The retail sector was seeing a glimmer of normalcy in Q4FY21 before the second wave of Covid-19 struck. With malls shut, department stores closed, cinemas halls empty, and all forms of outdoor movement curtailed, the retail sector once again fell off a cliff.

Many retail companies have little online distribution reach. For companies in these industries, investors have written off Q1FY22 due to the second wave impacting sales. But lessons from last year’s lockdown will prove vital.

The need to move quickly to e-commerce distribution, shore up cash reserves, and increase rural reach to substitute urban growth was vital towards the end of Q4FY21. Department store operators like Avenue Supermarts and V-Mart Retail are also struggling to cope with existing e-commerce competition. The e-commerce market is so competitive, even one of India’s biggest conglomerates, Reliance Industries is a minnow in the market. For fashion retail companies, e-commerce sales grew in Q4FY21, but an expense item that was waived off at the start of FY21 due to the first wave returned at the end of the year. This will eat into retail companies’ margins. 

With the second Covid-19 wave disrupting Q1FY22, we look at how organised retail players have weathered the past few quarters.

Department stores: Weak online distribution and rising competition

The sales momentum in Q3FY21 for department stores ran out of steam in Q4FY21. In the December 2020 quarter, with the economy reopening after the first wave, pent-up demand and the festive season led to a swift recovery in revenue. But in Q4, the sales momentum slowed as consumers hesitated to go to department stores especially in March, as cases began to rise. 

Sales in Q4 grew by 19% YoY for Avenue Supermarts and 7% for V-Mart on a YoY basis due to a low base in the year ago period. However, sales declined sequentially for Avenue Supermarts, the operator of supermarket chain DMart and V-Mart Retail (V-Mart).

Even with a recovery in sales YoY, customers aren’t rushing back to department stores. Anand Agarwal, the Chief Financial Officer of V-Mart said in the Q4FY21 earnings call that footfall was lower by 37% compared to pre-Covid levels. However, customers were buying in higher quantities as units per transaction grew by 19% YoY and billed amount by 8%. This helped customer conversion reach 61% of total customers, compared to 55% in March 2020. Customer conversion refers to converting non-paying customers into paying customers. V-Mart’s management expects customer footfall to decline further because of the second wave, impacting its sales in Q1FY22, and possibly even in Q2FY22. 

A saving grace for V-Mart is its high store presence in states with lower cases, Uttar Pradesh and Bihar (58% of all stores). These states also had relatively relaxed lockdowns compared to DMart’s hubs of Maharashtra and Gujarat (57% of all stores). Analysts expect V-Mart to recover by Q3FY22, ahead of DMart because of V-Mart’s presence in areas with milder restrictions. 

Factors that might delay department store operators’ recovery are operational segments and poor online presence. V-Mart sells only outdoor clothing through its online channel. The demand for these products was low in Q1FY22 because of lockdowns curtailing outdoor movement. The company is banking on a strong festive season in October-November to lift clothing sales. In Q1FY22, V-Mart partnered with Amazon to distribute its products online. However, the management is not overly optimistic about this partnership considering V-Mart’s customer base is in tier 2-4 cities, where Amazon’s presence is weak.

Avenue Supermarts launched DMart Ready under Avenue Ecommerce, its e-commerce platform in Q1FY21 amid the first wave. This channel primarily distributes essential grocery items. During the launch, its app downloads were higher than BigBasket and Grofers. However, this momentum did not last given DMart Ready’s poor distribution reach. DMart ready is only operational in five cities. It will face a tough time competing with BigBasket, Grofers, Reliance Industries’ JioMart, the e-commerce arm of Reliance Retail, Amazon’s grocery delivery arms (Amazon Pantry and Amazon Fresh), and Flipkart Supermart.

Reliance Retail: Focusing on expanding grocery distribution through JioMart

Reliance Industries, through its subsidiary Reliance Retail, has the largest retail network in the country. This network comprises its brick and mortar stores selling groceries, consumer electronics, jewellery, and fashion accessories and its online stores including Ajio, Urban Ladder, Netmeds, and its e-commerce delivery platform JioMart. Launched in January 2020, JioMart is a joint venture between Reliance Retail and Jio Platforms (under Reliance Digital Services).

