Retail Scenario In India: An Unlimited Opportunity CHAPTER 1 THE RETAIL SCENARIO – GLOBAL & INDIAN 1.1 Global Retail Scenario Retail stores constitute 20% of US GDP & are the 3 rd largest employer segment in USA. China on the other hand has attracted several global retailers in recent times. Retail sector employs 7% of the population in China. Major retailers like Wal-Mart & Carrefour have already entered the Chinese market. In the year 2003, Wal-Mart & Carrefour had sales of US $ 70.4 Crore & US $ 160 Crore respectively. The global retail industry has traveled a long way from a small beginning to an industry where the world wide retail sales is valued at $ 7 x 10 5 Crore. The top 200 retailers alone accounts for 30 % of the worldwide demand. Retail turnover in the EU is approximately Euros 2,00,000 Crore and the sector average growth is showing an upward pattern. The Asian economies (excluding Japan) are expected to grow at 6% consistently till 2010. On the global Retail stage, little has remained same over the last decade. One of the few similarities with today is that Wal-Mart was ranked the top retailer in the world then & it still holds that distinction. Other than Wal- 1
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 1
THE RETAIL SCENARIO – GLOBAL & INDIAN
1.1 Global Retail Scenario Retail stores constitute 20% of US GDP & are the 3 rd largest employer segment
in USA. China on the other hand has attracted several global retailers in recent times.
Retail sector employs 7% of the population in China. Major retailers like Wal-Mart &
Carrefour have already entered the Chinese market. In the year 2003, Wal-Mart &
Carrefour had sales of US $ 70.4 Crore & US $ 160 Crore respectively.
The global retail industry has traveled a long way from a small beginning to an
industry where the world wide retail sales is valued at $ 7 x 10 5 Crore. The top 200
retailers alone accounts for 30 % of the worldwide demand. Retail turnover in the EU is
approximately Euros 2,00,000 Crore and the sector average growth is showing an upward
pattern. The Asian economies (excluding Japan) are expected to grow at 6% consistently
till 2010.
On the global Retail stage, little has remained same over the last decade. One of
the few similarities with today is that Wal-Mart was ranked the top retailer in the world
then & it still holds that distinction. Other than Wal-Mart's dominance, there's a little
about today's environment that looks like the mid-1990s. The global economy has
changed, consumer demand has shifted & retailers' operating systems today are infused
with far more technology than was the case six years ago.
1
Retail Scenario In India: An Unlimited Opportunity
Given Below a List of World's Top 15 Retailers:
DT Rank 04 Country of Origin
Company name
Formats 2003 retail sales (US $ Crore)
1 US Wal-Mart Discount, Hypermarket, Supermarket, Superstore, Warehouse
3 US Home Depot DIY 6,481.64 Germany Metro Hypermarket,
Superstore, Specialty, Convenience, Cash & Carry, Departmental, DIY, Food Service
6,050.3
5 US Kroger Discount, Convenience, Supermarket, Super center, Warehouse, Specialty
5,379.1
6 US Kroger Discount, Convenience, Supermarket, Super center, Warehouse, Specialty
5,379.1
7 UK Tesco Department, Hypermarket, Supermarket, Superstore, Convenience
5,153.5
8 US Target Department, Discount, Super center
4,678.1
9 Netherlands Ahold Discount, 4,458.4
2
Retail Scenario In India: An Unlimited Opportunity
Hypermarket, Supermarket, Specialty, Convenience, Cash & Carry, Drug
10 US Costco Warehouse 4,169.311 Germany Aldi Einkauf Discount,
Supermarket4,006.0 e
12 Germany Rewe Hypermarket, Superstore, Super market, Specialty, Convenience, Cash & Carry, Departmental, DIY, Food Service, Discount, Drug
3,893.1e
13 France Intermarche Superstore, Super market, Specialty, Convenience, Cash & Carry, DIY, Food Service, Discount
3,747.2e
14 US Sears Department, mail order, Specialty
3,637.2
15 US Safeway, Inc. Supermarket 3,555.316 US Albertsons Convenience,
Drug, Supermarket
3,543.6
e= estimate.
3
Retail Scenario In India: An Unlimited Opportunity
1.2 Indian Retail Scenario Retailing in India is the largest employer after agriculture. It employs almost 7%
of the total work force in India and has a contribution of 14% to the national GDP. In the
year 2004, the size of Indian organized retail industry was Rs 28000 Crore, which was
only 3% of the total retailing market. Organized retailing is projected to grow at the rate
of 25%-30% p.a. and is estimated to reach an astounding Rs 1,00,000 Crore by 2010. The
contribution of organized retail is expected to rise from 3% to 9% by the end of the
decade.
Though with a population of a billion and a middle class of 300 million (upper
middle class= 40, Middle class =150 & lower middle class = 110), organized retailing is
still at its infancy in India. The great Indian middle class is estimated to grow to over 60
Crore by 2010 making India one of the largest consumer markets of the world. It is
projected that by the year 2010, 65% of the Indian population will be in the age group of
10-49 years, which makes the scenario even more attractive. India has the largest retail
network with 1.2 Crore outlets but only 4% of them are larger than 500 sq. feet in size.
USA on the other hand has 9 Lakh outlets catering to more than 13 times the total retail
market size of India. Thus India has the highest number of outlets per capita in the world
with a widely spread retail network but with the lowest per capita retail space (@ 2 sq.ft.
per person). AT Kearney has ranked India as the 2nd most attractive retail market after
Russia, in its Global Retail Development Index 2004 report.
