India's retail industry will struggle far beyond the lockdown – but Reliance’s JioMart has the ‘muscle’ to power through
- Credit rating agency CARE ratings has given the retail sector in India a ‘Negative’ outlook.
- With supply chains disrupted, retailers have to innovate quickly and come up with new ways of keeping the supply up. And it’s not going to come for free.
- That’s why
RelianceRetail is betting on the O2O model with its association with Facebook.
And the situation isn’t getting better anytime soon – not even after lockdown, say experts. Credit rating agency CARE ratings has given the retail sector in India a ‘Negative’ outlook. “The impact on demand, which is expected to remain muted at least for the next three or four quarters, will be more in case of players with presence in non-essential items and luxury segments,” said the ratings agency in its report.
However, it believes grocery will prevail as king. “The retailers with presence in essential commodities continue to have some cash flows to support their fixed costs,” said the report.
Low consumer spending even after lockdown
Because of the coronavirus pandemic, stock markets across the world have crashed, oil prices have seen a record low, and organizations across the world are taking cost cutting measures.
So, as the global economy worsens even after the lockdown lifts, consumers are going to be cautious about their spending.In lieu of a global recession, people aren’t going to loosen their purse strings.
“After the control of the spread of the coronavirus and post the lock-down period, the spending as well as shopping patterns of the consumers are expected to change significantly. The consumers are likely to curtail their discretionary spending with reduced income in their hands as well as tendency to preserve cash,” said the CARE report.
According to a report by Nielsen, here’s how spending will decrease across sectors post Covid-19.
Supply chain issues
The biggest problem that the retail industry faced with the coronavirus lockdown is the complete disruption of their supply chain. With borders sealed and passes required for movement, trucks were seen to be turned off and lined up across highways.
So, retailers have to innovate quickly and come up with new ways of keeping the supply up. And it’s not going to come for free.
“Operating costs will go up by 30-35% easily for small stores, larger stores will see costs going up by 10-15%,” said Rakesh Biyani, Future Retail’s Managing Director. He also spoke about how maintaining social distancing at physical stores will also inch up costs.
Who will survive the crash?
As people are staying in, the demand for groceries are going up. Even after lockdown lifts, people will avoid public spaces and will continue to order online. Online apps are raking in the orders – Bigbasket is currently processing almost 3 lakh orders a day.
So, for retail industries to survive they will have to have the “agility to recognize new consumer behaviour and adapt to meet the altered needs,” said the Neilsen report.
AdvertisementAnd how do they go about it? By creating a balanced approach of online and offline.
“In such times, the retailers with presence across the retail segments (grocery, apparel, appliances, accessories) as well as who have an omni-channel strategy with presence in both offline and online channels are expected to have a quicker recovery,” said the CARE report.
And interestingly, this is what Reliance Retail is betting on after its deal with social media giant Facebook – the O2O model.
Jio has made a quiet entry into e-commerce with JioMart. With the association with Facebook,
As Reliance chairman
AdvertisementAnd both of them have deep pockets to do so.
Reliance Retail has over 10,901 stores across the country, and is facing a crisis because of people not visiting stores. Reliance Retail also sells jewellery, apparel and accessories which have come to a stop now. However, even with the consumption slowdown over the past year, Reliance Retail in the third quarter of FY20 posted a 62.32%jump in its pre-tax profit at Rs 2,727 crore. Meanwhile Jio reported ₹13,968 crore standalone revenue from operations, and a standalone net profit of ₹1,350 crore.
“The recent tariff hike should still allow Jio’s EBITDA (earnings before interest, tax, depreciation and amortization) to rise 78% YoY [year-on-year] in FY21. Strong telecom and a weaker rupee will offset big cuts in petrochemicals, refining and retail as FY21 EPS rises a small 1.6% YoY,” estimates capital market and investment group, CLSA.
Experts too believe that this deal makes for an interesting combination for growth.
"The Facebook and Jio deal is the marriage of two superpowers. With the reach and deep pockets that both of them have, it will be a transformational partnership for India. Over the past years Facebook has acquired some very interesting assets like Whatsapp and Instagram. These assets combined with Jio's existing infrastructure make it a very interesting combination,” said Viram Shah, CEO and Co- Founder, Vested Finance, an investment firm.
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