Thursday September 20, 2018

Sri Lanka 'supermarkets' to grow; price controls, regulations a threat: Fitch

Nov 06, 2017 11:42 AM GMT+0530 | 0 Comment(s)


ECONOMYNEXT - Sri Lanka's self-service supermarket chains are set to grow with more people using them with prices sometimes better than traditional stores, but state price controls and ad hoc regulations are a threat, a rating agency has warned.

"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 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 said credit profiles of Cargills Food City, Keells Super and Arpico, which operate the three largest 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," the rating agency said.

Cash inflows from new store could eventually reduce gross leverage.

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, the report said.

Fitch said in 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.

But the sector was at risk from state interventions. Price controls could make losses and also promote low quality goods, the rating agency said.

"We believe regulatory changes in the form of taxes and price controls are the key risk for the industry," the rating agency said.

"From time to time the government has imposed price ceilings on essential items which have forced supermarkets to sell existing stocks at lower margins or losses.

"Price controls have also led to supply shortages and low quality products hitting the market…"

Until recently the sector was also hit by so-called value added tax that it could not pass on.

"The large modern retailers were affected the most as the VAT is imposed on high revenue generators, the rating agency said.

"We believe the tax environment has improved for modern retailers with the removal of deemed VAT – a sales tax that retailers were not allowed to pass on to consumers.

"However even a slight change in taxes could have a material impact on profitability, which is already thin." (Colombo/Nov06/2017)


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