4
Retail Scenario In India: An Unlimited Opportunity
Retailing, one of the largest sectors in the global economy, is going through a
transition phase in India. For a long time, the corner grocery store was the only choice
available to the consumer, especially in the urban areas. This is slowly giving way to
international formats of retailing.
A Look at the Evolution Process:
Detailing reasons why Indian organized retail is at the brink of revolution, the
IMAGES-KSA report says that the last few years have seen rapid transformation in many
areas and the setting of scalable and profitable retail models across categories. Indian
consumers are rapidly evolving and accepting modern formats overwhelmingly. Retail
Space is no more a constraint for growth. India is on the radar of Global Retailers and
suppliers / brands worldwide are willing to partner with retailers here. Further, large
Indian corporate groups like Tata, Reliance, Raheja, ITC, Bombay Dyeing, Murugappa &
Piramal Groups etc and also foreign investors and private equity players are firming up
plans to identify investment opportunities in the Indian retail sector. The quantum of
investments is likely to skyrocket as the inherent attractiveness of the segment lures more
and more investors to earn large profits. Investments into the sector are estimate at INR
2000 - 2500 Crore in the next 2-3 years, and over INR 20,000 Crore by end of 2010.
5
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 2
TRADITIONAL RETAIL v/s ORGANISED RETAIL
In India, traditional formats have dominated the retail scene. These formats include:
1. The food and non-food neighborhood counter stores called the kiranas, the Indian
version of the Western mom-and-pop stores;
2. The paan shops, that is, kiosk-like small shops selling tobacco, betel leaf and
other products;
3. Mandis;
4. Village haats;
5. Push cart vendors; and
6. Other shops like the tailoring shops, which catered to garment needs before
readymade stores came in vogue and
7. The Sonars who crafted jewellery as per customer requirements, etc.
2.1 Key Characteristics of Traditional RetailIndia has sometimes been referred to as a nation of shopkeepers. A high density
of population and the need for convenience has facilitated the operation of over 12
million stores in India. Of these, nearly 78 per cent are small family-run operations,
which use only household labour. The key characteristics of these stores are:
1. Small size: Such stores are small in size. They range in area from 200 square
feet or less to 1,500 square feet, depending on the area of operation.
2. Low operating costs and overheads: These stores are run by family members
and thus, there are no labour costs involved. Little money is spent on lighting,
power, fuel and ambience.
3. Proximity to consumers: These shops are located within residential areas and
can be accessed by customers on foot. This makes it convenient for households
to buy items on a daily basis.
4. Strong customer bond: These shop owners know their customers
personally and have strong relationships with them. This helps them gauge
6
Retail Scenario In India: An Unlimited Opportunity
likes and dislikes, and accordingly meet the individual needs of each
household.
5. Additional services: These small stores provide services like a month's credit,
which many customers find very useful. Such stores have also been
concentrating on offering customers the additional convenience of home
delivery and obtaining a product on order.
6. Non-payment of taxes: Since such small stores do not normally generate bills,
they manage to evade taxes. This saves them money, which they can re-invest
and also makes it possible for them to offer lower prices to select customers.
2.2 S.W.O.T Analysis of Traditional Stores
Strength Low capital requirement (due to
uncontrolled low rents and minimal
operating overheads) helps them turn
faster and increase in number with
easy entry and exit.
Proximity to consumers and strong
relationships help them gauge
customer needs and stock accordingly,
thus gaining more business.
These stores are located in prime
residential areas. The rentals in these
areas and other logistics are mostly
unviable for large stores.
They enjoy a near monopoly in areas
that are backward or do not have a
population with sustainable
purchasing power (like rural areas),
since organised retailers are unlikely
Weakness Storekeepers often do not provide
quality assurance, especially of goods
sold loose. However, with FMCG
companies themselves branding
various goods like flour, pickles,
sugar, etc, this might check the
problem.
Small storekeepers are increasingly
becoming conscious of hygiene
issues.
7
Retail Scenario In India: An Unlimited Opportunity
to enter such regions.
Opportunity Traditional stores have low or no
bargaining power due to their small
scale of operations. Thus, the biggest
threat they face from organised
players is the latter's ability to provide
quality products at a discount.
Due to their small size, traditional
stores are unable to stock a variety of
goods, which is what consumers are
now demanding owing to increasing
awareness.
Traditional stores rarely invest in
ambience. They also do not provide
the customer the chance to look at
various brands and varieties before
making a choice.
Threat Long operating hours might be
threatened with organised players and
associations demanding 24 X 7
operating permissions.
The additional services that were
unique to them are now being
replicated by all players. The
increasing use of credit cards provides
easy credit even otherwise.
With huge stores coming up in
catchments areas of 5-7 kilometers of
approachable distance and large
chains planning to set up hub- and-
spoke smaller stores, the very
existence of traditional stores is in
danger.
The boundaries that once existed between food chains and one-shop vendors are
gradually disappearing. Single- shop owners are becoming increasingly aware of
customer needs, hygiene and variety requirements. At the same time, chains are opening
stores in residential areas and focusing on customer-relationship management.
Chains have also drafted plans for entering residential areas with a hub-and-spoke
model, where one large store will support various smaller stores in nearby residential
areas. With efficient supply chain management and the availability of space and
technology, this will not take much time.
8
Retail Scenario In India: An Unlimited Opportunity
Kirana stores are becoming aware of the disadvantages inherent in their
lower bargaining power and their inability to offer discounts. Thus, they are coming
together to form cooperatives, which allow for bulk purchases, thus providing them a
competitive edge.
The opening up of the retail sector to FDI will create huge opportunities
in areas like processing, but will simultaneously lead to the displacement of at least
some such single-shop establishments.
