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The retailing sector of India can be split into two segments. They are the informal and the formal retailing sector. The informal retailing sector is comprised of small retailers. For this sector, it is very difficult to implement the tax laws. There is widespread tax evasion. It is also cumbersome to regulate the labour laws in this sector. As far as the formal retailing sector is concerned, it is comprised of large retailers. Stringent tax and labour laws are implemented in this sector. If the retail industry is divided on the basis of retail formats then it can be split into the modern format retailers and the traditional format retailers. The modern format retailers comprise of the supermarkets, Hypermarkets, Departmental Stores, Specialty Chains and company owned and operated retail stores. The traditional format retailers comprise of Kiranas, Kiosks, Street Markets and the multiple brand outlets. The retail industry can also be subdivided into the organized and the unorganized sector. The organized retail sector occupies about 3% of the aggregate retail industry in India.
Size and contribution of the retail industry in India
In terms of value, the Indian Retail industry is worth $300 billion. Its contribution to the Gross Domestic Product is about 10% , the highest compared to all other Indian Industries. The retail sector has also contributed to 8% of the employment of the country. The organised retail sector is expected to triple its size by 2010. The food and grocery retail sector is expected to multiply five times in the same time frame. The major reason behind the low participation in the Indian retail sector is the need for lumpy investments that cannot match up their break even points. The government policies are being revised from time to time to attract investments in this sector.
The Indian Retail Industry—Sky is the limit
In terms of the retail development index India ranks fifth. In Asia it occupies the second position , next to China. Among all the global markets, the Indian retail market is the most expanding. This is owing to absence in restriction at the entry level. So the large foreign companies can reap the benefits of economies scale by entering the green retail fields of India. There are many reasons why the retail industry in India can reach the zenith. Firstly the organised retail sector in India has a very low contribution to the entire retail sector in the country. Hence there is ample scope for the new players to achieve success in the backdrop of soaring disposable income of the upcoming generation. Secondly, not only have the incomes increased but there has been a sea change in the preferences of the consumers . These factors have acted as a stimulus for the ushering of foreign players retailing in apparels, accessories, electronic appliances etc. Large shopping malls have already mushroomed in the metropolitan cities. There still lies untapped potential in the Indian Retail Market.
Structure of the Retail Industry In India
The retail industry continued in India in the form of Kiranas till 1980. Soon, following the modernisation of the retail sector in India, many companies started pouring in the retail industry in India like Bombay Dyeing, Grasim etc. As has been mentioned earlier the retail sector in India can be widely split into the organised and the unorganized sector. The unorganized sector is predominant. We may discuss in detail the different divisions of the retail sector in India.
Unorganized Retail Sector
The unorganized retail sector basically includes the local kiranas, hand cart, the vendors on the pavement etc. This sector constitutes about 98% of the total retail trade. But Foreign Direct Investment in the retail sector is expected to shrink the employment in the unorganized sector and expand that in the organized
Organised Retail Sector
In the organised sector trading is undertaken by the licensed retailers who have registered themselves to sales as well as income tax. The organised retail sector have in their ambit, corporate backed hypermarkets and retail chains. The private large business enterprises are also included under the organised retail category. The organised retail sector can be further subdivided into:
This type of retail format is also known as the brick and mortar format. These retail stores are in the form of fixed point sale outlets. They are specially designed to lure the customers. There are different types of stores through which the instore retailers operate. Branded Stores appear in the form of exquisite showrooms. Here the total range of a particular brand is available and the quality of the product is certified by the government. There are also multi brand specialty stores that sell a series of brands so that the consumer can choose from the wide array of brands. Department stores have a large number of brands and products catering to all basic needs to luxurious items as well. Supermarkets are basically self service retail stores. Discount Stores offer commodities at reduced prices. In Hyper Marts customers have wide variety of products to choose from and they are also available at discounted rates. Convenient stores are located in prominent places within the reach of majority of the customers and do not operate in stringent work hours. Shopping Malls are a storehouse of a large variety of retail shops situated close to each other.
Retail Formats in India
The retail formats in India can be categorised into the traditional and the modern forms. The traditional format includes Kiranas, street markets, kiosks and multiple brand stores. The modern format, on the other hand includes supermarkets, hypermarkets, department stores and specialty chains. In discussing about the structure of the retail sector in India we cannot forgo forecourt retailing and trade parks.
Trade parks are basically business complexes that promote international trade. The global players here have access to the top Indian exporters. To the buyers this would prove to be a boon since they do not have travel to far off towns to enter into business deals with the exporters, especially in places where infrastructure is very poor. By this the exporters not only enhance their visibility but they also enjoy a host of other advantages. They can design libraries, studio etc, in order to attract potential customers.
This type of retailing is done by the oil companies in order to increase their revenue. They not only deliver fuel but also offer other services to its customers.
Size of Indian Retail Industry
The size of retail industry in an economy depends on many factors and the level of consumer spending is the most important among these factors. The retail sector in India has grown by leaps and bounds in the last five years. The reason behind this growth has been the synergy of many propellants. However the growth is not always genuine as there are exaggerations as well. But these exaggerations also have benefits since they given a feel of growing competition all around. Secondly the present situation is just a depiction of nascent stage. The future of the trajectory may not be as steep as it is now or may be even slope downward. 'What will be the future size of the retail industry' is the mind boggling question. Another moot point that will gain importance in due time concerns the future of the unorganized retail market which constitute a significant proportion of the whole industry. The retail stores have proved to be a vantage point for the customers. This implies that the small farmers who used to sell their product in the sabji-mandis and on roadsides are going to lose a significant market share as they can't employ the two profit maximizerseconomies of scale and economies of scope.
