Organized Retailing has played a major role world over in contributing to the nation’s GDP and in providing opportunities for skilled employment. This can be best seen in countries like U.S.A., U.K., Mexico, Brazil, Thailand, Malaysia Hong Kong, Sri Lanka, Dubai and more recently China. Organized Retailing is the second largest industry in the United States both in terms of the number of establishments and also in terms of employment.
Today retail sector exhibits a highly fragmented market structure with more than 12 million retail outlets. It has the highest retail density in the world. In terms of ownership, it primarily consists of independent, owner managed shops. The retail business includes a variety of traditional retail formats e.g. kirana stores where the basic necessities of life -- grocery are available. The value proposition, of these stores is HIGH SERVICE ORIENTATION, (which is personalized customer service) and coupled with LOW PRICES.
The organized retail format in India has its origin in Mumbai with the first retail shop being APNA BAZAR—a low cost – catering generally to the middle class population, followed by AKBARALLYS—a medium cost – catering generally to the then elite segment. The retail segment is expected to grow @12-15% in the next 5 years (i.e. by 2010) from abase level of Rs. 1800 Billion (in 2002). This in turn would drive the other sectors like infrastructure, employment etc. The organized retail sector addresses issues like the changing consumer behavior and focuses on the new emerging consumer segments like the “aspirants and the climbers”. The availability of funds coupled with an increasing per capita income (mainly for the middle and the upper class sections of the population), the media push – creating greater awareness – of the various brands and the products available, the ease with which consumers can travel to foreign destinations, and the increasing inbound tourist destinations are the major drivers of the retail sector.
Today, India's retail market totals $330bn, after growing for 10% on an average over the past five years1. Organised retail is only 3% of the total market Retailing contributes to about 14% of India’s GDP and is the second largest employer, employing about 8% of the population. There are about 120 lakh retail outlets with an average size of a unit being less than 500 sq. ft. These vital statistics have led A.T. Kearney to rank India as the most attractive retail destination in 20063.
Indian retail industry is witnessing a fast paced revamping exercise where the traditional formats are making way for modern formats like departmental stores, hypermarkets, supermarkets, specialty stores & Western-style malls, which are appearing in metros and second-rung cities alike.
The foremost reason for this sea of change is the burgeoning middle class with a good amount of disposable income. At the start of 1999, the size of the middle class was unofficially estimated at 300 million people. The middle class including upper middle, middle-middle and lower middle classes, is expected to grow by 5% to 10% annually 4. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector are among other reasons.
According to the widely discussed Goldman Sachs BRIC report of October 2003, “Over the next 50 years India could emerge as the world’s third largest economy.”
However, behind this rosy picture, lies a mountain of challenges. The economy being in a developing phase poses structural support shortage. Also, heavy initial investments are required by large retailers, and break even is difficult to achieve, so many of the top players have not tasted success so far.
But the future is promising; the market is growing, government policies are becoming favorable and emerging technologies are facilitating operations.
Indian Retail challenges?
The sudden speed picked up by the retail juggernaut has left the support infrastructure in a state of inertia. The challenges identified are:
Infrastructural problems:
Shortage of retail space The traditional realty players don’t have retail property development experience as reflected in their exterior focused design and improper tenant mix. The shortage is mostly visible in the larger metros due to the mall revolution & lack of town planning. Owing to space scarcity in major metros many retailers are entering tier 2 & tier 3 cities. 6
Unless real estate costs lower, retailers would take a long time to break-even.
Supply Chain & Logistics infrastructure Rs.50,000 crore worth of food produce is wasted in India each year due of lack of a robust supply chain infrastructure. This causes logistics costs to be 10-12% of the GDP. Absence of efficient logistics companies forces retailers to incur huge costs to set up individual SCM & logistics infrastructure.
Measures of supply chain efficiency- inventory turns ratio & stock availability at stores. While global retailer 7-Eleven has a stock turn of 50, India hangs between 4-10. Also, stock-out levels among Indian retailers lies from 5 to 15%, when the global average is less than 5% 7.
Increasing emphasis on providing value-added services is creating the demand for trained people (8mn new jobs over next 5-6 years). The availability of suitable candidates to handle organised retailing, new sales systems and processes is scarce and the education system is not geared up to it. Also there is no grassroot-level training facility for retail services. Significant competency gaps are seen in- Supply chain, customer relations, merchandising, facilities management and vendor development.