However, both organised retail and traditional retailing have their own advantages.
Sr. No. Traditional Organized1 Low operating costs and overheads Greater bargaining power2 Proximity to consumers Range and variety of goods3 Long operating hours Quality and variety of goods4 Additional services (like home delivery,
credit convenience and customised products)Attractive ambience
5 Strong relationship with customers Convenience and hygieneSource: CRIS INFAC
Thus, in the long term, even after a consolidation in the period following the
spread of organised retail, traditional retailers are unlikely to vanish from the retail scene.
Instead, both types will probably co-exist, providing consumers with the best quality,
greater variety and more affordable prices along with increased convenience.
9
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 3
ORGANIZED RETAIL TO GET BIGGER
Indian organized retail market is growing at a fast pace due to the boom in the
Indian retail industry. In 2005, the retail industry in India amounted to Rs 10,000 billion
accounting for about 10% to the country's GDP. The organized retail market in India out
of this total market accounted for Rs 350 billion which is about 3.5% of the total
revenues.
Retail market in the Indian organized sector is expected to cross Rs 1000 billion
by 2010. Traditionally the retail industry in India was largely unorganized, comprising of
drug stores, medium, and small grocery stores. Most of the organized retailing in India
have started recently and is concentrating mainly in metropolitan cities.
The growth in the Indian organized retail market is mainly due to the change in
the consumer’s behavior. This change has come in the consumer due to increased
income, changing lifestyles, and patterns of demography which are favorable. Now the
consumer wants to shop at a place where he can get food, entertainment, and shopping all
under one roof. This has given Indian organized retail market a major boost.
Retail market in the organized sector in India is growing can be seen from the fact
that 1500 supermarkets, 325 departmental stores, and 300 new malls are being built.
Many Indian companies are entering the Indian retail market which is giving Indian
organized retail market a boost. One such company is the Reliance Industries Limited. It
plans to invest US$ 6 billion in the Indian retail market by opening 1000 hypermarkets
and 1500 supermarkets.
Pantaloon is another Indian company which plans to increase its retail space to 30
million square feet with an investment of US$ 1 billion. Bharti Telecoms an Indian
company is in talks with Tesco a global giant for a £ 750 million joint venture. A number
of global retail giants such as Wal-mart, Carrefour, and Metro AG are also planning to set
10
Retail Scenario In India: An Unlimited Opportunity
up shops in India. Indian organized retail market will definitely grow as a result of all this
investments. Indian organized retail market is increasing and for this growth to continue
the Indian retailers as well as government must make a combined effort.
3.1 What Is Organized Retail? Retail
"Retail' is defined as "the sale of goods and commodities in small quantities to the
ultimate consumer'. Thus, retailing is the last leg in the channel through which goods
travel from the producer to the consumer. Generally, a retailer does not effect any
significant change in the product. (However, there may be exceptions like soft-drink
vending machines that take in concentrate and give out a ready-to-drink beverage.)
Our discussion of retail throughout this report adheres to this definition.
Therefore, services (for example, beauty salons, multiplexes, restaurants, etc) have been
excluded from the purview of our analysis although they may be available at the same
location (such as a mall) where goods are retailed. This study also excludes tobacco
products and pharmaceuticals from its purview, as these products, by-and-large, use
specialized channels of delivery.
Value Proposition
The value proposition that a retailer offers to a consumer is the availability of the
desired product in the desired quantity at the desired time, thereby creating time, place
and form utility.
Organised Retail
Organised retail may be said to refer to a form of retailing, whereby
consumers can buy goods in a similar purchase environment across more than one
physical location. This report attempts to analyze the structure of and the outlook
for the "organised retail of goods' excluding tobacco products and pharmaceuticals.
11
Retail Scenario In India: An Unlimited Opportunity
Such retail may entail the use of different store formats like single-product stores,
department stores, malls, etc. The categories of goods retailed would include food,
Retail Scenario In India: An Unlimited Opportunity
At present, foreign direct investment (FDI) in retail chain stores is
restricted in India. However, many multi- national companies (MNCs) have entered the
Indian retail scene through permitted routes.
Franchise: In the franchise model, an international brand gives its technology and
brand name to a domestic partner and gets royalty in return. Nike, Pizza Hut,
Subway, Tommy Hilfiger, Marks & Spencer, etc have adopted this route.
Joint venture: In this case, an international brand provides equity and support to
an Indian entity as in the case of McDonalds and Reebok. The MNC's share is
restricted to 49 per cent.
Manufacturing: Here, an international company sets up an Indian company to
manufacture its products and obtains the right to retail these products in India, as
in the case of Bata and Benetton.
Distribution: An international company sets up a distribution office in India and
supplies its products to local retailers. It can also set up franchised outlets for
brands as in the case of Swaroski and Hugo Boss.
Wholesale trading: In this model, an international company is allowed to
sell various products to local retailers as in the case of Metro Cash & Carry,
where Metro sells products to retailers, who, in turn, retail it to the end
consumers.
MNC retailers have followed varied entry strategies and their target segment has
also undergone changes, from the higher income group to a larger target segment.
Lifestyle and Dominos have targeted the higher income group, while McDonalds has
focused on a wider target population with its "value-for-money' positioning. Metro aims
to enter into the distribution chain of retailers and is focusing on end retailers as its
customers.
47
Retail Scenario In India: An Unlimited Opportunity
MNCs have, to date, focused chiefly on food, apparel and lifestyle product
segments. This basket is expected to expand further in terms of products and addressable
markets. This will lead to more players in the market. However, we believe that the level
of competition in the initial phase will be lower since there is enough room for growth for
each player.