Retailing in India: the present scenario
The present value of the Indian retail market is estimated by the India Retail Report to be around Rs. 12,00,000 crore($270 billion) and the annual growth rate is 5.7 percent. Retail market for food and grocery with a worth of Rs. 7,43,900 crore is the largest of the different types of retail industries present in India. Furthermore around 15 million retail outlets help India win the crown of having the highest retail outlet density in the world. The contribution of retail sector to GDP has been manifested below:
Country India USA China Brazil Retail Sector's share in GDP (in %) 10 10 8 6
Source:CII-AT Kearney Retail Study As can be clearly seen, retailing in India is superior than those of its contenders. Retail sector is a sunrise industry in India and the prospect for growth is simply huge. There are many factors that have stimulated the rise of the shopping centers and multiplex-malls in a jiffy. Some of them can be listed as follows: 1. Rise in the purchasing power of Indians- the rise in the per capita income in the last few years has been magnificent. This has led to the generation of insatiable wants of the upper and middle class. The demand of new as well as second hand durables has risen throughout the country thus providing the incentive for taking up retailing. 2. Favorable to farmers- retailing has helped in removing the middlemen and has thus enhanced the remuneration to farmers. This is a new revolution in the agricultural sector in India and will go a long way in amending the condition of agriculture, a major concern among policy makers. 3. Use of credit- a typical Indian is most conversant with using credit cards than carrying money. This has led to a shift of the consumer base towards supermarkets and make the payments in the form of credit. 4. Comfortable Atmosphere- a visit to a retail store appears to be more soothing for the generation-Y. People and kids prefer to shop in an air conditioned a tech savvy manner. The retail industry is the second largest employer in India. It currently employs about 7 percent of the total labor force in India. Finance Minister P. Chidambaram's recent statement “salaries ought not be legislated” is a welcome move as most of the organized retail is in private hands. However only about 4.6% of the total retail trade is in organized sector. It generates about Rs.55,000 crore ($12.4 billion). The major and minor players desperately need to work hard in this direction so that next time the figures look more decent. The government must also make an attempt to ameliorate the situation as political instability and infrastructure namely power and roads are the major roadblocks in the path of smooth functioning of the market.
Retail sectors in neighboring countries:
China- the total sales from retail market in China reached US$755 billion in 2005. However organized retailing in China accounts for only 20% of it. Also the fragmentation of China's retail market is so high that top 100 retailers make up for only 10.5% of the total market. The registered sales of department stores grew by 25.7% and that of convenience stores grew by 36.5% in 2005. The Chinese retail market is expected to reach new highs as the population of strong middle class is expected to double by 2020 and mergers and acquisitions among retailers are3 going in great guns. The WTO restrictions are also expected to have a favorable impact on its retail sector. Japan- total annual sales for the Japanese retail industry for 2003 amounted to JPY 133,273 billion. Japan had 1.2 million retail establishments in June 2004 and there were 42,738 specialty superstores. Between 2002 and 2004 annual sales per store increased by 3.8%. The growth was mainly driven by the grocery superstores but the number of superstores specializing in clothes gradually came down. The organized retail sector in Japan couldn't perform at its full efficiency because of collapse of the 'bubble economy' in the early 90s.
Retail Distribution in India
The distribution sector bridges the gap between the producer and consumer and thus forms a crucial link. Distribution of retail in India has multiple dimensions. Its uniformity is difficult to decide and easy to argue. Distribution in any sector is usually measured by the reach of its products to people. But in case of the retail sector in India it also implies the dispersion among the organized and unorganized spheres. The question of distribution hovers mainly around the intentions of private players to reach out to the less rich people. But the point that has caught the public eye recently is the ambiguous mood of the beneficiaries and the chauvinist government that produces civil service.
Propagation of the retail sector:
The expansion of the retailing in India has been magnificent specially after the advent of liberalization and the abolition of licensing. A comparative study with other developed countries indicates that the retail sector has achieved a fantastic breakthrough in the Indian economy. India topped the A.T. Kearney's Global Retail Index in both 2005 and 2006as can be seen below: the GRDI Score as calculated by A.T. Kearney is a weighted average of market attractiveness, market saturation, country risk and time pressure. India had a GRDI score of 100 in both 2005 and 2006.implying market potential and attractiveness. As the graph clearly depicts, India's contenders like Russia and China are nowhere in competition. This result has been obtained mainly because of a higher APC(Average Propensity to consume) of the Indian people. According to IMF, India has a APC of more than 60% while the corresponding figure for Japan is 57% and China is 39%. Also Indians tend to exhaust 40% of their consumer spending on groceries(foodstuffs). These figures are intensified by the fact that Indians have special preference for lifestyle products and they feel comfortable in buying against credit as the credit card and mortgage market has been growing by more than 30% We present the results from another survey below in order to strengthen our findings.
Availability of Retail Stores
Country India Japan USA
Number of stores per 1,000 people 22 10 3.8
The above table reinforces our view that India has done a great job in retailing. One noteworthy point here is that Japan in spite of being one of the most densely populated countries has fared poorly than India. But
this euphoria loses its charm if we compare the percentage of organized retail in the total value generated by the retailing sector. According to international standards, a retail store is nominated as organized only when it features more than 10 employees. The above chart clearly portrays the miserable condition of India's organized retail A forecast of 40% annual growth in the organized retail sector seems sound. The number of shopping malls in India has grown from 1 in 2001 to 100 in 2005 but still more effort is needed to turn the predictions into reality. Studies have further showed that non-urban areas account for only about 15% of organized retailing So it is high time that the retail industries pay importance to diversification and reach out to non-urban markets. If they remain confined to the metropolis then they will soon hit a ceiling and will be able to grow no more. But at the same time they must realize that the rustic people are sceptic about the urbane lifestyle habits. The mega retail players will have to drop their policy of full extraction of consumer surplus and will have to employ the local people to over come the myth that entry of a branded retail will displace the millions of traders, shopkeepers and hawkers. Protests must be welcomed and meetings encouraged to make life saner. Retail markets in Germany, South Africa and many other countries allow 100% foreign investment in retail. This has helped in setting up of cash and in creating wholesale markets. However, in India, only 51% FDI is allowed in single-brand retail and that too with prior approval. In case of multi-brand retail, FDI is completely prohibited. This is a perfect beginning but foreign investment should be gradually liberalized to modernize farming and help farmers scale up. Moreover, restricting FDI for protecting mom-and-pop stores seems unjustifiable since Tata, Reliance and Bharti have already made a foray in the sector.
