India's Retail Sector Slowdown: Store expansions reduces as consumption slumps

India's retail sector is experiencing a slowdown, with major players significantly curbing new store openings in 2024. This reflects a broader trend of tepid consumer demand, particularly in discretionary categories like apparel and footwear, forcing retailers to prioritize cost management and profits.

Slowdown indicators

Reduced store expansion: An ET Analysis of Investor Presentations of leading retailers like Reliance Retail, Aditya Birla Fashion & Retail (ABFRL), DMart, Trent, Titan, and McDonald's, reveals a drop in new store additions. In 2024, these companies collectively added an average of only three new stores per day, compared to approximately 10 in 2023.  The total store count for these companies increased just 3 per cent to 34,839 outlets in 2024, a significant decrease from the 12 per cent growth observed in 2023.

Muted revenue growth: Company reports and Emkay Research analysis reveals, ABFRL reported 3.3 per cent year-over-year (Y-o-Y) consolidated revenue growth in the December quarter (Q3FY25), lagging behind competitors who achieved high single-digit or double-digit growth. Key segments like Madura and Pantaloons, which make up 72 per cent of ABFRL's consolidated sales, saw flat to -2 per cent growth.

Weak consumer sentiment: Retailers too cite persistently weak consumer sentiment, particularly in cities, as a major factor. Demand has been inconsistent, with spikes during festive and wedding seasons followed by periods of tapering. As per the Retailers Association of India (RAI) sales growth in organized retail segments like apparel, footwear, beauty and QSR slowed to a mid-single digit last calendar year, compared to 15 per cent in 2022.

Financial pressures:  High food inflation, low salary hikes, increased consumer debt, a slowdown in job creation, and rising housing costs are all contributing to the decline in discretionary spending. Moreover rising real estate costs have forced retailers to be more careful with new store leases.

Short to mid-term future outlook

There is cautious optimism among retailers. While retailers acknowledge the current challenges, they express optimism about future growth. Many are focusing on consolidating their existing operations, closing unprofitable stores, and preparing for renewed expansion. ABFRL for example is undergoing a restructuring, including the demerger of its Madura lifestyle business and a focus on its ethnic and direct-to-consumer (D2C) segments. The company's recent capital raise is intended to reduce debt and fuel growth in these areas.

As per Emkay Research retailers are focusing on profits over rapid expansion. The focus is on optimizing store networks, improving margins, and adapting to changing consumer preferences. At ABFRL for example, the focus is on brand re-imaging for Pantaloons, shifting its focus from value to the mid-market segment. This transition may impact growth in the short term.

Also as rental prices are starting to taper, companies are looking for better lease deals, which will help future expansion.

Impact on consumer buying, retail, and store opening

Consumers on the other hand are prioritizing essential goods and services, leading to a decline in spending on discretionary items like apparel, footwear, and accessories. With falling footfalls and profits, retailers are closing underperforming stores to improve profits. This trend is expected to continue in the short term. New store opening has reduced significantly as retailers adopt a more cautious approach to expansion. No wonder Bata India’s focus is on closing unprofitable stores, a clear example of how retail companies are attempting to raise profits during a slow down.

Companies like ABFRL have noted that sales are stronger in the lower price points and rural/Tier-II, III markets, and in the premium segment. This indicates a polarization of consumer spending. In fact, ABFRL's experience with Pantaloons highlights the challenges in the mid-market apparel segment. The company's shift reflects the need for retailers to adapt to evolving consumer preferences and market conditions. The rise of D2C and ethnic wear segments indicates a growing demand for specialized and culturally relevant fashion.

The bottomline is, retail sector's future will depend on the broader economic recovery and the ability of retailers to adapt to changing consumer behavior.