This phenomenon will bring in fresh capital and technology, which will aid
the development of the industry. International companies will also bring in better
business practices and management techniques, which will prove to be beneficial to
existing domestic players and the industry as a whole. The opening up of the retail
sector for FDI will improve the state of the industry and fuel growth.
However, a few large international players have postponed their plans to
enter India on account of the uncertainty over FDI and the many regulations
governing the Indian retail industry. Following the ongoing debate on allowing FDI in
retail, we expect organised retail to be granted industry status, which will make it easier
for players to procure funds.
CHAPTER 8
48
Retail Scenario In India: An Unlimited Opportunity
FOREIGN DIRECT INVESTMENT 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 feared 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.
49
Retail Scenario In India: An Unlimited Opportunity
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 centers 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, and 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.
International Players Likely To Enter the Indian Market
Players Country of Origin Retail Sector ActivityJC Penney USA Retail Major Department
StoreTarget Corporation USA Retail DiscountSara Lee Corporation USA Retail ApparelTesco UK Food RetailH & M Sweden Retail ApparelKarstadt- Quelle Germany Retail Major Department
StoreCarrefour France Food RetailSource: CRIS INFAC
50
Retail Scenario In India: An Unlimited Opportunity
Players Who Have a Presence in India and Are Likely To Expand Operations
Players Country of Origin Retail Sector ActivityGAP USA Retail ApparelWal-Mart USA RetailDiscountMetro AG Germany Food RetailBenetton France Retail ApparelMarks & Spencer UK Retail Major Department
StoreMcDonalds USA Food RetailSource: CRIS INFAC
Trends in international markets have shown that organised retail has grown faster
in countries where FDI was allowed in the retail industry. FDI was also responsible for
improvements in product quality, increased choice, better services and a superior
shopping experience.
In Latin America, the entry of foreign retailers had a positive impact on
the productivity and efficiency of domestic firms, who were compelled to consolidate
their operations, invest in supply chains and improvise their pricing structures. The
opening of the Indonesian retail sector provided unprecedented opportunities to foreign
retailers. Indonesia saw the growth of various formats like hypermarkets, department
stores, malls, plazas and convenience stores.
The introduction of FDI in retail in the Thai market resulted in stiff foreign
competition. Within a short span of time, foreign players affected a considerable
expansion of operations and marginalized local players, leading to the closure of a large
number of local businesses. However, the entry of foreign players also marked the
implementation of best practices and superior technology, and Thailand gradually
emerged as an important shopping destination.
China opened its doors to foreign retail players in a phased manner. According to
the data provided by the China General Chambers of Commerce, although foreign
players have entered the Chinese market, the increase in the number of stores of foreign
players has been slower (at 21 per cent) than the year-on-year growth (32.35 per cent)
51
Retail Scenario In India: An Unlimited Opportunity
recorded by domestic players, primarily because of the latter's knowledge of the local
market.
Retailing: Comparing Various Asian Economies (2002-03)
Country Total market ($ billion) Share of organized sector (Per cent)Taiwan 40 81Malaysia 20 45Thailand 32 40Indonesia 75 30China 325 15India 180 02Source: CRIS INFAC
According to CRIS INFAC, if FDI is allowed in the Indian retail industry, it could
increase the growth rate of organised retail and thus benefit other allied sectors like food
processing, textile manufacturing, IT and tourism. Organised retailing can lead to an
improvement in the quality of employment, as players will have to invest in training,
which would result in higher salaries and better working conditions. Although some job
displacement cannot be ruled out due to the reduction in the existing distribution chain of
intermediaries and middlemen, we believe that in a growing economy this loss can be
offset by new jobs created in the allied sectors mentioned above as well as in organised
retail itself.
A survey commissioned by the government and conducted by the Indian Council
for Research on International Economic Relations (ICREIR) reveals that about 65 per
cent of the unorganized retailers in India feel that growth in organised retailing has no
major impact on their business. Further, 48 per cent of this section believes that the entry
of international retail companies would leave them similarly unaffected. Therefore, the
systemic efficiency improvements brought in by FDI would be greater than the
cost of displacement.
ICRIER has recommended that FDI of up to 49 per cent be allowed in the initial
stages; this can then be raised to 100 per cent in 3-5 years depending on the growth of the
sector. The study suggests a 3-5 year time frame for 100 per cent FDI in order to give
domestic retailers sufficient time to adjust to the changes and the reforms.
52
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 9
CHALLENGES FOR INDIAN ORGANISED RETAIL
Organised retail in India is expected to grow at 25-30 per cent per annum in the
next 5-6 years. However, players in this industry face many regulatory and other
challenges, which could slow down the pace of the industry's growth.
9.1 Multiple TaxationThe retail industry attracts a variety of taxes from both the Central and the state
governments. These include the Central sales tax, sales tax (state), entry taxes for inter-
state sales and octroi depending on the area of operation and procurement and the type of
goods sold. Corporate tax at 30 per cent is also payable. This is higher for foreign players
operating through various formats. Taxes are levied on all goods procured including
essentials like milk.
9.2 Multiple LegislationMultiple licenses and clearances are required for setting up and operating a retail
store. These make the process of setting up an establishment more cumbersome, reducing
the flexibility of operations, slackening rapid expansion and increasing the overall cost of
the retail chain.
The stamp duties on property deals in India are significant. The lease cost alone
can be up to 6-10 per cent of sales in India, while it is only 3-5 per cent globally. Further,
the initial urban planning of cities was undertaken with smaller plots in mind. In
addition, rigid building and zoning laws make it difficult to procure space for
retailing. The urban land ceiling act and rent control acts have distorted property markets
in cities, leading to exceptionally high property prices. The presences of strong pro-
tenancy laws make it difficult to evict tenants and make people reluctant to give out real
estate on rent. The problem is compounded by the lack of clear titles to ownership.
