Food retailers take up to 50% hit on margins as prices shoot up

Rapidly rising food prices is forcing food and grocery retailers to take a hit of up to 50 per cent on their margins in pulses and groceries.

Retail consultants said food and grocery retailers may see a drop of up to 20 per cent in their volumes if prices continue to shoot up, forcing shoppers to curb spending or downtrade in discretionary items.

Prices of agricultural commodities have risen 23 per cent so far this month following poor rains, the main source of irrigation for kharif crops. For instance, the price of toor dal, a staple item in many Indian kitchens, has touched Rs 100 a kg in a short span, while that of sugar has touched Rs 35 a kg.

D V Ramkumar, vice president, staples and fresh, Spencers Retail, which runs supermarkets and hyperstores, said, “It is a matter of concern that prices have gone up so drastically. They can have an adverse impact on consumption patterns.”

Ramkumar said Spencers was trying to offer people as much respite as possible by reducing its margins up to 50 per cent on essential items such as pulses, edible oil and so on.

“Food and grocery retailers normally make net margins of 4 per cent. We are giving discounts on our products to the maximum extent possible. Our food products are competitively priced compared to any other retailers,'' Ambeek Khemka, group president of Delhi-based Vishal Retail, said.

Others such as Kishore Biyani's Future Group are using better forecasting techniques to assess demand in the upcoming weeks and has opted for more combination pricing to offer better deals to its customers.

Food Bazaar, the Future Group's food and grocery format, has already conducted forecasts up to November. "When we can forecast in advance, we can store the quantities required by our stores well and bring reasonable stability to our prices,'' said Sadashiv Nayak, president, Concept Big Bazaar, adding "in groceries, our sheer scale enables us to deliver better prices to our customers.”

Food Bazaar is also pushing its combination pricing aggressively to attract customers, where two products such as rice and oil are being bundled, so that customers can take the advantage of lower prices of one item even if the first item is expensive.

"We have to see what sells and what doesn't, what sells in which area and so on. It requires a lot of management bandwidth,'' said Nayak.

Aditya Birla Retail's CEO Thomas Varghese said modern retail prices were much more competitive during high inflationary conditions than kiranas and mandis because they do not alter prices drastically.

“We just look at procurement price and margins and sell. We give our customers the best deals,” Varghese said.

But analysts said it would be difficult for retailers to offer lower prices for long.

“The price war among retailers could prove fatal at this point of time since consumers are spending less. For instance, FMCG companies have not reduced their prices in the past one year and have tried to maintain their margins. Retailers cannot offer discount to customers for long,” said Harminder Sahini, an expert on food retailing.