India’s fashion majors shift focus from store count to return ratios

01 June 2026, Mumbai

For more than a decade, scale was the ultimate currency of success for Indian retailers, with most racing to plant flags across Tier-II, III cities in pursuit of the country’s next wave of consumers. But as FY26 draws to a close, the sector’s largest players are rewriting the rules of expansion. The focus is shifting away from headline-grabbing store additions toward a far more unforgiving metric: return on capital employed (ROCE).

Across boardrooms in Mumbai and Bengaluru, retailers are being judged not by how many stores they open, but by whether those stores generate returns meaningfully above their weighted average cost of capital (WACC). The shift reflects growing investor discomfort with capital-intensive expansion that fails to translate into durable economic profit.

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The Tier-II reality check

The growth opportunity in smaller cities remains intact, but the economics have become harder to justify. Industry estimates show apparel retail revenue grew between 9 per cent and 10.5 per cent in FY26, yet profit has not kept pace. The rapid push into emerging consumption centres has created what analysts describe as a ‘value-destruction paradox’, where rising store counts dilute blended returns instead of strengthening them.

The challenge is becoming visible in the industry’s largest expansion stories. Reliance Retail recently crossed the 20,000-store milestone, cementing its dominance across formats. However, analysts continue to scrutinise whether the scale achieved is delivering sufficiently high returns relative to the capital deployed. The heavy investment required for nationwide rollouts, warehousing infrastructure and omnichannel integration has compressed return profiles despite strong topline growth.

Retailers are also finding that the economics of smaller-city expansion are taking longer to mature. The traditional 18-month breakeven and stabilisation period for value-fashion stores has now stretched to nearly 30-36 months in many markets. Rising logistics expenses, elevated fit-out costs and slower consumer ramp-up in newer catchments are extending the time stores remain in what industry executives privately call the ‘value destruction zone’. As a result, a double-digit increase in store count no longer guarantees proportional gains in economic profit. Mature metro locations continue to generate stronger productivity metrics, while many newer stores dilute portfolio returns during their early operating years.

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Productivity over expansion

The changing market sentiment is influencing strategy at some of the country’s most closely watched retail companies. Trent, operator of the fast-growing Zudio and Westside chains, has emerged as a case study in balancing scale with capital discipline. Zudio’s value-fashion model has been one of the standout retail success stories of recent years, crossing 850 stores and surpassing the billion-dollar revenue mark. Its operating strength lies in exceptionally high inventory turns, estimated at 12-15 times annually, which support healthy ROCE despite aggressive expansion.

Yet the company is simultaneously taking a far more measured approach with its premium Westside format. Expansion is being limited to roughly 30-40 stores annually, with tighter scrutiny on lease economics and location productivity. The strategy reflects a broader industry realisation that disciplined site selection may now create more shareholder value than unchecked footprint growth.

This revision is also increasing same-store sales growth (SSSG) as the industry’s preferred performance benchmark. Apparel retailers reported average SSSG of 12.8 per cent during the nine months ending December 2025, underlining the sector’s growing emphasis on extracting more revenue from existing assets rather than relying solely on expansion. Experts argue that productivity-led growth is becoming structurally more valuable than physical expansion. Better inventory management, sharper merchandising and optimised store formats are increasingly seen as the primary drivers of operating leverage.

Inventory emerges as the biggest capital battle

Inventory remains the single largest consumer of capital in fashion retail, where trend cycles are short and markdown risks are constant. Slow-moving stock directly erodes margins and weakens return ratios, forcing retailers to rethink supply-chain and fulfilment models. To address this, major retailers are increasing omnichannel integration strategies that unify online and offline inventory pools. Instead of maintaining excess safety stock at every physical store, companies are increasingly using centralised inventory visibility to improve sell-through rates and reduce working capital pressure.

Reliance Retail, for example, reported a fourfold rise in hyperlocal and quick-commerce fashion orders in early 2026, a trend that is helping improve inventory velocity while shortening fulfilment cycles. Faster stock movement has become critical in protecting margins in an environment where online fashion return rates continue to hover between 30 per cent and 40 per cent. The pressure is especially acute in premium malls, where rising occupancy costs are further tightening profitability. Retailers are therefore reassessing store sizes, lease structures and product assortments to ensure every square foot contributes meaningfully to returns.

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Table: The inventory trap

Aditya Birla Fashion and Retail Ltd is also entering a new phase of strategic consolidation. Following the May 2025 demerger of its Madura Lifestyle business, the company has sharpened its focus on high-growth categories such as ethnic wear and luxury fashion. With a retail footprint of over 7.3 million sq. ft., ABFRL achieved pre-Ind AS EBITDA breakeven for its core business during 9MFY26. The company is now transitioning from an acquisition-heavy growth model toward portfolio optimisation aimed at improving ROCE and delivering sustainable profitability by FY27.

The shift reflects a broader lesson emerging across the sector: scale without productivity is no longer enough. Investors are rewarding retailers that can balance expansion with disciplined capital allocation, faster inventory turns and stronger store economics. As the industry heads into FY27, the competitive edge may no longer belong to the retailer opening the most stores. Instead, it will likely belong to the one generating the highest return from every rupee invested.

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