53
Retail Scenario In India: An Unlimited Opportunity
Stringent labour laws are another worrying factor. Although instituted to protect
store workers, Indian labour laws constrain the operation of modern formats of retailing.
These laws restrict working hours, require shops to close for one day of the week in
certain areas and make the hiring of part-time employees difficult. However, to attract
investments, state governments have permitted a certain degree of flexibility in certain
cities (like Bangalore) for the use of labour, making user, however, that associated
benefits are not lost.
9.3 High Cost/Unavailability of Real-Estate Pro-tenant rent laws, non-availability of government land, zoning restrictions,
high stamp duty and lack of clear ownership titles increases the difficulty of finding good
real estate in terms of location and size. It also increases transaction costs and supply
constraints. Retail players look for real estate based on the catchment areas suitable to
their formats. The difficulty in procuring the same leads to problems in strategizing and
planning expansions. This problem is being increasingly solved by leasing space in malls.
Lease rentals are one of the most important factors determining the profitability of a
retailer, as most other costs are largely uncontrollable. On an average, lease rentals
account for 7-8 per cent of the revenues and 40-45 per cent of the non-material costs for a
retailer. As is evident from the tables below, even a small change in lease rentals can
significantly alter the profitability levels of stores.
Sensitivity Analysis of Lease Rentals on Net Profits
ApparelLease rentalsNet profit
4012.8
5011.1
609.3
776.4
904.1
1003.6
1100.9
Food Lease rentalsNet profit
501.9
601.5
750.8
880.4
100-0.4
110-1
120-1.7
HypermarketsLease rentals Net profit
3018.6
4019.3
578.9
701.4
80-8
90-17.4
DepartmentalLease rentalsNet profit
4018.6
5015.1
6011.6
778.6
901.7
100-3.7
110-9.1
Lease rentals are measured in Rs per sq.ft. ; Net profit is measured in Rs million
54
Retail Scenario In India: An Unlimited Opportunity
9.4 Supply Chain Bottlenecks The food and apparel segments are classified as small-scale industries in India. As
such they are governed by numerous regulations. For instance, most players have to buy
food grains and staples through the Agricultural Produce Marketing Committee. This
poses difficulties in terms of scaling up and reduces product range.
Distribution and logistics are major bottlenecks for the Indian industry,
especially for the food industry. Poor infrastructure, coupled with a lack of third
party logistics providers, makes operations difficult. There is an absence of cold
chains, proper storage and transportation methods (suitable vehicles and containers). This
leads to high wastage and increased transaction and product costs. At present, the major
part of the food chain does not have high value additions, which translates to lower
product price realizations and lost opportunities for the industry on the whole.
To cope with this, large retail chains are integrating backwards and using high
volume and scale, combined with centralized purchasing, to increase their bargaining
power. They are using information technology as an enabler to track orders and
preferences faster.
A case in point is that of a large retail player in India, which has reportedly set up
a centralised consolidation centre. It buys fresh food and vegetables, staples, rice, chillies,
etc in huge quantities every month from farmers in the area that houses its consolidated
centre. This is then sent to its warehouse, from where it is dispatched to stores. An
efficient supply chain management along with centralised procurement enables the
company to have high volumes and thus gives it the ability to offer discounts.
9.5 Customer Preference India's cultural diversity translates into a wide variety of purchasing habits and
preferences. In order to ensure success, the retailer must be aware of local habits and
preferences and decide on an optimum product mix and range accordingly. This increases
55
Retail Scenario In India: An Unlimited Opportunity
the retailer's customization and stocking range. This, in turn, leads to higher inventories
and fewer best practices.
9.6 Stiff Competition from Small Traditional Format Organised retailing faces severe competition from the unorganized segment
on the cost and service front. Unorganized players are typically small-time
businessmen, who own small stores (average size of 500 square feet). The level of
overheads of these players is far lower. There are no labour costs as such stores are run
by family members, and no expenses are incurred on creating an attractive ambience.
These players can evade taxes, which organised players have to pay. This makes the
unorganized player more cost effective than the organised player.
9.7 Availability of trained manpower There is a shortage of manpower trained to suit the requirements of retail
organisations, both at the shop floor level (as working for a store is not considered
prestigious), and at the middle level (where managers are required to effectively
implement growth plans). With a growth in organised chains, companies are facing a
high employee turnover. With the advent of foreign players, existing manpower could
move to multinationals as in the IT/ITES sector. Sensing the lack of available manpower
various institutes have started courses in retail management.
56
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 10
KEY SUCCESS FACTORS
As in the case of any other business, success in the organised retail industry is
determined by a few select factors. Not all of these can be quantified but nearly all of
them are instrumental in determining the success of a retail establishment. The section
below enumerates the various factors that are believed to be instrumental in determining
the success of players in the retail industry.
10.1 Location Location is the most important factor determining the success of a retail store or a
chain. Lease costs are as high as 8-9 per cent of the total costs of a retail organization. A
store located in an area frequently accessed by local residents has the potential for high
footfalls but has higher rentals as well. Selecting a suitable location is a strategic
decision. Choosing a wrong location and then changing it can have considerable strategic
and financial implications. The exit costs are high not only because capital expenditure
will have to be incurred again but the image of the store might also suffer a setback.
There might be difficulties in changing location if the property has been acquired on a
contractual basis. Thus, organised retailers generally select a location after a detailed
study of target customers, local buying behaviour and catchment areas.
