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Is it over?
Arindam Das
P/MN/R/08/149
Retail Romance
P/MN/R/08/149
Introduction:
Indian retail industry was growing at rapid rate till mid 2008, companies with or without prior
experience and expertise in this business was joining the retail bandwagon. Retailers especially
organized retailers were opening new stores in each and every corner of big metro cities as well as in
smaller tier-II and tier-III cities. Industry experts were going gaga over the golden future that retail
industry will unfold.
But then financial slowdown and liquidity crunch started showing the ugly side of consumerism which
later resulted in recession and economic downturn. This tough economic climate revealed the basic
weaknesses of the Indian retail industry which were previously remained out of picture. Now thing are
looking very ugly with big retailers who were too busy opening new shops earlier now planning to cut
costs by closing a bulk of them just to stay afloat. So the question arises- ‘Is the honeymoon period of
retail in India over?’
Before finding out what actually the scenario is let’s see the growth of Indian retail industry and the
breakup among the players.
Indian retail industry started growing at a breakneck speed after liberalization policies improved the
growth rate of Indian economy. Indian economic growth paved the way for retail boom.
GDP (%)
10%
8%
6%
4%
2%
0%
1997
2000
1998
1999
2001
2002
2003
2004
2005
2006
2007
High private consumption, growing middle income group, large number of young professionals is some
of the causes that supported the retail growth. Following are the breakup of Indian consumption.
Retail Romance
P/MN/R/08/149
As we can see the projected growth of Indian retail industry is quite high. Following graph will represent
it in a better way-
600 486
500 445
373 408
400 342
300
200 200
100 87
26 39 59
0 12 18
2007 2008 2009 2010 2011 2012 2017
As we can see from the data that the percentage of organized retail which we are more concerned
about is very less compared to that of unorganized retail. Compared to the other countries the share of
organized retail is very low.
100%
3%
20% 20%
36% 30%
80% 40%
55%
60% 85% 81%
40%
20%
0%
US Taiwan Malaysia Thailand Brazil Indonesia Poland China India
So we can clearly see that there is immense opportunity in India retail space. Now the question arises
‘Why Indian retail industry struggling?’
Retail Romance
P/MN/R/08/149
Bottlenecks:
Indian organized retail industry has several structural problems that are affecting the performance of
the industry. Some of the most important problems are as follows-
Lack of proper infrastructure: Due to lack of infrastructure in the ground level the whole
process of supply and distribution is getting affected very badly.
Weak supply chain: Along with infrastructural problems the slow development of supply chain
system is another hurdle which is making the retailing business inefficient by making retail chains violate
the ‘promise of availability and convenience’ and results in customer loss.
High retail price: Due to the very rapid growth of the Indian economy real estate sector grew like
nothing else and real estate price surged sky-high. This high rentals and acquisition costs pushed the
limits of the retail players burdening them with higher costs without significant opportunities to recover
the cost since the location, though important are not the only factor driving retail sales.
Lack of diversity: Indian retail players started opening hundreds of similar type of shops without a
proper business plan targeting only the growing middle class and young professionals which during this
downturn hurting them a lot.
Conversion rate: Conversion rate of Indian retail sector is very low compared to that of the other
countries.
Political hindrances: Political parties concerned more with their vote bank and images are
creating roadblocks every now and then which are slowing the natural growth and evolution of the retail
industry.
In the following discussion we will try to understand what is working and what is just struggling and why.
Retail Romance
P/MN/R/08/149
Subhiksha, which runs the retail stores across India, is battling for survival. It has negotiated its
rentals in many cities but now it is planning to close more than half of its stores.
Reliance Retail has pulled out of cash and carry business because of the bleak outlook and they
don’t want to burn any more cash. Its Reliance Fresh is not doing that well.
RPG Group’s Spencer’s not doing very well. Spencer’s recently closed some of its stores to
streamline the operations and cut costs.
Aditya Birla Group’s More is also struggling.
On the other hand some retail stores are doing good business and also trying to expand their business
verticals. Such as-
Future Group’s Big Bazaar has bucked the trend though it is resorting to new ways to boost
sales. It is trying to rent expensive clothes for special occasions. It is also in talks with
Carrefour for a cash-and-carry set-up.
Some Indian business houses which are entering the retail segment are-
Tata group recently launched ‘Croma’, a retail chain consisting of electronic goods.
Mahindra and Mahindra launched their new retail venture with ‘Mom and Me’ names retails
stores.
Bharti Group will be launching their cash and carry format retail chain ‘BestPrice Modern
Wholesale’ in collaboration with US retail giant ‘Wal-Mart’.
So as we can see that the situation is not that bad. Small retailers are also doing good business. In
Kolkata these retail outlets and chains are doing well-
In other cities also some retail chains are also making decent profits.
Now the question that will surely arise is that why some retailers are doing well while others are finding
it very difficult. In the next section we will try to find some answers.
Retail Romance
P/MN/R/08/149
The report also suggests that controlling the costs will be a key area of
focus to offset margin compression from top line pressures, increasing
competition and promotional activity. As a result, retailers are likely to
focus on inventory management, supply chain efficiencies and labour
productivity. Retail chains such as Vishal Retail already started their
negotiation to reduce their rental costs by at least 25-50%.
Retail Romance
P/MN/R/08/149
Sources: