The decision of Bharti Enterprises and Walmart to go their separate ways in India may suggest that having a foreign partner in a retail venture isn’t a sure-fire recipe for success. But the stocks of most listed retail companies have not reacted to this development.
For long, stocks of retail companies rose on hopes that Foreign Direct Investment (FDI) in multi-brand retail would help domestic retailers rope in foreign partners. Retail stocks rose between 30 per cent and 80 per cent last year. When the move was finally announced in September last year, retail stocks leaped another 6 per cent to 19 per cent in a single day. But stringent rules and confusion over their implementation, which led to a series of clarifications through the year, meant that the euphoria propelling the stocks has slowly fizzled out.
Losing gains
While FDI hopes have faded, the retail business has also faced slowdown woes. The worsening consumer spending picture and rentals inching higher weighed on prospects.
Sales in stores open for more than a year (same-store sales) are the most commonly used metric to assess how a retailer is doing. In the recent June quarter for instance, Trent’s Star Bazaar clocked single-digit same-store sales growth indicating that retaining customers was becoming difficult. Similarly, barring its value format, Future Retail clocked slowing same-store sales growth.
Most retail stocks have ceded a good portion of their previous gains due to these trends. For instance, Shoppers Stop, which soared 79 per cent last year, has dropped 25 per cent since the start of this year. Trent, too, has lost 28 per cent in the year so far.
The other big retailer Future Retail, beset with debt troubles, has also given up its 102 per cent gain.
Changes don’t help
The successive relaxations and clarifications to the rules for FDI in retail have not made it easier for foreign players to enter the market either. For instance, in August, new retailers were allowed to open stores in any city/town within the States permitting FDI. Earlier, they were allowed only into cities with a minimum 10 lakh population. But this hasn’t helped, as getting permission from various States is expected to be the key hurdle for most new retailers. Next, the rule on supply chain investments was diluted.
New players were required to spend only half of the initial investment towards supply chain infrastructure, instead of the entire investment. Even so, with this investment required to be wholly new, they cannot acquire stakes in an existing supply chain company. What’s worse is that the existing stores cannot be acquired either, and must be newly set up. Retailers hoping for a capital injection to ramp-up scale thus, face a severe roadblock.
The contentious rule about mandatory sourcing from small and medium enterprises was tweaked too, but the quantum of sourcing remains at 30 per cent.
The festival season in the third quarter of this fiscal may provide an indicator on whether consumers have started spending. Until then, the party in retail stocks may not start again.