10.2 Knowing the Customer The success of a retail chain depends on its perception in the minds of target
customers. The tastes of customers in India differ from region to region. Hence, retailers
need to change product mix and offerings according to the tastes and preferences of local
customers. Although a good location can bring in footfalls, the conversion factor and
ticket size are driven by the range of merchandise that the store stocks. The selection of
the right merchandise requires a strong understanding of the preferences of the target
customers in the catchment area, their spending ability and their spending pattern.
Further, the store must be dynamic in churning its merchandise so that it reflects current
57
Retail Scenario In India: An Unlimited Opportunity
trends and customer tastes. This is the reason most stores have end-of-season sales and
discounts.
10.3 Service Quality Service quality is as essential as the merchandise mix and the location of the
store. The customer needs to be treated as the "king' at the store and should be provided
with a better shopping experience each time he/she walks into the store. The ambience of
the store defines its positioning. It should incite the customer to purchase. The store
should provide clear directions and make sure the customer is not confused. Store
employees should be friendly and helpful but not interfering. They must be able to
understand customer requirements and guide them accordingly. Service plays a very
important role in creating loyal customers, who play a significant role in store sales.
10.4 Scale of operations The ability to scale up a business model would define the growth rate of a retailer.
A larger scale helps distribute overheads and provides more space. Further, a higher scale
of operations would provide an added advantage in terms of loss-bearing capabilities. A
retailer with a higher number of stores would definitely be in a better position to
manage/resurrect slow sales in 1-2 stores without significantly affecting overall business
as compared to a retailer operating a small fleet of stores.
However, the scaling up of operations needs to be backed by consistent
service across various stores and the ability to select merchandise tailored to target
customers in each location. It also requires suitable technological and operational back up
and management dedication.
10.5 Supply chain management An efficient supply chain management is the backbone of an organised retail
chain. Adequate storage and stock facility for all outlets is critical for the success of
any store. Information technology helps monitor aggregate volume and supply chain
58
Retail Scenario In India: An Unlimited Opportunity
efficiencies. Proper management of stock could help a retailer transfer stocks from one
store to another and thus provide a judicious mix in each outlet. Good supply chain
management supports scale and also leads to lower wastage, thus lowering shrinkage
cost.
10.6 Management quality The ability to select the right formats in keeping with the intended value
proposition and the ability to effectively manage the scaling up of operations are
essential characteristics of good management in a retail outfit. Experienced,
dynamic and dedicated management is required not only at the top level for
strategizing, but is equally important at the middle level for implementation and store
operation.
59
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 11
GROWTH STRATEGIES
With numerous opportunities for growth, organised retail chains in India have
been scaling up their models by adopting new formats and increasing the number of
stores of the same kind in new areas. To scale up a retail operation, a retailer can follow a
growth path by using one or a combination of the following dimensions:
11.1 Product Line A retailer can increase the depth and breadth of a product mix and enter into new
verticals like food, apparel, consumer durables, jewellery, footwear, electronics and
entertainment. An example is the extension of Trent, primarily an apparel player, into the
food vertical by way of Star India Bazaar.
11.2 Target Customers A retailer generally caters to a specific class of customers. High-end jewellery
showrooms and department stores like Shoppers' Stop primarily cater to the SEC A
class. However, a retailer can expand reach by setting up different kinds of stores that
cater to various economic groups - the SEC A, B, C and D segments. A case in point is
Pantaloon. Within the apparel vertical, it caters to various sections of the society
through different stores. While Pantaloon Stores, which stock expensive brands, cater to
SEC A and B, Big Bazaar with its range of low-end clothes caters to SEC C and D.
However, success is largely determined by selecting a mix and demarcating the kind of
goods to be made available in different stores. Thus, the clothes found in Pantaloon
Stores will not be on offer in Big Bazaar.
11.3 Formats A player can also grow by adopting different formats. A player in a specialty
chain can also set up hypermarkets and department stores. Players with department stores
like Piramyd are planning to set up specialty Trumart stores for food. The different
60
Retail Scenario In India: An Unlimited Opportunity
formats that a player can adopt can be hypermarkets, supermarkets, department stores and
specialty chains. An example is RPG, which operates in multiple formats like specialty
food stores, music stores and hypermarkets.
11.4 Markets Retail does not create demand per se, and markets develop at their own pace,
independent of the channel. Once different growth paths are adopted, the needs of the
customers in a given area get saturated. Players can then grow by expanding their
markets. The different markets (local, regional, national and international) in which a
player operates will determine its scale. A local player would be one like Akbarallys,
established in a particular area. Viveks or Vijay Sales cater to a region. Chains like
Pantaloon, Trent, Shoppers' Stop, RPG, Lifestyle, Globus, etc have established their
presence across the country. Once the national markets are saturated, players look at
international set-ups. International players like Wal-Mart and Carrefour have expanded
operations beyond their saturated domestic markets, going on to establish their presence
world-wide.
61
Retail Scenario In India: An Unlimited Opportunity
CASE STUDY
PANTALOON RETAIL (INDIA) LIMITED
12.1 Profile Pantaloon Retail (India) Ltd (PRIL) was incorporated on October 12, 1987, as
Men's Wear Private Limited under the stewardship of Kishore Biyani. It was converted
into a public limited company in September 1991. The company sold branded
garments under the Pantaloon, Bare and John Miller brands and set up its first men's wear
Pantaloon Shoppe outlet in 1993. Its name was changed to Pantaloon Retail (India) Ltd in
1999, when it made a full-fledged entry into the retail segment through the Pantaloons
Family Store.