In Q4FY21, Reliance Retail’s revenues grew by 21% YoY to Rs 46,100 crore. Its earnings before interest, taxes, depreciation and amortization (EBITDA) grew by 41% to Rs 3,623 crore. This was the highest EBITDA growth among the conglomerate’s business segments. However, the retail business’ EBITDA received a boost from investment income from money raised by Reliance Retail Ventures, the parent company of Reliance Retail.

JioMart will be Reliance Retail’s main play to achieve the conglomerate’s retail ambitions in FY22. JioMart’s parent companies, Reliance Retail, and Reliance Digital Services contributed 40% of annual revenue in FY21, up from 26% in the previous year.

Reliance Retail’s revenues are expected to grow at a compounded annual growth rate (CAGR) of 35% between FY22-25, according to Goldman Sachs. The investment bank said Reliance Retail will generate revenues of Rs 3.2 lakh crore by FY25, contributing 35% of annual revenues. At the end of FY21, grocery contributed 21% of Reliance Retail’s revenues and 23% of EBITDA. 

In order to kickstart this growth in FY22, Reliance Retail will bank on JioMart’s grocery distribution. JioMart is present in 200 cities, this is more than any other e-commerce grocery platform. The demand for daily groceries will remain strong in FY22. JioMart delivers staples sourced from local kirana stores. These two distribution channels (e-commerce and traditional trade) recovered quickly after the first wave. They are expected to recover by Q2FY22 once the second wave subsides.

A problem for JioMart will be the competition in the e-commerce grocery space. Tata Digital recently acquired a majority 64% stake in BigBasket, which has the largest market share in the Indian e-grocery market. Tata Digital invested $200 million (Rs 1,400 crore) in BigBasket as part of the acquisition. The number three player by market share, Grofers recently received $120 million (Rs 900 crore) in funding from Zomato and investment firm Tiger Global. 

At the end of FY21, JioMart held a 4% market share in the e-grocery market. which was valued at $3 billion (Rs 22,000 crore). This is expected to grow at a CAGR of 64% between FY21-25 to reach $22 billion (Rs 1.6 lakh crore).

Fashion Retail: Margins under pressure as rental concessions stop

With outdoor movement minimal, fashion retail companies are once again heading for a difficult FY22.  Listed companies like Aditya Birla Fashion and Retail (ABFRL), Arvind Fashions, Shoppers Stop, and TCNS Clothing Co. (TCNS) saw a decline in Q4FY21 revenues on a sequential basis. ABFRL owns brands like Pantaloons, Van Heusen, and Peter England, Arvind Fashions has licensed brands like - Arrow, U.S. Polo Assn., and Calvin Klein. Shoppers Stop sells fashion apparel through its online platform and physical stores. TCNS sells clothing apparel under W, Wishful, Aurelia.

Jagadish Bajaj, the Chief Financial Officer of ABFRL said demand was strong in January and February 2021. However, demand decreased in March due to the emergence of the second wave. In Q1FY22, with state governments announcing lockdowns, ABFRL’s stores were closed for most of the quarter. Only 15% of ABFRL’s stores were opened in June 2021 as lockdowns were relaxed. Lockdowns in retail hubs of the National Capital Region (NCR), Mumbai, Bangalore, Chennai, are expected to lower sales for fashion retail companies.

Fashion retail will bank on its e-commerce sales momentum in Q4FY21 to continue in FY22. In Q4, e-commerce sales more than doubled YoY in Q4FY21, while overall sales remained flat. For companies with an existing online presence like Shoppers Stop and Trent (through Tata Cliq), the growth was higher than fashion retail companies that relied on e-commerce companies like Amazon, Flipkart, and Myntra for distribution. 

Since many people were working from home in Q1FY22, the demand for outdoor wear fell and comfort and innerwear rose. Companies with strong comfort and innerwear portfolios like Page Industries’ licensed brand Jockey, Arvind Fashion’s licensed brand Hanes, and ABFRL’s Van Heusen Innerwear are expected to see sales momentum rise in Q1FY22.