There are many hurdles in the path of smooth growth of the retail sector but a burgeoning and aware middle class and cultural and ethnic diversifications surely wait a revolution in the retail sector.
Retail Sector Growth In India
In this section we may deal with the growth of the organized as well as the unorganized retail sector of India. Due to the untapped potential that exists in the Indian retailing market, it is a very fast growing sector. One reason that can be attributed to this rapid entry of the foreign retail giants ,is that the Western Countries have reached a point of saturation in their retail sector. Another reason as already mentioned earlier is the change in the tastes and preferences or the psychographic of the consumers that is bent in their favour. Although the retail sector in India contributes to about 10% in the GDP, it is the most underdeveloped sector in terms of investments that are made in this sector. The unorganized retail sector has recorded a growth of 5% per annum while the organized sector is growing at 25-30 % per annum. One should not be impressed by the figures of the organised retail markets since developed market in US, Taiwan, Malaysia is still a dream to the Indian retail market. They have registered a growth of 50% per annum. The retail stores have mushroomed in the Tier II and Tier III cities. The participants in the retail market hold the presence of market in the cities as a signal to their growth. It has been seen that the retail companies have invested in the IT sector for their growth and development. The IT sector has contributed greatly to the growth of the retail sector in India. The retail firms have made lumpy investments in Enterprise Resource Planning System as a strategy for their growth and development. SAP has also assumed a significant role in the growth and development of the organised retail industry. The sudden growth of the organised retail sector can be attributed to the ushering of the domestic retail
giants like Reliance, Pantaloons, ITC, RPG, Rahejas and the Bharti Group. The foreign companies continue to wait in the sidelines. These prominent retail chains have adversely affected the farmers in some states. Another viewpoint is that the farmers have rather benefited since they were eager on the market intervention of the buig retailers for the purpose of marketing and processing of their output. Since the big retailers reap the benefits of buying directly from the farmers , the consumers can purchase the products at minimal price rates. In places like Uttarakhand, the big retail chains are welcomed for the same purpose by the farmers. They have helped in putting finances in the right channels of processing and packaging.
Growth of the Retail Outlets In India
Source: P.G.Chengappa, Lalith Achoth, Arpita Mukherjee, B.M.Ramachandra Reddy and P.C.Ravi, Evolution of Food Retail Chains: The Indian Context, 5-6th Nov. 2003, www.ficci.com From the above table it is quite evident that there is a rising trend in the total retail outlets in India. The non-food retail outlets contribute more to this rise. The trend in the retail sector as compared to other sectors may be represented in the following graph. We can see that as compared to the clothing and the food and beverages industry the retailk industry has witnessed a sharp rise especially from 2002. before that it was following a slow and steady pace. The growth of the different retail sectors can be discussed as under.
Growth of FMCG
The report produced by HSBC shows that the FMCG retail sector is expected to grow by 60 % by 2010. leaving aside the packaging sectors, the other sectors that have registered rapid growth are hair care, household care, confectionery, chocolates etc.
Growth of Consumer Durables
The consumer growth industry is estimated to grow by 40% in the coming season. The television, refrigerator and washing machines sector has also witnessed a rapid growth. The market for Indian colour television is expected to reach the value of 10.5 million units by the next fiscal year. The refrigerator market is estimated to reach 4.5 million. Hence in a nut shell the retail industry in India has witnessed unprecedented growth in the past years. The organised sector is expected to make Quantum jumps in the coming years in terms of its contribution to GDP.
Contribution of Indian Retail Industry
Contribution of Retail:
What, How and For Whom The presence of retail sector in India has been in limelight for the last few years. Its significance has been undoubted. Policymakers are quite optimistic that the evolution and steady maturation of organized retailing will take the economy to new highs. Besides, it will also help strengthen the linkages between the different sectors so as to break the vicious circle of poverty and ensure a bright future for the next generation. The benefit of retailing to general public includes growing awareness and brand consciousness.
Indian Retail: Past Vs Present
It is widely accepted that the retail industry has undergone a drastic change in last five years and there is yet more to come. Let us compare the image of Indian retailing in 2004-05 to that of its status in 2007-08 in the following table:
Magnification of the Indian Retail Industry
Yardstick Value of retail sales Annual growth rate Value of organized market Share of organized market in the sector Forecasts (after 5 years) about size of organized retail market
Situation in 04-05 Rs. 10,20,000 crore 5% Rs 35,000 crore 3.4% Over Rs. 1,00,000 crore
Situation in 07-08 Rs 12,00,000 crore 5.7% Rs 55,000 crore 4.6% Rs. 2,00,000 crore
Forecasts about growth rate of organized retail market
The above table clearly shows that the retail market as well as the mindset required for it has experienced a thorough revisal in the last three years. This is just the beginning and Indians are sanguine that the sector will see rosy days in the future. This confidence has helped India acquire the No.1 position among 30 most attractive retailing destinations in the world according to the Global Retail Development Index of 2005 (by AT Kearney, India). Among emerging markets, India holds the second position after China in the list of most favored retail destinations. The retail industry employs a huge share of the total workforce in India. It is the second largest employer after India. Presently 7 percent of the total labor force is employed in the retail sector. According to available data it is also the largest employer in the services sector and maximum growth in the non-agricultural sector has been witnessed by retail trade. According to market analysts 300 new malls, 1,500 supermarkets and 325 departmental stores are going to come up in India in the next few days. The shopping revolution that has led to this retail boom is going to continue and this is a good news for the government as well as those who wish to work in the organized sector.