Over the last 5 years, PRIL has evolved from an apparel retailer focusing on
men's garments to a retail company servicing lifestyle-conscious and value-conscious
customers. It targets lifestyle-conscious customers through the Pantaloon department
stores and the Central Malls and value-conscious customers through the Big Bazaar and
Food Bazaar store chains. PRIL is one of India's leading manufacturer-retailers, with 12
Pantaloon stores and 18 Big Bazaars, 31 Food Bazaars and 3 Central Malls across the
country.
Pantaloon Retail India Limited
Year of incorporation
1987
Ownership Public Limited CompanyRetail sector activity Department stores, Hypermarket, Supermarkets, Malls.Principal fascia Pantaloon, Big Bazaar, Central, Food Bazaar.
62
Retail Scenario In India: An Unlimited Opportunity
2) Private Labels The company is likely to have higher margins due to the contribution of private
label products, which typically have higher margins. At present, nearly 70 per cent of
65
Retail Scenario In India: An Unlimited Opportunity
the sales in PRIL's retail business, mainly its apparel business comes from the sale
of private label products. A similar strategy has been adopted for Big Bazaar and Food
Bazaar, with the company planning to launch around 120 private label products in Big
Bazaar by the end of 2005-06.
3) Tie-Ups with Over 75 Mall Developers PRIL has tied up with various mall developers to obtain space as anchor tenants.
This will enable it to grow faster and acquire space at cheaper rates.
4) Increasing Store Size The company is progressively increasing the average store size of each of its retail
formats. The average size of a PRIL store has increased from 15,000 sq ft in 1998-99 to
20,000-25,000 sq ft. The average size of a Big Bazaar store has increased four times to
more than 50,000 sq ft, while the Food Bazaar store has doubled to around 6,500 sq ft.
5) New Areas PRIL believes that the Indian market is different from those of other countries, as
the shopping behaviour here is significantly different. Thus, it plans to get into new areas
by capitalizing on this Indianness. Some of its likely forays are:
1. Small Tea and Samosa (an Indian snack) stores, called CHAMOSA, where each
item will be available for Rs 5; this will cater to the value-oriented segment.
2. The home furniture segment, both standard and customized. In addition, various
facilities will be provided to make home decoration and maintenance easier.
3. The leisure and entertainment segment through its subsidiary.
66
Retail Scenario In India: An Unlimited Opportunity
CHAPTER 13
FUTURE OF INDIAN RETAIL INDUSTRY
Retail industry in India is greatly fragmented comparing to the developed and
other developing countries. This presents enormous prospective for the structured retail
industry to flourish throughout the country, as the market for the final product is huge.
Retail industry is largely led by private companies. The distribution for fast-moving
consumer products includes many layers like carrying and forwarding agencies,
distributors, wholesalers, stockiest and retailers.
The Indian retail environment has attained $ 210bn quiche, witnessing a strong
development pace of five percent per year (according to a latest survey by Price
Waterhouse Coopers). As per the estimation 200 malls, presenting additional 50mn sq ft
of retail space will be ready in next two years. Existing retail space in 160 malls is nearly
32mn sq ft.
Organized retailing now accounts for three percent out of the total retailing,
however is predicted to extend to 10 percent by the year 2010. In other means, organized
Indian retail sector would triple its share of the total market within the coming four years,
generating new 8mn jobs, in addition to the 21mn jobs that are already created by retail
sector. As per the estimate, the current retail business witnesses more than 12mn retail
outlets, which include all shapes and formats.
The analysts foresee bright future of the retail sector. A huge number of shopping
malls, nearly 100, have come up in the recent past, generating 20mn sq ft. retail space,
extending more space of about 12mn sq ft to it. Nearly 60 malls are on the verge of
completion and may be operational by the end of current financial year. A forecasted
number of nearly 200 malls, in a move to make additional 50mn sq ft of retail space, will
be completed within the next two years.
67
Retail Scenario In India: An Unlimited Opportunity
According to analysis by KSA Technopak, India has lowest per capita retail space
accessible around the globe. The study depicts that India require generating at least
110mn sq ft of additional retail space a year for many years, only to meet the demand
generated on account of a continued GDP growth rate of nearly 6 percent. Hitherto, the
Central Government as well as State Governments and local municipals have failed to
match steps with drag on the economy of an incompetent retail sector. This space crisis is
leading to a condition, in which prime locations demand extremely high rates.
To make India's emerging retail market open to foreign direct investment (FDI)
has been on the Government agenda since long time. A number of transformations and
practices were being done, but the sources disclosed that the policy, which is under
finalization is such that FDI in the retail market would lead towards the rear connections
of manufacturing and production and not only set aside to open of retail stores of global
and imported brands.
The global retail giants like Wal-Mart, Gap, Tesco, Versace, K-Mart/SEARS,
Carrefour, ZARA, FCUK, Fendi, NEXT, Mother Care, lKEA, Trussardi, DKNY and
Debenhams have made plans to march in the Indian market. ESPRIT, GUESS, Chanel,
Mango and many other global marked their presence in India by implementing licensing
and franchisee agreements. The global retailers on the line of control, awaiting the green
signal from Govt. to enter Indian retail market. However, the current scenario has
encouraged Indian players to speed up retail expansion and fresh retail ventures.
Companies like Shoppers Stop, Trent, Reliance, Lifestyle, Tanishq, Crossroads,
Akbarallys' and Tanishq already have planned to invest over Rs 5,000cr. Trent is on the
edge to take both its brands 'Star India Bazaar' and 'Westside' to new cities, meanwhile
Shoppers' Stop has recently geared up for expansion of present ones and to add 11 new
stores including two hypermarkets. Also, Pantaloon has planned to add eight 'Big Bazaar'
malls within the next 6 to 8 months.
