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The organised retail sector in India has been witnessing various issues and challenges which are proving to be a hurdle for its fastpaced growth.
Even though the organised retail sector is in a very nascent stage in India, it provides ample opportunities for retailers, and mitigation of a few
challengeswillhelpthesectorattainhighereconomiesofscaleandgrowth.Elucidatedbelowarethechallengesandrisksthatthesectorfaces:
Globaleconomicslowdown
Competitionfromtheunorganisedsector
Retailsectorhasnorecognitionasanindustry
Highrealestatecosts
Lackofbasicinfrastructure
Supplychaininefficiencies
Challengeswithrespecttohumanresources
MarginPressure
Globaleconomicslowdownimpactingconsumerdemand
ThecurrentcontractioninoverallgrowthhasnotbeensosevereeversincetheonewitnessedduringWorldWarII.Thesubprimetriggeredcrisisin
the US during end of 2007 gradually spread across other parts of the world as a the fallout of this crisis, credit availability dropped sharply in
advancedeconomiesandtheirGDPgrowthcontractedincessantlyduringthelastquarterof2008.Thefinancialcrisiscontinuedtotroubleadvanced
anddevelopingeconomiesinspiteofpolicymakersattemptstoreplenishliquidityinthesemarkets.Manyfinancialinstitutionscollapsedandfiledfor
bankruptcy,asthesituationgotfrombadtoworse.Manybanks/institutionsmademassivewritedownsfollowingthisturnofevents.During200710,
thewritedownsonglobalexposuresareexpectedtobeworthUS$4trillionwhilethewritedownsontheUSoriginatedassetsalonearelikelytobe
worth US$ 2.7 trillion11. Such massive writedown will affect the financial system to a grave extent, as it is likely to further strain banks funding
capabilities.Alreadythesewritedownsareturningintoamajorchallengeforbanks/financialinstitutionsbecauseofsolvencyissues,anddeepening
riskoffailureofbanks/financialinstitutions.FailureoftheUSinvestmentbankLehmanBrothers,forinstance,hashadanenormousimpactonthe
overallglobalfinancialsystem,andhasconsequentlyshakentheconfidenceofbanks,investors,householdsetc.
According to IMFs World Economic Outlook (Apr 2009), the global GDP contracted by 1.8% in the first quarter of 2009 as compared with the 4.5%
growth recorded during the same period in the previous year. Likewise, the advanced economies witnessed contraction in GDP growth (by 1.7%)
duringthelastquarterof2008whiletheUS,EuroareaandJapanwitnessedarecessionarytrend12.AccordingtoIMFestimates,theworldGDPwill
continue to contract by 2.4% during the third quarter of 2009. Going ahead, policymakers face a daunting task as they need to put back things as
earlyaspossibleaccordingtoIMFsWorldEconomicOutlook(Apr2009),theworldeconomyisexpectedtorecovergraduallyonlyin2010by1.9%,
bycorroboratingdemand,withappropriatemonetaryandfiscalmeasures.
The financial crisis and global economic slowdown resulted in job losses around the world, which weakened consumer demand. The unemployment
rateremainedhighintheUSduringfirstquarterof2009,EuropeandemergingeconomieslikeBrazilforinstance,theannualunemploymentratein
theUSreached5.8%in2008from4.6%in2007,whichfurtherwentupto9.4%inMay2009.Infuture,therisingunemploymentratesinadvanced
economies as well as economies that are heavily exportoriented will further dampen consumer spending as a result, the retail sectors growth will
remainunderthreat.IntheUS,theretailtradesalesgrowth(bothretailandfoodservices)contractedby0.7%in2008from3.3%growthin2007.
Thedownwardtrendinretailtradesalescontinuedduringthefirstsixmonthsof2009(JanJune),asitwentdownby9.3%13ascomparedwiththe
previousyear.InEU27countries,thetotalretailtradeinvolumetermscontinuedtocontractduringthefirstfivemonthsof2009forinstance,during
May2009,theretailtradeinvolumetermsinEU27contractedby3.1%againstthesameperiodinthepreviousyear.

Consumptiondeclinesintheadvancedeconomies
Privateconsumptionexpenditureisanimportantindicatorofoveralleconomicgrowth.Inthelastcoupleofquarters,thedeclineinconsumptionhas
furtheraffectedtheglobaleconomicdownturn.Moreover,widespreadfinancialcrisisseverelyhitcreditavailabilityandhouseholddisposableincome.
Forinstance,UShouseholdslost20%(US$13trillion)14oftheirnetworthasapercentageofdisposableincomefromthesecondquarterof2007to
the fourth quarter of 2008. The stock prices across the world started falling during the second quarter of 2007 and continued its losses throughout
2008theglobalstockmarketslostbetween4060%indollartermsthattranslatedtoahugelossofglobalwealthin2008.Thepersonaldisposable
income(atcurrentprices)intheUSregisterednegativegrowth(3.9%and2.1%)duringthelasttwoquartersof2008,respectively.Theconsumer
demandsituationwasaggravatedfurtherbyreducedcapitalavailabilityandconsequentfallininvestments.
