Private consumption expenditure in India forms around two-thirds of the GDP which translates to the retail market size of almost $1 trillion. Historically, this market has grown in line with the nominal GDP rate of growth. Of this, close to 20% market is organized. Given the tailwinds of the demographic profile, increased disposable income, urbanisation and rise in women employment, the organised retail sector could grow at a faster pace compared with the nominal GDP growth rate over the next few decades. Other sub sectors comprising food and grocery, jewellery, apparel, footwear, QSR, alcoholic beverages, beauty and electronics also have huge growth potential.
Though the long-term opportunity is ripe for a sector like retail and discretionary, it has gone through its own set of challenges over the past two years. A clear trend which has been observed after Covid is the K-shaped demand recovery, wherein companies catering to high-income households have fared well whereas the mass segment has lagged. While the pandemic dealt a blow to all sectors in the economy, those at the bottom of the income pyramid were perhaps hit the hardest. That’s the reason only a few pockets of retail did well while others struggled.
The muted growth for most retail companies during the same time can be attributed to a combination of internal and external factors. While the rise in interest rates impacted the disposable income for consumers, low real wage growth for rural consumers given higher inflation also dampened the sentiment.
Idiosyncratic reasons attributable to the slowdown in discretionary sub-sectors included substantial increase in store count across retailers pre-empting the pent-up demand post Covid to sustain, large stockpile of inventory and high RM inflation which was passed on to consumers. It was during this time that muted consumer demand, coupled with higher fixed costs, impacted profitability across players, which led to an earnings downgrade cycle in the sector.
Green shoots of recovery
Though demand is still lower vs historical levels, we believe recovery is round the corner due to a mix of factors — recovery in overall macro and corrective steps the companies to ramp up sales. Barring food inflation, which has witnessed volatility, at an overall level, inflation continues to be soft. This, coupled with better monsoons and market anticipation of rate cuts at the later half of this financial year, bodes well for both urban and rural mass recovery. The Budget should also provide a fillip to some categories through job creation, continuation in infrastructure spending, reduction in import duty on gold, etc. Higher spend and improving sentiment will boost the organised retail.
Also, companies during this time have curtailed store expansion plans and have been selective and organized in growth aspirations. Inventory levels throughout the system have significantly improved. This, along with improved commentary on footfalls, recovery in SSSGs for some players and higher number of marriage days in the second half, provides confidence of a gradual recovery.
Decadal opportunity: While the past year-and-a-half have seen earnings downgrade, we believe the worst is over for the sector, with demand picking up over the next couple of quarters. Improved profitability will be driven by demand revival, aided by operating leverage. We believe in the long-term growth trajectory for the consumer discretionary sector, especially the ones catering to specific consumer needs and having a focused approach.
The author is CIO, Aditya Birla Sun Life AMC.
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