Contribution of FDI in Retailing
Permitting Foreign Direct Investment in the retailing sector can have immense benefits. It can generate huge employment for the semi-skilled as well as illiterate population which otherwise can't be employed in the already confined rural and organized sector. The retail sector is highly dependent on the rural sector. Thus it can facilitate the improvement of the standard of living of farmers by purchasing commodities at a reasonable cost. It also stems out an indirect employment generation channel by training and employing people in the transportation and distribution sectors such as drivers, mechanics etc. It is also evident that real estate is a genuine challenge for organized retailing. Traditional retailers can use this situation in their favor by taking franchisees of the mega players of this industry. On the other hand, the consumer gains from the wide variety of choices and a more diversified basket of prices available under one roof. Secondly the indirect benefits like better roads, online marketing, expansion of telecom sector etc. will give a 'big push' to other sectors including the rural one itself. Last but not the least the huge tax revenue generated from these retail biggies and collected in government coffers will gradually wipe out the ugly looking fiscal and revenue deficits. Besides the transaction in foreign currencies by these MNCs will create a balance in exchange rate and will bring in stable funds in the economy as opposed to FII's hot money. This will in turn act as a boost to the developing (or 'transforming', as suggested by the USAID) economy of India. The phobias relating to FDI in the retail sector are unfounded as neither the retailing sector in India is an infant industry, nor it can outweigh the paramount local tastes and preferences.
Let's pray that the retail sector like the IT and manufacturing sector brings happiness in the eyes of the people and help remove the regional and class-based disparities.
Corporate Retail Sector
Penetration of organized market:a matter of concern
The concept of organized retailing in India is not much old but there has been much hope over its future in India. People are confused (actually unaware) of its merits and demerits. This ignorance has been used by political parties to create different sensations to create political advantage. In this study we make an attempt to clearly point out the pros and cons of expansion of the organized retail sector beyond metros and the possible risk-averse ways of entering the suburbs and towns
The present foray and its implications
According to “The Great Indian Retail Story” a report on the Indian retail sector published by Ernst & Young, 220 mall projects will come up by the end of 2007. The planned positioning of these malls are shown in the pie chart below. The diagram clearly depicts the bias of retail giants to set up shops in metropolitan areas. This failure to reach suburban dwellers will jeopardize the profit making motive of the retailers. As products are services are pure imitation of each other, the intense price battle among competitive retail owners will undermine the supernormal profits that could have otherwise accrued (known as the theory of Bertrand Oligopoly).
An improper analysis of facts has further aggravated the situation. The state government in Delhi and NCR(National Capital Region) has been lenient in granting permission for commercial use of land whereas the local authorities in remote place have shown narrowmindedness. However according to economists, this roadblock can be overcome by franchising. The mega retail players can surely explore the opportunity of strategic partnership with domestic retailers. Let's now come to another debate that has generated much heat in the recent past but failed to ameliorate the situation. It is a well-known fact that agricultural growth rate is lagging at less than 4 percent (average annual growth rate for 2002-07 was 2.3 percent)and this rate must be increased to a stable 6 percent in order to attain the accolade of the fastest growing nation. According to the Ernst & Young report, the Food and Groceries comprises of 41 percent of private consumption expenditure and account for about 77 percent of total retail sales. So far so good, the pie diagram below shows the share of the sector in organized retailing
This diagram demonstrates that footwear has a whopping share in the organized retail market. But food and
groceries, the leader in private consumption expenditure has a modest share of 1 percent in organized retailing. This is the channel that must be bettered. Organized retailing in the agricultural sector can do miracles in improving the revenue from it. Organized retailers face the customers directly and thus can easily communicate the consumer's preferences and grievances to the producers in terms of both quality and quantity. This market information crucially affects producer's investment decisions and their risk domain. In addition, organized retailers have very large scope of operations and so can bring in cheap credit, insurance and other services to the poor farmers. Moreover removing the middlemen is akin to providing wide consumer base.
Penetration: Ways for improvement
1. Production comes before supply and sales comes after supply. This must be understood by retailers. It is imperative that they check out the supply chain management from vendors and the type of products that are in demand. This must be done without fail before setting up retail chains as “A 5 percent reduction in customer defections can treble profits”, according to Ranjan Biswas, Partner, Ernst & Young India. A lot of importance is attached to this because the climate as well as culture of India is diversified. So ensuring a non-stop supply of commodities as well as guesstimating people's ever changing choice is mandatory. 2. Though India tops among its competitors for its attractive retail sector prospects, one wishing to build a retail outlet chain in India still has requires about 20-33 licences from governments at various levels. 'Single window clearance' was demanded recently by Retailer Association of India(RAI). This will help retailers to set up retail outlets without much hassles. Under the single window clearance system, it will be possible to get an application cleared within seven days and those already having an existing store in the state will be able to get a licence for opening a new one by merely applying and taking an extension. 3. International retailers coming to India will set up shop in only those malls that are maintained at par with international standards. Proper mall management is urgent from the view point of Indian mall developers. Mall management includes not only right positioning(deciding on the product that the mall targets) but also includes proper tenant mix and zoning(placing the appropriate retailers at the ideal places inside the mall). Promotion, marketing and financial management are of no less importance. The organized retail sector in India is projected to grow at a CAGR(Compound Annual Growth Rate) of about 49.53 percent from 2006 to 2010 and FDI of 51 percent in single brand retailing will pave the red target for Indian retail in the coming years.
FDI In Indian Retail Industry
The Government of India was initially very apprehensive of the introduction of the Foreign Direct Investment in the Retail Sector in India. The unorganized retail sector as has been mentioned earlier occupies 98% of the retail sector and the rest 2% is contributed by the organised sector. Hence one reason why the government was fearing the surge of the Foreign Direct Investments in India was the displacement of labour. The unorganized retail sector contributes about 14% to the GDP and absorbs about 7% of our labour force. Hence the issue of displacement of labour consequent to FDI is of primal importance. There are different viewpoints on the impact of FDI in the retail sector in India. According to one viewpoint , the US evidence is empirical proof to the fact that FDI in the retail sector does not lead to any collapse in the existing employment opportunities. There are divergent views as well. According to the UK Competition Commission, there was mass scale job loss with the entry of the hypermarkets brought about by FDI in the UK retail market. According to another school of thought, there is undoubtedly labour displacement associated with FDI, but employment generation will occur in different dimensions. Varied skills would be specialised. Taking into consideration the pros and cons of introducing FDI in India, ICRIER has recommended 49% of FDI . The opening up of FDI in India is also expected to be gradual so that the domestic industries can tailor themselves according to the changes. At the formative stage , the idea was to start with 26% of FDI in this sector. But soon the idea changed as China's FDI moved up from 49% to 100% in the retail sector. While the government is continuing its plans to liberalise FDI in the retail sector in India, foreign companies like Wal-Mart are waiting on the threshold. They basically wish to enter into partnership with various multinational chains. FDI would bring about modern infrastructure that would help to boost the productivity of the organised retail sector in India. Malls have mushroomed in various locations. They are the centres of entertainment for the new generation. FDI is not allowed in the retail sector and this is the reason why many prominent global players like Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony, Sharp, Kodak etc are entering the retail market via licensee or franchisee. The opening up of the economy to FDI in the retail sector is also expected to generate employment. FDI can be a blessing instead of curse only if it produces backward linkages relating to production and manufacturing. It may also, in the process help to push up domestic production as well as exports. In the present scenario, 51% Foreign Direct Investment is permitted in India only through single brand retailing. The international retailers are entering the matket through licensees just as Wal-Mart has entered through the franchisee, Bharti Enterprises.
