The overall retail segment seems to be making a gradual recovery as economic activity continued to improve and hence the Q3 of the FY 2021 looked positive for all the players.
The festive period in the third quarter from October to November 2020 had given the much needed relief to retail players who had been hit by the COVID-19 pandemic. During the quarter, recovery was stronger in small markets than metros and in high street stores than mall stores. Besides this, as per market reports the Q3 was cash-positive led by revenue recovery and cost rationalising. The greater operating leverage led to companies’ sequentially better operating performances. However, most companies expect to see costs ahead inching up to previous levels.
A recent report from Anand Rathi points out that the expansion plans of most retailers are on track and most companies have talked of accelerated store expansion ahead as recovery touches pre-COVID levels. The impact of COVID-19 on the retail sector led many companies to raise funds to manage cash burn during the year and resorted to store rationalization and closures.
Another report by Motilal Oswal Institutional Equities points out that the footfalls are improving in the retail segment and points out that currently over 95 per cent of retail stores were operational in 3QFY21. Moreover the festive season, wedding season, and winter arrivals have provided the sales push. Footfall is gradually improving on a month-on-month basis (decline in Dec’20 due to festive season demand in Nov’20), but still stands below last year’s levels. Retailers expect sales to reach pre-COVID-19 levels in FY22E. The report further observes that the retailers would continue to invest in their online capabilities and look to increase revenue contribution to the double digits. The report points out that retail players are considering store expansions, too.
Many market reports also point out that among the retail segment the organised brick and mortar stores could reclaim pre-pandemic levels with 23 to 25 per cent revenue growth in the next fiscal. An observation by CRISIL sees that a broad based demand revival, with increased footfalls and recovery in discretionary consumer spending, will help the organised brick and mortar revenue may reach the pre-pandemic mark of Rs 5.7 lakh crore in the next fiscal. The growth will ride on a low base. It has been observed that the sector may log in an estimated 19-22 per cent revenue de-growth this fiscal due to the pandemic which led to temporary store closures and restricted footfalls in the first half. CRISIL says that sales have recovered to over 80 per cent of pre-pandemic levels in the third quarter of the FY21 and is expected to recover almost fully by the close of the current quarter.
However, interestingly the rate of recovery has varied across segments, with the food and grocery retail segment rebounding faster than discretionary segments such as fashion and apparel retail. The consumer durables and electronics retail segment has also recovered relatively swiftly owing to lifestyle changes spurred by the lockdown restrictions. Operating profitability is also expected to recover sharply next fiscal.
“The recovery in revenue and continuation of a part of the cost rationalisation measures adopted will help resurrect operating profitability for Brick and Mortar retailers to the
pre-pandemic level of 5-6 percent next fiscal, from just 2 per cent this fiscal,” remarked Anuj Sethi, Senior Director, CRISIL Ratings Ltd.
CRISIL says that going ahead in the immediate near term the retail sector’s long-term growth prospects remain healthy, given the low penetration of organised retail. It is expected that retailers with omni-channel presence, large scale, healthy balance sheets will be better placed to capture growth opportunities. Any resurgence of COVID-19 cases impacting store operations of retailers will remain a key monitorable.