Ø Inconsiderate Regulatory Framework: A retailer requires around 12 to 15 clearances at the Central, state and local level to set up operations because there is no single window clearance process. The provisions of ‘The Shops and Establishments Act’ also vary. There are various restrictions on interstate movement of goods, especially food grains.
Ø Indian retail industry is greatly fragmented compared to other the developed and developing countries. Only 3% of total Indian retail is organised. Fragmented market results in high inventory levels, high proportion of retail business taking place in the ‘unorganized’ rural areas. India is witnessing oversupply from unorganized formats like kirana & paanwalas. Around 4.3m outlets cater to 1.2bn people, i.e. 280-persons per outlet as against the global average of 1,800-persons per outlet. The Chinese & Vietnamese retail markets too suffered from small-scale, fragmented, provincial operating models.
Ø Most Indian retailers are still uncertain about benefits of technology. Retail IT budget in India is currently 1% of total spends which is lower than US spends. Significant IT investments are needed in merchandise planning, distribution management and POS to capture & analyse customer data . While Indian retailers are still to adopt bar coding, Wal-Mart and Metro are experimenting with Radio Frequency Identification technology. There is high dependency on few consultants & vendors are not IT-savvy.
Ø Limited FDI is depriving India of the resultant consolidation in the sector because foreign retailers provide employment, spend more on marketing, advertising, bulk purchases; have wealth of retail experience from developed retail markets, introduce larger product variety & improved shopping experience. This will also aggregate demand, bypass the existing intermediary system, invest in the supply chain, ensure lower prices to end-customers and higher returns to farmers.
Ø India is diversified, ethnically and culturally, posing a challenge for Indian players wishing to set up a national chain or brand. It leads to product proliferation and stocking larger number of SKU’s at stores, complexity in sourcing & planning, which in turn increases management costs. Foreign players wanting to enter India too have to think twice before deciding to step in.
Ø Untapped Rural potential:
"India's greatest need is to take the benefit of retailing to the doorstep of the farmer," ITC chairman YC Deveshwar says.
70% of India lives in villages & consumes over one third of most durable and non-durable products. Retailing in rural India is a different ball game because before targeting a share of their wallet, the Indian rural market requires an income propeller.
In China (2004) too the Ministry of Commerce has realised the rural potential and by 2009 will build a rural retail network .
Ø Availability of skilled personnel
The non-availability of trained personnel especially at the managerial level is one of the key challenges to this sector. The ability to hire and retain quality manpower will be one of the most important success factors for this industry
The Drivers of Growth of the Organized Retailing Sector.
Providing Quality Real Estate:The government is easing land regulations and releasing land for retail. Rs.8 trillions is being invested in real estate in coming 5 years 19. Retailers are foraying into retail property development & mall management. E.g. Rahejas, DLF, Pantaloon, Provogue, etc. Pantaloon Retail’s Rs3.5bn fund- ‘Kshitij’ and foreign fund ‘Horizon’- US $350m, will develop 51 retail properties10. Another booster is entry of foreign players and provision for 100% FDI in real estate for townships for retail with floor space of over 5,00,000 sq. ft .
Foreign Direct Investment (FDI) in India
FDI is a concept wherein a foreign partner invests directly in a company. This investment would be for the purpose of getting a higher dividend or for getting managerial control in the company. Normally a direct investment in a retailer organization gives the foreign investor a controlling interest in the domestic company. The presence of a foreign investor normally is a win -- win situation for both the investor as well as the recipient country.
In addition FDI may also be used to access certain markets or resources. (Example: in areas like extracting raw material, growing crops and even operations in the service industry. Some of the well-known examples where FDI has been used in the service industry would be De Beers in diamond extraction, Pepsi in the Food and Beverages sector of the retail industry and AIG in the insurance industry.
FDI is a very important means of economic growth for any country. The amount of FDI entering into the country is dependant on broadly two factors:
Ø Internal Factors (e.g. government policies)
Ø External factors (e.g. competitive environment).
However some obstacle still remains in the path of attracting FDI to India. (e.g. reliable regular sufficient power, good roads and correspondingly good transport networks). It is estimated that more than 40% of the perishable goods are lost due to non-availability of refrigerated vans and bad roads. Additionally the fear is that the presence of FDI would drive out the ‘Mom and Pop’ shops and cause loss of employment as seen in USA.