Recent News on FDI in India
Metro AG an Shorite are already in operation. Foreign retailers are in search of investing in wholesale. WalMart as we have mentioned has already joined the retail market of India. Geant is also expected to start its retailing operations soon in India hence we may conclude that FDI in retailing in India would require the creation of additional jobs to compensate the resulting job loss. It would result in the reduction in the Kirana shops and Retail Stores. The consumers can benefit from such exposures, it would enhance quality, improve on the supply chain, increase exports, so on and so forth. There are certain other issues that have discouraged FDI in India and they are discussed as under.
Bottlenecks to FDI in Retail Industry
According to the Land and Property laws only the Indians have the right to land and property in India and this law has in a a way inhibited the entry of the foreign players in India. Again the labour laws are so designed that the store workers can be protected , quite contrary to the requirements of the modern formats. The tax structure of India is also unfavourable for the foreign players. The corporate tax rate for the domestic companies is 36.59% whereas it is 41.82% for the foreign companies. The changing sales tax as well as the Value Added Tax is also not favourable in the case of international companies.
Government Intervention in Indian Retail
“India's government seems to be on a gradual but definite path toward allowing foreign retailers into the country....” suggests the A.T. Kearney's Retail Development Index 2006. It is a common knowledge that the Union government has to face a number of hurdles both from it's opponents as well as it's allies before it could announce the final verdict. There have been demands from all corners regarding framing of rules to safeguard interests of the so-called small traders. Simultaneously economists have the consensus that industrialization is imperative for the growth of the economy and foreign investment has to play an inevitable role in it. With Lok Sabha elections to come in 2009, the Union government too seems a bit confused regarding decision in who's favor can provide it a political edge. So in this study let us compare the views for and against liberalization as is held by Indian Bureaucrats.
Entry of large players: stiff opposition from Left Parties
The recent outburst of fury among the Kerala's LDF(Left Democratic Front) Government has been noticeable. They have exacted for a three-pronged approach to prevent the retail giants from serving the Keralians. At the first stage, not only MNCs but also the local retail giants like Reliance will be shown the red signal. In fact a magnified CPI protest has compelled a Reliance Fresh outlet in Kochi to take police protection. The draft of a bill has been finalized to amend the Kerala Essential Commodities Act so that the state government can intervene in the retail market. As a second step, local councils (70% of which is controlled by the Left) will deny licenses, that are mandatory to start a retail chain in the state. Kochi and Tiruvananthapuram corporations will be in fact commanded to reconsider the licenses of outlets that are already operating in the regions. This strategy grants more power to the state. However a ban on shopping in these outlets is still not clear. The third and the most revolutionary judgment is actually an outcome of the whole game. Government-controlled supermarkets and hypermarkets will be established in some of the key cities in the state. This rigid legal wall not only in Kerala but across the country has been born out of a traditional mindset. Kerala claims to have a literacy rate of 90.92% and a sex ratio of 1058 females per 1000 males. The data speaks for the government's prudent commitment in the case of Kerala. So it is high time that the government opens up avenues for its people to let them grow and become self dependent. But the government is still holding good, the conventional 'infant industry' outlook. The main worry is the negative impact on the already gloomy condition of employment. Let's make an attempt to understand the vicious circle of unorganized retailing and present employment scenario. Unorganized retailing has a share of about 96% in the Indian retail sector. But why should people work in such miserable situations if the manufacturing and services sector are booming is the overwhelming question. There has been a trend to migrate to cities in search of alluring bright city lights. But the consequences has been been even worseearning lower than expected wages(Harris Todaro model of migration). The illiterate and unskilled people ultimately set up a grocery shop to earn a living. This gives birth to another unorganized retail shop in India and thus enlarges its share. So the unorganized retail market in India has born out of fate rather than selection.
The Actual Scene
Those opposing the expansion of organized retail in India must understand that the share of primary sector shrinks and that of the secondary and then the tertiary sector expands as an economy grows. This is the basic structural adjustment in case of any transforming economy. India is at a take off stage. A retardation in the agricultural sector is not permissible but inhibiting the growth of services on grounds of protection to agriculture is more irrational. A proof of this has been seen in a small town of North Bengal. The opening of a Big Bazaar (brand name for stores under Pantaloon) departmental store has seen a human deluge of about 7,000 people in the 35,000 sqft shopping mall by 3pm. This clearly indicates that people (even in remote places) have become fed up of monotonous marketing practices and demand nowadays is purely governed by choice.
The Ruling UPA government's outlook
The UPA government is rather clear in its aim of taking India to new highs. The commerce minister has repeatedly asserted that FDI will kill two birds with the same stone. It will generate substantial direct as well
as indirect employment and at the same time will not tamper with the present scope of the unorganized retail market. The indirect employment includes jobs in transport, packaging and other logistic services. It will enhance competition in the country thus giving a virtual chance to face global challenges while operating at home. Mr. Nath is clearly focused on the utilization of FDI in acquiring benefits. It is true that such investments will bring in huge imports but this may also help in the Indian products reaching the foreign consumers. Foreign majors such as Wal-Mart, Tesco and Carrefour are ready to enter India. The UPA government has already permitted 51 percent FDI in Single-brand products without consulting its allies and it is expected that slowly but steadily the government will achieve its goal.
