The Hindu Business Line : Organised retail penetration may be 10 pc by 2010: Fitch

INTERNATIONAL rating agency Fitch has found that due to increased consumer preference for organised retailing, its penetration is expected to be 8-10 per cent over the next five years.

At present, organised retail penetration of just 3 per cent of the total retail consumption translates into Rs 28,000 crore.

Fitch said growth in organised retailing would be driven largely by more favourable income distribution patterns, rising consumption expenditure and greater use of credit cards.

It said that though organised retail continued to focus on food, groceries and apparel, the players would have to continue to customise their formats to better service their target markets.

Of the organised retail segments, hypermarkets and department stores were likely to expand the fastest, though they would be largely confined to bigger cities. However, the supermarket segment was likely to witness core competition and margin pressures. "Gaining critical mass and promoting private labels would be critical to profitability in this segment."

In other retail segments, a combination of strengthened pricing power with suppliers as well as investments in supply chain infrastructure for efficient sourcing and promotion of in-store brands would help retailers enhance margins.

It said larger retailers had shown improved operational efficiencies and thus better financial performance and improved financial flexibility.

Multiple means of financing were also opening up as the industry gained acceptance within the investor community.

The industry as a whole was witnessing a spate of investments as scaling up continued to be the key focus. However, the rapid pace of expansion had resulted in negative free cash flows for most retailers.

Fitch said larger companies, such as PRL and Shoppers' Stop, had gained the critical scale required to emerge as large, stable retailers in the future. Their ratings, however, were constrained by the industry being in its infancy and the pressure on cash flows due to large investment plans of these companies, was likely to persist.

Also putting a check on near-term growth prospects for the sector are factors such as the lack of a uniform tax structure, increasing pressures on infrastructure in key consumer markets and limited availability of quality real estate. Fitch noted that the government has attempted to alleviate these pressures through regulatory changes such as introduction of VAT and foreign direct investment in construction, and these measures are likely to boost of retail in the medium to long term.

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