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.
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