Two back-to-back merger deals in the retail sector, which has been reeling under competitive pressure despite the rise in the spending capacity of Indians, has raised fresh hopes of the brick-and- mortar players investing in scale to take on the emerging threat from the e-commerce sector. This transition is expected to transform the retail sector into an attractive option for investors, while also proving to be beneficial for consumers who could benefit by way of better price and service offerings as a result of the competition among large players.
The announcements by Aditya Birla Group to merge Madura Garments with Pantaloon and by Future Retail to merge Bharti Retail with itself come at a time when e-commerce companies have been increasingly eating into the market share of brick-and mortar retailers.
Why the consolidation was needed?
For brick-and-mortar players, the move towards consolidation and economies of scale seek to thwart an existential crisis.The stress levels within the sector have been rising over the last few years on various accounts including competition from pure online players. According to a report prepared by Crisil in 2014, online retail is set to eat into the share of traditional retailers. While the market size of online retailers rose from Rs 1,500 crore in 2008-09 to Rs 13,900 crore in 2012-13, the report projected it to grow over three times to Rs 50,400 crore in 2015-16. As a result, the share of online in organised retail is projected to rise from 7.9 per cent in 2012-13 to 18 per cent by the end of this fiscal. Sources within the industry also say that there has been a net decline in the number of outlets being operated by the organised retailers over the last couple of years.
These facts explain why institutional investors have ignored this sector.
While there have been numerous small players within the sector, insiders feel that consolidation will hold the key as it will result into few large players who will be in better position to compete with pure online players and grow in terms of sales and profits.
However, there are some who feel that there is still some way to go before the brick-and-mortar retailers will start to flourish.
customers on their online platform, deliver from their physical stores and the customer can also derive comfort from the fact that if there is a service-related issue, he would have the option to visit the physical store too.
The sector is likely to open up for investors now
For a sector that five to seven years ago was seen as a sunrise sector and is now witnessing growth in low double digits, the investor participation has remained very low over the years. While foreign direct investment in multi-brand retail is not permitted in India and therefore, in a way, limits the availability of capital needed for the growth of players within the sector, even foreign institutional and domestic institutional investor interest in listed retailers stands limited.
Experts say that this rationalization and beginning of consolidation may be the first step towards revival of the sector. While competition among big players may prove to be beneficial for the consumers on account of better deals and better services going forward, investors may also look at potential winners within the sector for investment purposes.
Insiders point that competition among online platforms of brick and mortar players and pure online players will result into better service offering for the consumers as the players will compete on that front.
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Source – Financial Express