IT Trends in the Retail Sector in India
IT in Retail: What's Hot
The Indian retailing, which has topped the charts for being the most favored and attractive destination is yet in its nascent stage. Neither the FMCG retailers are in a position to maintain world class standard, nor one wishes to be an iconoclast. The digitization of the Indian retail sector has captured the minds of retail magnets for quite some time now but has remained the grey area of the Indian story of retail sector. The Indian IT sector is growing at a rate of 31 percent and posted a record revenue of $40 billion in 2006-07. This is indeed a good news but the staggering domestic segment demanded services worth only $8.2 billion. In this study we focus on how e-retail can boost the plans of existing and forthcoming national retail players. We further try to put forth the challenges in computerisation of the organized retail and make an attempt to suggest some prospective solutions.
Traditional retail sector:
Why IT is the need of the hour The organised retail sector of India will form about 10 percent of the total retailing business in India and is expected to worth US $70 billion by the end of 2010. in the mean time it will grow at a CAGR of around 49.53 percent. But certain speed breakers associated with the primitive form of retailing must be overcome to maintain its tempo. 1. Unorganised retailing in India is ubiquitous and so the communication between the manufacturer and retailer is heavily dependent on the wholesalers, dealers and traders. This is more so because the retailers can't afford costly investments. So they ultimately have to suffer due to low participation market flow of commodities. Nowadays even the organised business houses are facing the problems related to SCM(Supply Chain Management). The SCM's huge emphasize on middlemen rather than on the retailers has aggravated the problem. The introduction of EDI (Electronic Data Interface) can deliver QR (Quick Response) and ECR (Efficient Consumer Response) systems to ameliorate the partnership channel and thus shorten the time between the placement of orders and delivery to occur. For eg. the 17 outlets of FoodWorld are linked online with its central manufacturing house at Chennai. 2. The scale and process complexity are also of paramount importance as millions of customers deal with thousands of retail outlets. At the end of the day the total number of transactions is in the order of hundreds of millions. This makes keeping track of the money movement an onerous job. The spread of the planning cycles and huge geographical dispersion makes the task more arduous.
How does Information Technology help India has seen a retail boom in the last five years. This has helped the sector grow to a size of Rs. 8,10,000 crores. IT can and has to play a substantial role in this flourishing industry to keep up the vigour as well as to make it globally competitive. It can happen in many ways: 1. Retailing in a large country like India is basically a multi-plant and multi-market activity. It is almost if not actually impossible to handle the diversified operations. Introduction of IT can make things easier and the
node can be immensely useful in managing the complexities. 2. Advanced planning and scheduling and inventory management are inevitable to any growing retail sector. Besides, merchandising and seasonality management systems can drastically change the fortune of retail sector in India. 3. To improve penetration and enhance quality of services, data mining and top-class forecasting has no substitutes. Understanding consumer needs and collaborating with suppliers are essential parts of merchandising activities. A logical interpretation of data is fundamentally important to make decision, specially when one is looking forward to establish a new retail chain. These help in modifying revenues and cutting down costs, the two dimensions of an upward-moving profit curve. Data-cleansing and rearchitecture also help in making effective decisions. It is fully justified that all the retail institutions as well as the manufacturer and all distribution centers be linked Online to ensure EDI of the server installed in the market with the EPOS (Electronic Point Of Sale). However the retailers should carefully choose the IT service provider as global researches have shown that global IT expenditure in the retail sector is growing at 13 percent whereas the revenues has grown at a mere rate of 2 percent. The maintenance costs are also quite high owing to the different technology platforms for fragmented point solutions.
Opportunities of the Western Retailers in India
The retail industry in the western countries have reached a point of saturation and there is no way of expanding. In this backdrop the retail giants are trying to make their mark in the retail market of countries that still have untapped potential of expansion. India happens to be one of them. AT Kearney has constructed the Global Retail Development Index which has helped the western retailers to identify the countries in which investments could be made. Opportunities in India have attracted the western retailers like Wal-Mart, Euroset, Supervalu who have plans to enter as single branded retailers . In gauging whether to enter, the companies keep into account the timing factor, that is whether the consumers are ready to accept the products that are offered by them. It is highly possible that there are potentials in the market but the consumer preferences are skewed against the products that are offered. Certain parameters have been included in the construction of the Global Retail Development Index and given weightage which have been shown in the following figure. Table1: Parameters in the Construction of GRDI
Parameters Country Risk Market Attractiveness Market Saturation Time Pressure Weightage 25% 25% 30% 20%
Each of the parameters may be explained as under.
Country risk arises from political risk, poor debt management, low credit ratings and access to bank finance. Country risk also have their origin from business risk arising from terrorism, corruption and violence.
Attractiveness of Market
This is measured by retail sales per capita. If the score is zero in this parameter, then it clearly hints to a
highly underdeveloped retail sector. On the other hand a cent percent score would indicate that the retail sector has reached the point of saturation. Weightage is also given to population, urban population and business efficiency. The more the population and urban population more will be the prospect for growth. By business efficiency we mean the quality of infrastructure. Higher the quality of infrastructure, higher will be the ease of business operations.
To understand the market saturation level, importance is to be given to the share of modern retailing, number of international retailers, the sale of retail per urban inhabitant and the market share of the top retailers.
The time factor as measured by CAGR has a weightage of 20% in the construction of GRDI.