A key concern for companies will be rising rental expenses in FY22. In Q1FY21, during the first wave and national lockdown companies negotiated with building and mall owners to reduce or waive off rental payments. These rental concessions gradually decreased in the latter quarters of FY21 as stores reopened.

Fashion retail companies with a strong physical presence like Trent and Shoppers Stop (90-95% of revenue from physical stores) might see rental expenses go up in Q1FY22. Trent operates the supermarket chain Star Bazaar through its joint venture with Tesco Enterprises. In FY20, 30% of Trent’s revenues came from Star Bazaar. Companies with a smaller proportion of sales from physical stores like ABFRL and Arvind Fashions (60-70% revenue from physical stores) will be impacted less due to the increase in rental costs. That said, fashion retail companies began negotiations with building owners for rental concessions once again in Q1FY22. The result of these negotiations will be revealed in the coming quarters. 

EBITDA margins declined in Q4FY21 due to lower revenues and decreasing rental concessions. This is expected to continue until revenue recovers and rental waivers are renegotiated.

Cinema operators: Demand to recover only in Q3FY22

Another segment of consumer-facing businesses is cinema companies - the last to open in most cities post lockdowns, and the hardest hit. These companies’ multiplexes are housed in malls, similar to retail companies. Malls were shut down in many parts of the country for the majority of Q1FY22. This will impact the revenues of cinema operators like PVR and Inox Leisure (Inox), which are still way below pre-Covid levels. 

NCR and Maharashtra, which were the first regions to relax lockdowns, opened malls only in the final phase of the unlock. Malls in Tamil Nadu reopened in the last week of June. Malls in Karnataka will open from July 5, but multiplex theatres will remain closed. With cinemas in major cities closed for over two months, cinema operators’ revenues are expected to dip even further in Q1FY22. 

PVR’s management is not hopeful of an immediate recovery in revenues during the unlock in Q2FY22. Kamal Gianchandani, the CEO of PVR said in the Q4FY21 earnings call, that after a near washout in Q1FY22, cinema releases will be low in Q2FY22. This is because production houses do not expect viewers to come back to cinemas by Q2FY22. Movie releases will increase only in Q3FY22, which is when the management expects pent-up demand to bounce back. 

Cinema operators are also rushing to raise funds to safeguard against future uncertainties. In June 2021, Inox raised Rs 300 crore through a qualified institutional placement of 96.7 lakh equity shares. PVR raised a total of Rs 1,100 crore through a rights issue in August 2020, and a QIP in February 2021. Analysts suggest this rush to raise funds for equity rather than debt is to safeguard against the uncertain demand situation ahead. Cinema operators are cautious of a third Covid-19 wave resulting in lockdowns and decreasing demand once again.

These fundraising rounds are required because PVR and Inox recorded negative operating cash flows in FY21. Demand is unlikely to recover in Q2FY22, and cinema companies are burning cash. A third wave, especially during the festive season in Q3FY22, could wreak havoc for PVR and Inox

Retail sector still not in the clear

Even before the second wave, footfalls in department stores were 30% lower than pre-Covid levels. After the second wave, this is expected to fall further. Avenues Supermarts’ e-grocery channel is still at a nascent stage, and cannot compete with BigBasket, Grofers, and Amazon Pantry. V-Mart’s presence in cities with lower cases is a positive. But the demand for fashion apparel will be low in H1FY22 impacting revenues. Reliance Retail, the biggest retailer in the country, will focus on expanding its e-commerce market share through JioMart. This will be driven by the recovery of traditional trade and e-commerce distribution channels.

For fashion retail companies, rental concessions will be lower, eating into margins. However, these companies have strengthened their e-commerce channels. This channel will be heavily relied upon in Q1FY22 and Q2FY22 especially because outdoor movement will recover slowly.

Cinema operators will likely have the most difficult start to FY22. The first quarter of FY22 was a washout, and cinema companies don’t expect movie releases to be high in Q2FY22. Both PVR and Inox have raised money more in fear of a third wave than for growth. India’s retail industry is poised precariously, where some see opportunities, while for others, threats still abound.