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Despite growth prospects, rising costs a worry

Increasing salaries, soaring rentals and stiff competition is proving to be roadblock to otherwise a booming retail sector.

business Updated: Mar 30, 2007 14:37 IST

The potential of India's retail sector may be huge and growing, but soaring rentals, salaries and interest rates could make the journey a bumpy ride for retailers in the near term.
Case in point - Kishore Biyani's Pantaloon Retail and Shopper's Stop, the two existing largest publicly traded retailers, are being tipped as the biggest casualties of the rising cost pressure being driven by the entry of giants like Reliance Retail and Bharti-Walmart.
According to retail analysts at Merrill Lynch, an expected surge in cost pressures could bring down the earnings growth rates of the two companies to about 30 per cent over the next two years, as against over 50 per cent in the past three years.
New large players like Reliance and Bharti are boosting demand for real estate as well as people and this is likely to result in a sharp surge in the rental and salary costs, while increased interest rates are already inflating the companies' debt burden.
Staff costs have already jumped by over 35 per cent since mid-2006, while there is room for further sharp rise here, Merrill Lynch's Vandana Luthra and Manish Sarawagi said.
Besides, rentals are expected to rise by more than 15 per cent in the immediate future, taking into account increased real estate prices and the new 12 per cent service tax on rents, they said in a report on the Indian retail sector.
The rising cost pressure on salary front is also evident from the financial performance of retailers in the past two quarters when Pantaloon's staff costs rose by nearly 120 per cent, which is nearly double of its sales growth.