Challenges before Indian Retail Industry
Retailing in India:
A challenging opportunity “... I will say that if you're alive you've got to flap your arms and legs, you've got to jump around a lot, for life is the very opposite of death....”. Every game is a knife-edge balance between reward and risk. Rewards are received at the end of the game if one has borne all the risk and is alive and kicking till the end. Indian retailing industry has been looked upon as a dream come true but for many entrepreneurs it has become a nightmare. In this study we make an attempt to jot down the various problems concerning the Indian retail sector. Since a boon from one's viewpoint may be a curse from another's, so we have tried to ignore all types of biases. In some cases suggestive measures are also suggested. These measures are surely not mutually exclusive but may be (informally) collectively exhaustive. Conspicuousness and eccentricity of Challenges
1. Amalgamation or Confusion- According to Tata Strategic Management Group, India has a high density retail structure of 1 retail outlet per 90 people and is the 9th largest retail market in the world. But the structure of the retail industry in India is in utter jumble. The parallel operation of convenience stores, supermarkets, hypermarkets and specialty stores in the economy is bewildering. According to the 'Wheel of Retailing Theory', certain loopholes in one of the forms of marketing can get communicated to other forms also. 2. What to sell- Another bemusement is the category of items to be offered. According to researches, 41 percent of total consumption expenditure goes to the segment of food and groceries and it accounts for 77 percent of total retail sales. So it is obvious that this is the most preferred section of retailers. But unfortunately the foible taste bias for 'wet market' (i.e. fresh food available through hawkers) has marred this prospect also. Therefore supply chain management, storage of fresh perishable foods and persuading the customers that the food is inexpensive despite being fresh are genuine challenges to the newcomers. Diversifying the product base to consumer products such as readymade garments, furnitures, mobiles and computers can mitigate the losses, if any from food marketing and also broaden the reach to consumers. 3. Nostalgia- Indian shopping habits are no different. People tend to attach qualities like honesty, fair price, good behaviour etc. to shopkeepers with whom they have been dealing right from childhood. They find no reason to go to a distant megastore without any genuine reason. This problem is difficult to deal with as it demands a change in long-formed mindset. Organised retail outlets can overcome this problem by
employing eligible local peoples who can interact in vernacular language and win the confidence of people. 4. Information Technology- This is a major problem and India must act fast if it wishes to create a smooth field for organized retailing. Digitization of services will make transfer of goods easy and an improvement in supply chain management will definitely play a significant role in attracting more consumers and less consumer grievances. Besides, it will generate easier payments option for customer and easier money movement for the CEOs of these highly diversified malls.
1. Human resource crunch- the concern for insufficient manpower in the industry has been in news for the last few months. This fear is somehow unfounded. The retail industry according to recent reports is growing at a rate of 100 percent. Kishore Biyani's Future Group i.e. the Big Bazaar chain of retail outlet alone provides employment to more than 18,000 people and is planning to expand its employment base to 34,000 by June 2008. If we add to this the foray by mega players like Reliance and Bharti-Walmart then the fear can surely turn into a misperception. Retailing mainly deals with hard-selling of space, trade of stocks and building of relationships. Since most of the openings are for front line shop people, a graduation will suffice. Nowadays many institutes also provide post-HSC and post-graduate retail-specific courses. 2. Hindrances from government- Some political parties want the government to amend laws and improve curbs so that the mega players can't openly decimate the unorganized retail sector. This is a conclusion based on a myopic outlook and must be amended for a long term strategy. The fear is baseless because of the reasons mentioned above. The megastores will no doubt provide employment to the less educated masses. Also taking business away specially from small food vendors is more easily said than done. Instead the limiting move will send wrong signals to the investors and will ward off investments when the states need it most. Allowing 51 percent retail FDI in single brand retailing is a welcome move in this direction. It is expected that the government will create further opportunities for the organized retail to come up as home grown investment is always sweeter than foreign investment. The advent of organised retailing in an economy where spending power is growing fast and Tier II as well as Tier III town dwellers are becoming brand conscious is sure to bring a revolution in the retail sector.
E-Retailing in India
E-retailing, most commonly known as e-tailing is nothing but shopping through the Internet and other media forms. There are many things that are common between direct retail stores and online retail stores. Both have the process of billing of the customers and have to maintain a relationship with the suppliers. Bottlenecks Faced By E-Retailing in India
Problems with the Payment System
People in India are not used to the online shopping system and moreover the online payment system through the credit card is also totally alien to them. Most of them do not avail of the transaction facilities offered by the credit cards. They are also dubious regarding the online payment system through the credit cards. Hence different payment options should be made available to them like the credit card, cash on delivery and net banking to give them further assurance.
Problems with Shipping
The customers using the online shopping channel should be assured that the products that they have ordered would reach them in due time. For this the retail companies have resorted to private guaranteed courier services as compared to postal services.
The customers should be assured that the online retailers are not only available online but offline as well. This gives them the psychological comfort that these companies can be relied upon.
Products offered at discounted rates
The online retailers save on the cost of building and employee salaries. Some part of this benefit should also be enjoyed by the online customers by a reduction in the price of the product. The customers should be conveyed this message that they are getting the products at a discounted price.
Most internet retail shops use English as their mode of communication. English may not be comprehensible to the majority of the Indian population . To increase the customer base, content in the online retail shops should be provided in local language. Another reason why the concept of e- retailing or online retailing has not gained prominence in India is that the Indians prefer to touch the products physically before buying them. This facility is provided through the multi-brand outlets, not available online. Studies have revealed the preferences of the customers towards the traditional shopping methods. Hence the retailer online should first make it a point to spot the potential customers and accordingly plan out the product. If the customers are more open to online shopping, then nothing can be more beneficial. They save the time and effort to visit, departmental stores, shopping malls, etc. products can be delivered by a click of the mouse. Another problem is that the retail industry is standing on its point of inflexion and considering its infant stage, it would take time for the new concept of e-retailing to take off.
Some online retailing sites in India
E Bay is heading the race of online retailers. In this race it has become very difficult to determine the online retail store that makes the products available at convenient and cheap rates. From this very difficulty has cropped up comparison sites. Comparison is done on the basis of an index which is constructed from the data available from different shopping sites. The bechna.com and the ultop.com are such sites though many more sites are entering this zone. The comparison sites not only help to choose the online sites that would be providing the best deal but also offline as well. Sites like Rediffproductsearch, Compare India.com have constructed the data that is taken from the conventional local retai;ers. These sites help the customer in finding out the local retail store that will best suit his purpose.
Future of E-retailing in India
There are divergent views on the future of e-retailing in India. Some experts are of the opinion that the giant, big brand retailers would dominate the small ones due to their wider investment capacities. It would be next to impossible for the small retailers and the kiranas to prove their existence in the battlefield of online retailing. Another viewpoint is that there would be an exponential growth in the online retailing business in India.