68
Retail Scenario In India: An Unlimited Opportunity
After the merger, Reliance Industries Ltd (RIL) is substantially getting ready to
enter in field of retailing. RIL is poised to emerge as the single largest player in this
sector. On the other hand, Tescos, Wal-Marts or Safeways ultimately enter in the country.
So finally, Shoppers' Stops, Pantaloons and Westsides in coming years have will face
stiff competition. More than the Tescos and Wal-Marts, Reliance, Godreg and Tata are
likely to attain reach to the country's interiors.
At the same time, several apparel exporters are keen to get opportunities in retail
sector. Gokaldas Images, OC, TCNS, Gokaldas Exports and Celebrity Fashions are some
of the exporters who already have expanded into retail sector with triumph.
69
Retail Scenario In India: An Unlimited Opportunity
CONCLUSION
To conclude, it can be said that though the global retail industry has reached its
maturity, the Indian retail industry is still at its infancy. But with the huge potentiality
existing in the Indian market, it is expected to grow in leaps and bounds in the near
future.
Instead of comparing the total global retail industry with the Indian retail industry,
let’s compare Wal-Mart alone with the Indian retail industry & put forward few
interesting facts:
1. Retail Sales of Wal-Mart for the year 2003 was US $ 25,632.9 Crore; higher
than the size of Indian retail industry.
2. The size of any Wal-Mart store is much higher than the size of any existing
shopping mall in India.
3. Wal-Mart has over 4,800 stores, which is unparallel to any of the India's large
format store.
4. New stores opened annually by Wal-Mart are about 420, much higher than all
organized Indian retailers put together.
5. The sales per hour of $2.2 Crore are incomparable to any retailer in the world.
6. Wal-Mart has around 30,000 suppliers throughout the world and more than
600,000 SKU's on its web site, a number that cannot be compared.
7. Daily customers are about 1.57 Crore (almost equivalent to Mumbai's entire
population).
8. Time between each Barbie Sale at Wal-Mart is just two seconds (same rate at
which babies are produced in India!)
Overall, it can be said that “Retail Industry" in India will emerge as one of the best 5
Business sectors in this decade.
70
Retail Scenario In India: An Unlimited Opportunity
RECOMMENDATION & SUGGESTIONS
To make Indian retailing world class many challenges are to be overcome by the
industry. Some suggestions to improve the situation are offered below.
Establishment of Retailer co-operatives, which will maintain warehouses etc. to
work as a distribution centre for the member retailers can help Indian retailer attain a
respectable position in the relationship matrix mentioned above. The whole
organisation will run at a no-profit, no-loss basis. This would enable the retailers to
buy the products they want directly from the original manufacturers in huge quantity
This would make the application of the concepts of QR (Quick Response) and ECR
(Efficient Consumer Response) possible to a certain extent.. However, many inherent
difficulties may make the functioning or even establishment of such a co-operative
difficult. Nevertheless, these problems are inevitable and must be dealt with firmly.
Merger and buy-out of weak retailers by a stronger one, especially in metros and big
cities may be another step towards this direction. This would give the new retailer the
desired leverage to be world class.
Use of technology to the greatest extent possible may also help strengthening the
retailer’s position in the marketing channel. First step may be taken with setting up of
a network of independent firms believing in use of technology for business
excellence. Then a collection of strong retail organisations may pressurize the
suppliers and other channel members to use compatible technology. This may open
the door for implementation of QR or ECR or other relevant concepts for the retailers.
An overall change is to bring about in the mindset of the retailers. They will have to
think differently. They must find out and satisfy service outputs of the target
customers Unless there is a drastic change in the mindset of at least large and medium
retailers and as well as that of the manufacturers, the required change is not going to
71
Retail Scenario In India: An Unlimited Opportunity
come by easily. The retailers must learn and understand to lead the chain from the
front.
Setting up of more and more non-store retailing centers would also ensure a
strong retailing organisation. Non-store retailing makes implementation of modern
principles easier and less costly.
Setting up of franchisee organisation may also help in strengthening the position of
the retailers. The franchiser can exert a tremendous control over the way retailing is
done. Transnational service organisation like McDonald and KFC are being able to
offer a centralized control over purchase and operation. Large and medium sized
retailers may take up the concept of franchising to reach the market in a more
meaningful way. Though the management of franchisee network is difficult than
managing a retail chain in view of high level of investment and other obligations,
Indian retailers should spread out its wings its in this profitable and efficient way.
Financial Performance: Balance sheet for June 2006
Balance sheet as at June -06SOURCES OF FUNDS:Equity Share capitalReserves & surplusWarrant Application Money Shareholder’s FundDeferred Tax LiabilitySecured loansUnsecured loansTotal loans
26.88500.02-526.9027.92428.10173.29601.39
Total liabilities 1156.20APPLICATION OF FUNDSGross blockDepreciationNet blockCapital WIPNB + CWIPInvestmentCurrent AssetsInventories
366.0156.58309.4386.06395.49140.62
507.02
72
Retail Scenario In India: An Unlimited Opportunity
DebtorsCash & bank balanceLoans & advancesOther current assetsTotal current assetsCurrent LiabilitiesCreditorsOther current liabilitiesProvisionsTotal current liabilitiesNet Current AssetsMisc. Expenditure
17.0321.77338.561.09
885.47126.45106.4332.50265.38620.09
Total Assets 1156.20
73
Retail Scenario In India: An Unlimited Opportunity