In spite of these obstacles, a World Bank Study on FDI in India has suggested that opening of FDI in the retail sector in India would be beneficial both in terms of technological inputs, new products and also employment generation on lines similar to the IT sector. The benefit of allowing FDI in India can be seen through the benefits that China has reaped by allowing FDI up to 49% in this sector. In India with the per capita consumption being quite low, it is difficult to imagine the Mom and Pop shops being driven out. Most of these Mom and Pop shops satisfy the “locality” requirements rather than the convenience requirement.
The main drivers of the organized Retailing Sector can be identified as follows:
Ø Rising Income Level
The profile of the Indian customer is continuously changing. This change can be seen the figure given below.
Shift in the profile of the Indian Customer
It is estimated that the consuming class and the climbers are expected to grow from a level of 120.8 million households (in 2001- 02) to a level of 157.2 million households (in 2006-07) thus registering a growth of 5.5% p.a.
The Marketing Whitebook has estimated that out of the total consuming class and the consumer class, almost 56% (~ 46 million) is expected to be concentrated in urban India. The proportion of the consuming class and the climbers in the urban markets are likely to drive the demand significantly especially for lifestyle products.
Ø Young Population with high disposable Income
According to KSA Technologies, India has the lowest median age of 24 for over 1000 million populations when compared with the other populous countries like China, USA and UK. This young population by virtue of its mere size would drive the consumption pattern as this group has the ability and willingness to spend. Fig. 6 & 70 demonstrates this amply.
The changing pattern of households by income
The changing size of the population especially in the age group of 20 – 34 years is very clearly depicted in following figure. This class is the relevant class for the retail industry and is growing very rapidly.
The changing demographics in India.
Ø Availability of Brands and Merchandise
Consumerism and brand proliferation has been another enabler for organized retailing in India. Most of the world’s largest and leading brands are currently available in India. For e.g. Louis Philippe, Van Huesen, L’Oreal, Peppe, Arrow, Tommy Hilfiger etc.
Ø Media Proliferation
The presence of a large number of media and the corresponding exposures has led to the increase in consumer spending especially on apparels.
Ø Availability of Real Estate
Availability of the real estate is one of the biggest drivers of the organized retail sector. According to M/s Shoppers Stop a total of Rs. 250 billion would be required by 2010 in real estate only. The bulk of the investment is in the NCR (Delhi) followed by Mumbai, Bangalore and then by Pune.
Ø Inbound Tourist / Impact of Globalization.
There is a large vast of NRI population in the country. The availability of international goods at comparable prices is also one of the drivers of the industry. Again the impact of globalization has resulted in an increase in both the depth and width of a product, which in turn has resulted in an increase in consumerism.
Ø Unconventional Retailing:
“I shall tell this with a sigh somewhere ages and ages hence: Two roads diverged in a wood, and I - I took the one less traveled by, And that has made all the difference.” Robert Frost
Innovative formats Wedding mall (Gurgaon), Sports mall – Okini (Mumbai), forecourt retailing, E-tailing, Catalog retailing, kiosks, Airport Retailing etc. are some possible formats of future.
Region-specific formats department stores of size 25000-30000 sq.ft. in tier 2 towns as against 50000 + sq.ft. in tier 1 cities to cater to smaller groups.
Ø Urban Opportunity :Indian retailers inspired by Wal-Mart’s growth in small American towns are tempted to follow suit. However, in India the share of 35 towns with a population of 1 mn plus grows faster than their smaller counterparts, from 10.2% today to reach 14.4% by 2025. While the share of the towns in the overall retail market, would grow from 21% to 40% by 2025. Retailers should therefore focus on the top 37 towns in the next decade, as the opportunity in rural India is smaller and fragmented.
Conclusion
The size of India is both an opportunity and a challenge. Bureaucracy and corruption remain key features of business life in India – even if the regional expansion programmes. The race for space is on, with much still to go for! Despite the challenges involved, India remains an exciting and dynamic market, with consumers hungry for choice and modern retail formats. By 2015, KSA Technologies xpects the Indian retail market to have evolved from a small-scale, highly fragmented, provincial operating model to a modern, large-scale cross-regional one.