Conclusion on retail industry in India
Contribution of Retail:
What, How and In this report we have analyzed in detail the retail industry in India. We had initially started with the evolution of the retail sector in India, then moved onto its size, distribution and the growth of the retail sector. We have also covered issues like the Foreign Direct Investment in the retail sector, the untapped opportunities that exist in the retail industry in India. We have also discussed about the bottlenecks that the retail industry is facing in India, online retailing in India and the role of Information Technology in the retail sector in India. In this section we have coined down the major findings of our research.
1. The Retail Sector in India can be split up into two, the organised and the unorganized. The organized sector whose size is expected to triple by 2010 can be further split up into departmental stores, supermarkets, shopping malls etc. 2. In terms of value the size of the retail sector in India is $300 billion. The organised sector contributes about 4.6% to the total trade. 3. The retail sector in India contributes 10% to the Gross Domestic Product and 8% to the employment of the country. 4. In terms of growth the FMCG retail sector is the fastest growing unit and the retail relating to household care, confectionery etc, have lagged behind . 5. The foreign retail giants were initially restricted from making investments in India. But now FDI of 51% is permitted in India only through single branded retail outlets. Multi brand outlets are still beyond their reach. Again they can only enter the market through franchisees,. This was how Wal-Mart had entered joining hands with Bharati Enterprises. 6. On line retailing is still to leave a mark on the customers due to lacunae that we have already mentioned. In a nutshell we may conclude that the retail industry in India has a very bright future prospect. It is expected to enrich the Indian Economy in terms of income and employment generation.
Top Companies in the Indian Retail Industry
The India retail industry: who's who
The Indian retail sector has been a euphoria over the last five years. India topped the A.T. Kearney's Global Retail Development Index for two consecutive years and this has infatuated Indian as well as foreign retail players to go gaga on the merchandising track. According to geographical expansion, Delhi/NCR and Mumbai are the felicitated regions as the top companies have rated the spending potential of consumers in the vicinity of the national capital and the financial capital as excellent. Other metros such as Kolkata, Chennai, Hyderabad and Bangalore have caught the sight of investors but their fortunes are yet to be illuminated. Companies like The Future Group, Reliance, Bharti-Walmart, DLF etc. have shown the way for other to enter. The country is expecting a surge in the growth sprint and let's hope for the best.
Top Companies: An analysis
Big Bazaar- Big Bazaar is a chain of department stores owned by the Pantaloon Group (Future Group)and headed by Kishore Biyani and headquartered at Mumbai. It offers all types of household items such as home furnishing, utensils, fashion products etc. It has a grocery department and vegetable section known as the Food Bazaar and its online shopping site is known as FutureBazaar.com. The real estate fund management company promoted by the Future Group expects to develop more than 50 projects across India covering a combined area of more than 16 million sq. ft. On April 1 2007, Big Bazaar had to shut its outlets in Mumbai as the 120 retrenched employees called a strike with the support of Bhartiya Kamgar Sena (the trade Union wing of Shiv Sena). Later the management agreed to reinstate the sacked workers.
- Bharti Retail, a wholly owned subsidiary of Bharti Enterprises. has announced two joint ventures (JV)with the international retailing behemoth, Wal-Mart. The first JV ensures cash and carry business, in which 100 percent FDI is permitted and it can sell only to retailers and distributors. The second JV concerns the franchise arrangement. Sunil Mittal, Chairman of the Bharti Group assured that the ventures will use “low prices every day” and “best practices for the satisfaction of the customer”. Processed foods and vegetables will be delivered by Bharti Field Fresh, Bharti's JV with Rothschild. Bharti Retail aims to foray every city with a population exceeding 1 million. It has plans to come up with an investment of more than $2 billion in convenience stores, supermarkets and hypermarkets spread over an aggregate 10 million sq. ft. The expansion drive looks ambitious but analysts are worried that Bharti may face stiff competition from Pantaloon and Reliance as they too have sanguine plans to flood the markets with thousands of retail outlets in the coming five years. Bharti Telecom also has plans to offer all its fixed and mobile telecom products and services from a single window to the SMB (Small and Medium Business) enterprises under the Bharti Infotel division.. Reliance Retail- Reliance claimed last year to start a retail chain that will be unique in size and spread, will lead to the welfare of one and all ranging from Indian farmers, manufacturers and ultimately consumers. It is known as Reliance Retail Ltd.(RRL) and is a 100 percent subsidiary of Reliance industries Ltd.(RIL). Soon after the Bharti-Wal Mart tie up, there was the news that RIL (Reliance Industries Ltd.) Chairman Mukesh Ambani met Commerce Minister Kamal Nath to discuss the apprehension of cheap imports from China. Reliance Retail has plans to open 4,000 outlets across 1,500 towns for an investment of $5.6 billion. Reliance is not away from agro-business. According to Buddhadeb Bhattacharjee, Chief Minister of West Bengal, “Reliance will hold demonstration farming, produce good quality seeds and give inputs to farmers”. Its most significant participation has been in the food procurement business in Madhya Pradesh and Punjab. This has in fact compelled the government to import wheat this year. Reliance Retail has also been reported to have entered into an agreement with footwear manufacturer Bata India Ltd. so that they will involve in selling each other's products. DLF Shopping Malls- DLF Retail Developers Ltd. is one of the troikas of the DLF Group. Besides being India's largest real estate developer, DLF is also of the leaders in innovating shopping malls in India. It caught public eye when it launched the 2,50,000 sq ft. shopping mall in Gurgaon. It has brought a dramatic change in the lifestyles and entertainment with its City Centres and DT Cinemas. DLF has plans to invest Rs. 2000-3000 crore in all the emerging areas from metros to A class cities in the next two years. Till last year the company was involved in building 18 malls out of which 10 were in the NCR region. Future plans of DLF involve opening up of 100 malls(speciality malls, big box retailing and integrated malls) across 60 cities in next 8-10 years. They are slowly transforming into 'lease' and 'revenue share' models. Local players like ITC, the A.V. Birla Group and Tatas have given the hints to enter organised retail. France’s Carrefour SA and Britain’s Tesco too were recently in news for their future plans to explore the Indian retail market.
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