from the prices. Access to more markets for the merged entity can help drive more revenues for all the product categories.
An M&A between a retail company and a technology company can give companies a competitive advantage and help drive revenue, profitability and innovation, Ramanathan said.
Asked what advice Deloitte has for retailers, Ramanathan was of the view that retailers who do not adopt effective omni-channel models and provide a differentiating consumer experience are likely to face either consolidation or failure.
Alongside this, they will also have to increase their resilience by diversifying sales channels and helping small brick-and-mortar retailers go online.
He also said retailers need to maintain robust supply chains, distribution systems and manage liquidity. “There’s a high need to keep track of changing consumer behaviour, remaining agile and changing as per the new normal by utilising various technologies,” he added.
Technology and changing consumer behaviour due to the pandemic is forcing companies to innovate and bring about new ways of doing business.
“Omni-channel retail — pure online and pure physical — is giving way to hybrid models in the pandemic-stricken world in order to reach out to the customer and to create a seamless experience,” Ramanathan said.
Further, artificial intelligence (AI) is being used to strategise supply chain management and customer acquisition, which are helping companies drive profitability and personalise the shopping experience for customers.
Due to the pandemic, there was a big change in consumer behaviour. People preferred not to venture out and adopted online/contactless delivery (e-commerce). Companies are therefore devising strategies for customers to explore products digitally and improving online engagement.
Modern retail is being driven by millennials, affluent professionals and brand-oriented customers buying international and domestic brands at more organised, better, and bigger destinations. There has been a sharp rise in such destinations.
High street retail, supermarkets, and malls in India were earlier confined only to Tier-I cities but are now moving to Tier-II and Tier-III cities, Ramanathan said.
He pointed out that the share of modern trade has been increasing faster over the last few years.
In addition, many general trade or kirana stores in Metros and Tier 1 & 2 cities are upgrading to look and feel more like modern retail outlets. In other words, the modern trade is expected to continue growing.
“In the future, customers will have less but more focussed shopping trips, more confidence in established brands, accompanied by fewer footfalls but high conversion in malls,” Ramanathan said.
Retailers will have to adopt to digital platforms to sell their products as companies would need to cater to increasing demand from e-commerce. At the same time, maintaining in-store operations will be important as many customers still want to look at and feel a product in the store before purchasing.
Technology such as robotics and AI can enable retailers deliver well and scale up internal processes such as order taking, fulfilment, logistics and inventory management at speed, making the operations agile.
Ramanathan said that there is a need for hyper-personalisation. This means retailers will have to capture granular consumer data and use sales representatives as personal consultants to deliver a more personalised shopping experience for customers. Delivering a personalised experience will be a differentiator for brands.
Consumer companies will have to create simultaneous Direct to Customer setups alongside traditional distribution and reach customers directly by taking orders through their websites/apps and delivering directly to the customer.
The ecosystem of delivery partners providing last-mile deliveries has strengthened significantly in the last two years. Their potential to reach almost every pin code will further disrupt traditional in-store purchasing behaviour.
Retail sales recoveries will largely ride on the sale of essential goods. Non-essential retail growth in India is not expected to reach normalcy before October-December 2020.
“Until the coronavirus vaccine comes, footfalls may remain muted. The consumer mood may remain gloomy due to the continuous risk to their earnings, and this would limit disposable income. Slower store rollouts and even slower retail space developments would hurt medium-term growth,” Ramanathan said.
However, gradual unlocking measures taken by the government to revive the economy, a good recovery rate among Covid patients, use of technology and innovative ways of doing businesses by retailers may help turn things around. Demand can rise during the festive season and give some much-needed oxygen to the retail ecosystem, Ramanathan added.