Ø Inconsiderate Regulatory Framework: A retailer requires around 12 to 15 clearances at the Central, state and local level to set up operations because there is no single window clearance process. The provisions of ‘The Shops and Establishments Act’ also vary. There are various restrictions on interstate movement of goods, especially food grains.
Ø Indian retail industry is greatly fragmented compared to other the developed and developing countries. Only 3% of total Indian retail is organised. Fragmented market results in high inventory levels, high proportion of retail business taking place in the ‘unorganized’ rural areas. India is witnessing oversupply from unorganized formats like kirana & paanwalas. Around 4.3m outlets cater to 1.2bn people, i.e. 280-persons per outlet as against the global average of 1,800-persons per outlet. The Chinese & Vietnamese retail markets too suffered from small-scale, fragmented, provincial operating models.
Ø Most Indian retailers are still uncertain about benefits of technology. Retail IT budget in India is currently 1% of total spends which is lower than US spends. Significant IT investments are needed in merchandise planning, distribution management and POS to capture & analyse customer data . While Indian retailers are still to adopt bar coding, Wal-Mart and Metro are experimenting with Radio Frequency Identification technology. There is high dependency on few consultants & vendors are not IT-savvy.
Ø Limited FDI is depriving India of the resultant consolidation in the sector because foreign retailers provide employment, spend more on marketing, advertising, bulk purchases; have wealth of retail experience from developed retail markets, introduce larger product variety & improved shopping experience. This will also aggregate demand, bypass the existing intermediary system, invest in the supply chain, ensure lower prices to end-customers and higher returns to farmers.
Ø India is diversified, ethnically and culturally, posing a challenge for Indian players wishing to set up a national chain or brand. It leads to product proliferation and stocking larger number of SKU’s at stores, complexity in sourcing & planning, which in turn increases management costs. Foreign players wanting to enter India too have to think twice before deciding to step in.
Ø Untapped Rural potential:
"India's greatest need is to take the benefit of retailing to the doorstep of the farmer," ITC chairman YC Deveshwar says.
70% of India lives in villages & consumes over one third of most durable and non-durable products. Retailing in rural India is a different ball game because before targeting a share of their wallet, the Indian rural market requires an income propeller.
In China (2004) too the Ministry of Commerce has realised the rural potential and by 2009 will build a rural retail network .
Ø Availability of skilled personnel
The non-availability of trained personnel especially at the managerial level is one of the key challenges to this sector. The ability to hire and retain quality manpower will be one of the most important success factors for this industry
The Drivers of Growth of the Organized Retailing Sector.
Providing Quality Real Estate:The government is easing land regulations and releasing land for retail. Rs.8 trillions is being invested in real estate in coming 5 years 19. Retailers are foraying into retail property development & mall management. E.g. Rahejas, DLF, Pantaloon, Provogue, etc. Pantaloon Retail’s Rs3.5bn fund- ‘Kshitij’ and foreign fund ‘Horizon’- US $350m, will develop 51 retail properties10. Another booster is entry of foreign players and provision for 100% FDI in real estate for townships for retail with floor space of over 5,00,000 sq. ft .
Foreign Direct Investment (FDI) in India
FDI is a concept wherein a foreign partner invests directly in a company. This investment would be for the purpose of getting a higher dividend or for getting managerial control in the company. Normally a direct investment in a retailer organization gives the foreign investor a controlling interest in the domestic company. The presence of a foreign investor normally is a win -- win situation for both the investor as well as the recipient country.
In addition FDI may also be used to access certain markets or resources. (Example: in areas like extracting raw material, growing crops and even operations in the service industry. Some of the well-known examples where FDI has been used in the service industry would be De Beers in diamond extraction, Pepsi in the Food and Beverages sector of the retail industry and AIG in the insurance industry.
FDI is a very important means of economic growth for any country. The amount of FDI entering into the country is dependant on broadly two factors:
Ø Internal Factors (e.g. government policies)
Ø External factors (e.g. competitive environment).
However some obstacle still remains in the path of attracting FDI to India. (e.g. reliable regular sufficient power, good roads and correspondingly good transport networks). It is estimated that more than 40% of the perishable goods are lost due to non-availability of refrigerated vans and bad roads. Additionally the fear is that the presence of FDI would drive out the ‘Mom and Pop’ shops and cause loss of employment as seen in USA.
