The potential of India's retail sector may be huge and growing, but soaring rentals, salaries and interest rates could make the journey a bumpy ride for retailers in the near term.
Case in point - Kishore Biyani's Pantaloon Retail and Shopper's Stop, the two existing largest publicly traded retailers, are being tipped as the biggest casualties of the rising cost pressure being driven by the entry of giants like Reliance Retail and Bharti-Walmart.
According to retail analysts at Merrill Lynch, an expected surge in cost pressures could bring down the earnings growth rates of the two companies to about 30 per cent over the next two years, as against over 50 per cent in the past three years.
New large players like Reliance and Bharti are boosting demand for real estate as well as people and this is likely to result in a sharp surge in the rental and salary costs, while increased interest rates are already inflating the companies' debt burden.
Staff costs have already jumped by over 35 per cent since mid-2006, while there is room for further sharp rise here, Merrill Lynch's Vandana Luthra and Manish Sarawagi said.
Besides, rentals are expected to rise by more than 15 per cent in the immediate future, taking into account increased real estate prices and the new 12 per cent service tax on rents, they said in a report on the Indian retail sector.
The rising cost pressure on salary front is also evident from the financial performance of retailers in the past two quarters -- when Pantaloon's staff costs rose by nearly 120 per cent, which is nearly double of its sales growth.
While, some argue that rising costs are mainly due to start-up costs associated with the new stores, the rate of new store openings have been in line with the past trends but staff costs have increased at a much higher than historic rates.
In addition, the increased interest rates are expected to add nearly 10-15 per cent to the retailers' debt burden, the analysts believe.
However, there is almost a consensus on the huge growth potential that the organised retail space provides in the country. The organised retail accounts for less than five per cent of the total retail market of an estimated Rs 10 trillion and is growing at a rate of 30 per cent per annum, as against an industry average of about six per cent.
Rising income levels and the consumer's propensity for spending is going up and this consumption boom is a very strong driver of organised retail.
According to NCAER data, high-income households are growing much faster than the low-income households and by FY'10, the share of high-middle and rich households should increase to 15 per cent, from 9 per cent currently.
