Rating agency notes growth potential in self-service supermarket chains

Rating agency notes growth potential in self-service supermarket chains

Rating agency, Fitch Ratings has reportedly said that Sri Lanka’s self-service supermarket chains are set to grow with more people using them with prices sometimes better than traditional stores.
However, the rating agency has also warned that state price controls and ad hoc regulations poses a threat to the supermarkets.
“We believe more people are now willing to shop at supermarkets and hypermarkets compared with five years ago, helped by the competitive prices offered by modern retailers, which are equal to or even below the prices of traditional retailers,” Fitch Ratings has reportedly said.
“Modern retailers are able to source products at low prices due to their larger scale while most of the fast-moving consumer goods (FMCG) they sell are subject to maximum retail prices which reduce the price difference with traditional retailers.
“We believe customers will gradually prioritise convenience and quality over price amid rising income levels, which also bodes well for modern grocery retail.”
Fitch has stated that credit profiles of Cargills Food City, Keells Super and Arpico, which operate the three largest chains would remain stable in the medium term despite high capital expenditure.
“We expect strong top line growth and stable profit margins to help generate sufficient operating cash to meet the companies’ expansion needs,” Fitch has said.
Cash inflows from new store could eventually reduce gross leverage.
Nevertheless, the news report states that Sri Lanka’s supermarket penetration is still around 15 percent of the retail trade compared to 30 percent for regional peers with similar social and economic characteristics, indicating growth potential.
Fitch has noted that the near term expansion was expected in the Western province, but in the medium term Western province growth would eventually slow, especially for stores that only have fast moving consumer goods.
Provinces such as North Central, North Western and Uva provided strong growth potential as they are supported by high per capita income growth and low supermarket penetration.

OSL take:

The growth spurt in the retail supermarket sector indicates an opportunity for an innovative investor to consider the setting up of supermarkets targeting the many regions in the country. The Fitch report also notes that provinces such as North Central, North Western and Uva show strong growth potential.

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Article Code : VBS/AT/10112017/Z_2

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