In spite of these obstacles, a World Bank Study on FDI in India has suggested that opening of FDI in the retail sector in India would be beneficial both in terms of technological inputs, new products and also employment generation on lines similar to the IT sector. The benefit of allowing FDI in India can be seen through the benefits that China has reaped by allowing FDI up to 49% in this sector. In India with the per capita consumption being quite low, it is difficult to imagine the Mom and Pop shops being driven out. Most of these Mom and Pop shops satisfy the “locality” requirements rather than the convenience requirement.
The main drivers of the organized Retailing Sector can be identified as follows:
Ø Rising Income Level
The profile of the Indian customer is continuously changing. This change can be seen the figure given below.
Shift in the profile of the Indian Customer
It is estimated that the consuming class and the climbers are expected to grow from a level of 120.8 million households (in 2001- 02) to a level of 157.2 million households (in 2006-07) thus registering a growth of 5.5% p.a.
The Marketing Whitebook has estimated that out of the total consuming class and the consumer class, almost 56% (~ 46 million) is expected to be concentrated in urban India. The proportion of the consuming class and the climbers in the urban markets are likely to drive the demand significantly especially for lifestyle products.
Ø Young Population with high disposable Income
According to KSA Technologies, India has the lowest median age of 24 for over 1000 million populations when compared with the other populous countries like China, USA and UK. This young population by virtue of its mere size would drive the consumption pattern as this group has the ability and willingness to spend. Fig. 6 & 70 demonstrates this amply.
The changing pattern of households by income
The changing size of the population especially in the age group of 20 – 34 years is very clearly depicted in following figure. This class is the relevant class for the retail industry and is growing very rapidly.
The changing demographics in India.
Ø Availability of Brands and Merchandise
Consumerism and brand proliferation has been another enabler for organized retailing in India. Most of the world’s largest and leading brands are currently available in India. For e.g. Louis Philippe, Van Huesen, L’Oreal, Peppe, Arrow, Tommy Hilfiger etc.
Ø Media Proliferation
The presence of a large number of media and the corresponding exposures has led to the increase in consumer spending especially on apparels.
Ø Availability of Real Estate
Availability of the real estate is one of the biggest drivers of the organized retail sector. According to M/s Shoppers Stop a total of Rs. 250 billion would be required by 2010 in real estate only. The bulk of the investment is in the NCR (Delhi) followed by Mumbai, Bangalore and then by Pune.
Ø Inbound Tourist / Impact of Globalization.
There is a large vast of NRI population in the country. The availability of international goods at comparable prices is also one of the drivers of the industry. Again the impact of globalization has resulted in an increase in both the depth and width of a product, which in turn has resulted in an increase in consumerism.
Ø Unconventional Retailing:
“I shall tell this with a sigh somewhere ages and ages hence: Two roads diverged in a wood, and I - I took the one less traveled by, And that has made all the difference.” Robert Frost
Innovative formats Wedding mall (Gurgaon), Sports mall – Okini (Mumbai), forecourt retailing, E-tailing, Catalog retailing, kiosks, Airport Retailing etc. are some possible formats of future.
Region-specific formats department stores of size 25000-30000 sq.ft. in tier 2 towns as against 50000 + sq.ft. in tier 1 cities to cater to smaller groups.
Ø Urban Opportunity :Indian retailers inspired by Wal-Mart’s growth in small American towns are tempted to follow suit. However, in India the share of 35 towns with a population of 1 mn plus grows faster than their smaller counterparts, from 10.2% today to reach 14.4% by 2025. While the share of the towns in the overall retail market, would grow from 21% to 40% by 2025. Retailers should therefore focus on the top 37 towns in the next decade, as the opportunity in rural India is smaller and fragmented.
Conclusion
The size of India is both an opportunity and a challenge. Bureaucracy and corruption remain key features of business life in India – even if the regional expansion programmes. The race for space is on, with much still to go for! Despite the challenges involved, India remains an exciting and dynamic market, with consumers hungry for choice and modern retail formats. By 2015, KSA Technologies xpects the Indian retail market to have evolved from a small-scale, highly fragmented, provincial operating model to a modern, large-scale cross-regional one.
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