Explained: Why food and grocery retail looks like a tough nut to crack

The $4.5-billion Godrej group last week joined conglomerates such as Aditya Birla and Bharti to exit food and grocery retail in the country. The sale of Nature’s Basket, Godrej’s chain of food stores in west India, is the second exit by a big group in a year in the category.

Constituting two-third of the $820-billion retail market in India, the food and grocery segment does have takers such as Reliance Retail, Future and RP-Sanjiv Goenka, who continue to be bullish about the segment. Yet, say experts, a combination of high rentals and overheads, as well as competition from organised, traditional and e-commerce majors, is pushing fringe players out of the market.

“What we are seeing is consolidation within the market, and if you look at a broader window of three to four years, the exits by big names have been even more,” the chief executive of a top food and grocery chain told Business Standard, requesting anonymity. “I expect to see more targets, especially at the regional level, to be picked up by some of the serious players in the business.”

Future Group’s founder and CEO Kishore Biyani says brands such as Nilgiris, Easyday and Heritage are today part of its network of small stores that it is building to increase its presence in food and grocery. The plan is to take its small-store network from 1,200 now to 10,000 in the coming years, he says.

Sources at the Godrej group admit that Nature’s Basket was “non-core” and that it made perfect sense to exit amid heightened activity from online and offline players.  Two weeks ago, Flipkart brought its online grocery store 'Supermart' to Mumbai, while Amazon has been pushing its e-store Amazon Pantry and is also eyeing an omni-channel play in grocery with its acquisition of More supermarkets (along with PE player Samara) from the Aditya Birla group.

“Priorities for each group may be different, prompting them to view the future of a business in a different light versus their competitors,” says Arvind Singhal, chairman, Technopak. “Food and grocery retail also requires scale, since margins are thin. So it can be a challenge if you lack scale,” he says.

 
Dhanraj Bhagat, partner, Grant Thornton India, says net profit margins in food and grocery retail can be as low as 2-3 per cent, pushing players to increase their volume of business with the help of discounts, promotions and offers. “While margins in gourmet food retail are a little higher, footfalls are not enough to sustain the business. Plus, e-tailers and some of the bigger grocery chains are also stocking niche products today. Even high-end traditional trade outlets are targeting upscale consumers with imported products. So it can be a tough for those specialising in gourmet food retail,” he says.

Nature’s Basket was known largely for its niche and imported products and attracted well-heeled consumers in Mumbai, Pune and Bengaluru, where its stores — 36 of them — were located. 

The chain is expected to give Spencer’s Retail (from the RP-Sanjiv Goenka group) a foothold in the west and is likely to see a change in its assortment in the coming months.