Retail sector in India

Industry Insight – Indian Retail Industry:

            The retail sector in India is witnessing a huge revamping exercise as traditional markets make way for new formats such as departmental stores, hypermarkets, supermarkets and specialty stores. Western-style malls have begun appearing in metros and second-rung cities alike introducing the Indian consumer to a shopping experience like never before. The Indian Retail Sector is at an inflection point, with changing demographics driving growth of organized retailing and driving growth in consumption.

With an expanding economy, the country’s overall retail sector will become a $450 billion (Rs 20.85 trillion) business by 2015. At present India’s modern retail business accounts for only about 5% of the country’s annual retail business.

            Along the way, the modern retail business will create about 1.6 million jobs in the next five years acc. to McKinsey.

            Modern retailers will not only create employment opportunities but also would help raise India’s overall economic productivity and could also result in lowering prices of goods.

            With changing demographic and economic profile of the Indian population, it is believed that India is expected to experience accelerated consumption over the next few years.

            Further, it is also believed that increase in consumer spending would be driven by nuclear families, increasing population of working women and new job opportunities in emerging service sectors such as IT Enabled Services. With declining interest rates an average Indian is not averse to taking loans. Not only are the demographic factors becoming more favorable but also the growing media penetration is leading to a convergence of aspirations of various classes of consumers.

            Food and beverages, apparel and consumer durable are the top three categories of consumer spend and form 87% of the total retail sales in India.

Growth in organized retail

            In sharp contrast to the global retail sector, retailing in India – though large in terms of size – is highly fragmented and unorganized. With close to 12 million retail outlets India has the largest retail density in the world.

            However, most of these retail outlets belong to the unorganized sector. The inability of the unorganized sector to offer a wide range of products along with artificially inflated costs due to various factors have presented opportunities for growth in the organized retail sector migration from unorganized to organized retail has been visible with economic development in most economies. The Indian retail industry is evolving in line with changing customer aspirations across product groups, with modern formats of retailing emerging. Organized retail derives its advantages in generating operational efficiency while simultaneously catering to rising consumer aspirations.

            Size drives economies on procurement, and lowers logistics and marketing costs while delivering better value to customers in terms of lower price, better quality, greater selection, improved service and in store ambiance.

            Drivers for retail transformation in India

            A number of factors that drive transformation in retail – such as income growth, changing demographic profiles and socio-economic environment – are already in place in India. However, organized retail has to overcome significant challenges in terms of regulations and infrastructural barriers in order to realize its full potential. Availability of quality retail space has been one of the main constraints for development of organized formats in India. In the past, negative yield spread on leased property and lack of bank funding due to unorganized property market resulted in a dearth of quality retail space in the country. The spread between yield on property and its financing cost has turned positive with the fall in interest rates. Attractive yields on investments have resulted in sharp increase in property development.

            Consumerism and brand proliferation has been another enabler for organized retailing in India. Most of the world’s leading brands are now present in India.

            Challenges for organized retail

There exist differential sales tax rates across states in India .This adds to cost and complexity of distribution as this necessitates multiple warehouses and does not allow for centralization of certain 16 procurement given the incidence of local levies. At the same time, there is large-scale sales tax evasion by smaller stores who derive significant cost advantage through such evasion.

            The retail sector has not been granted industry status, limiting funding from banks and financial institutions. The capital requirements for a retailer are in real estate (which banks have historically restricted lending to) and for working capital requirements. While some of the leading retailers are still able to get bank funding, the smaller ones are constrained for growth funding. Similarly, equity options are also restricted with Foreign Direct Investment not being permitted in the retail sector. FDI restrictions have also restricted entry of international majors in retailing in India, which could have

            Otherwise helped the industry develop with funding as well as bringing in the best practices and systems.

            The availability of trained manpower poses a key risk for the retail sector. With growing opportunities in the emerging service sectors such as ITES, the ability of the retail business to hire and retain quality people is under pressure.

            Supply chain management efficiency are essential to retailers to maintain and improve margins. In India, both vendor management and logistics management are still undeveloped. However, with growing size of operations, supply chain efficiency will become a key differentiation of profitability in retail.