Continued healthy demand and expansion in underpenetrated tier-II and -III cities will help organised brick-and-mortar food and grocery (F&G) retailers log a strong revenue growth of 14-15 per cent in fiscal 2025 despite fierce competition from quick commerce channels, said a report by CRISIL Ratings. This, it added, translates to three years of strong growth on the trot — after ~30 per cent last fiscal and an expected 15 per cent in the current one.

However, modest demand from the discretionary segment — comprising general merchandise (crockery, home appliances and utensils) and apparel — owing to inflationary pressures will keep the sector’s operating margin range bound at 6.0-6.5 per cent in the current and next fiscals (6.9 per cent last fiscal). For the record, food and non-food grocery contribute 75-77 per cent of revenue for F&G retailers, while the balance is contributed by the discretionary products sold at F&G outlets. Besides, the discretionary segment offers relatively higher margins to F&G retailers.

“Healthy demand outlook and low organised penetration will ensure mid-teens revenue growth for F&G retailers this fiscal and the next. We expect area addition of CRISIL Ratings-rated players to increase ~20 per cent cumulatively over fiscals 2024 and 2025 on a high base following a substantial increase of ~40 per cent in fiscals 2022 and 2023. Incumbent retailers are also expanding into omnichannel platform – includes brick-and-mortar stores and online formats – to compete with quick commerce players. But then, they will ensure calibrated investments to restrict cash burn in the online format,” said Poonam Upadhyay, Director, CRISIL Ratings. 

Even as the pace of increase in area under operations normalises, the sector’s revenue density (revenue per square foot) is expected at ~Rs 33,600 next fiscal, remaining ~10 per cent lower than the pre-pandemic peak. This is primarily owing to slower-than-expected ramp-up of store openings in the past two fiscals, especially in metros/ tier-I cities, due to increasing competition from the quick commerce segment.

Though quick commerce is expected to log a growth of ~30 per cent in the medium term, its share in the F&G segment will remain at around 9-11 per cent with the brick-and-mortar format dominating. Nonetheless, organised brick-and- mortar retailers are investing in omnichannel offerings to enhance customer convenience owing to the growing popularity of quick commerce.

Further, the report stated that the demand from the discretionary segment is expected to remain modest because of prevailing inflationary pressures; its share has moderated to 22-23 per cent from ~29 per cent prior to the pandemic. With the contribution from this segment likely remaining subdued in fiscal 2025, it shall affect the F&G retailers’ gross margins. However, benefits of operating leverage stemming from the increase in revenues shall help offset the impact and keep operating profitability in the 6.0-6.5 per cent range in the current and next fiscals.

Shounak Chakravarty, Associate Director, CRISIL Ratings, said, “Strong cash flows and well-managed working capital will obviate any need for material debt raising, leading to continued healthy balance sheets for CRISIL Ratings-rated F&G players. Capex spend is estimated at ~Rs 5,500 crore over fiscals 2024 and 2025 compared with Rs 6,000 crore over fiscals 2022 and 2023 towards online expansion, addition and refurbishment of stores. Ergo, key debt protection metrics, i.e., interest cover and total debt/Ebitda (earnings before interest, taxes, depreciation and amortisation) will remain healthy in line with previous fiscal’s level of ~13 times and ~0.40 times, respectively.”

With this in view, demand momentum from the discretionary segment, slower-than-expected ramp-up of newer stores and competition from the unorganised and quick commerce segments will be key monitorables.