As mentioned earlier in the section, the financial crisis triggered massive layoffs globally, which pushed up the unemployment rates. Further,
uncertain future market conditions raised precautionary household savings that curtailed investments and consumer demand. The investment
activitiesin27highincomecountriesoutof30countriesfellby4.4%(ata16.5%annualisedrate)duringthefourthquarterof200815.Ontheother
hand,inanuncertainsituationlikethis,thehouseholdsavingswouldgoupasaprecautionarymeasurewiththeglobaleconomytryinghardtorebuild
inthecomingmonths.Forinstancethehouseholdsavingsrate(notseasonallyadjusted)inEU27jumpedto12.5%duringQ42008from8.6%inQ1
2008,whileinvestmentsdippedto9.0%from9.9%duringthesameperiod.

ThepersonalconsumptionexpenditureintheUSregisteredmerely0.2%yoygrowthin2008,downfrom2.8%growthin2007.Further,thepersonal
consumptionexpendituregrowthturnednegativeduringthesecondhalfof2008andfirstquarterof2009.Thepersonalconsumptionexpenditurein
the US contributes over 70% of its GDP at constant prices. The severity of the current recession (slowdown) can also further be measured from
previousrecessionsin1975,1982and199116.Forexample,theaveragepercapitaconsumptioninthepreviousthreerecessions(1975,1982and
1991)grewby0.28%,whilein2009,itisestimatedthatthepercapitaconsumptionwillcontractby1.1%ascomparedwiththepreviousyear.India
isnotentirelyinsulatedfromthisweakeningdemand.Forexample,duringthefirsthalf(H1)ofFY09,PFCE(atconstantprices)grewby3.3%,which
was less than half (7.9%) of that witnessed in the corresponding period of previous year. During the second half (H2 FY09), the trend continued as
PFCE further slowed down to 2.5% as compared with 9.0% in the corresponding period in the previous year. An interesting observation on the
economic slowdown and its effects on consumption in India can be made from the volume of credit card transactions growth, which declined from
34.6%inFY08to13.7%inFY09.
Competitionfromtheunorganisedsector
Organised retailers face immense competition from the unorganised retailers or kirana stores (momandpop stores) that generally cater to the
customers within their neighbourhood. The unorganised retail sector constitutes over 94% of Indias total retail sector and thus, poses a serious
hurdle for organised retailers. If put numerically, the organised retailers are facing stiff competition from over 13 million kirana stores that offer
personalised services such as direct credit to customers, free home delivery services, apart from the loyalty benefits. During the current economic
slowdown,thetraditionalkiranastoresadoptedvariousmeasurestoretaintheircustomers,whichdirectlyaffectedorganisedretailers.Generally,it
hasbeenobservedthatcustomersshopimpulsivelyandendupspendingmorethanwhattheyneedatorganisedretailoutletshowever,inkirana
stores,theysticktotheirneedsbecauseofthelimitedvariety.Duringadownturn,manycustomersmaynotliketospendmoreasisevidentfromthe
pastfewmonthstrendthatshoppersareincreasinglyswitchingfromorganisedretailstorestokiranas.
Retailsectoryettoberecognisedasanindustry
The retail sector is not recognised as an industry by the government even though it is the secondlargest employer after agriculture. Lack of
recognitionasanindustryaffectstheretailsectorinthefollowingways:
Duetothelackofestablishedlendingnormsandconsequentdelayinfinancingactivity,theexistingandnewplayershavelesseraccessto
credit,whichaffectstheirgrowthandexpansionplans
Theabsenceofasinglenodalagencyleadstochaos,asretailershavetoobligetomultipleauthoritiestogetclearancesandforregular
operations
Highrealestatecosts
Eventhoughtherealestatepriceshavesubsidedrecentlyduetotheslowdownineconomiesandthefinancialcrises,thesepricesareexpectedtogo
upagaininthenearfuture.Presentlythesectorfaceshighstampduties,protenancyacts,therigidUrbanLandCeilingActandtheRentControlAct
andtimeconsuminglegalprocesses,whichcausesdelaysinopeningstores.
Earlier on the lease or rents on properties were very high (among the highest in the world) at some prominent locations in major cities. The
profitabilityofretailcompanieswereaffectedseverelybecauserealestatecostsconstitutedamajorpartoftheiroperatingexpenses.Nowcompanies
are moving out from prominent malls of tier I cities and are renegotiating the rental agreements with landlords to reduce costs. Some are even
focussingonsettingupshopsintierIIandtierIIIcities.
Lackofbasicinfrastructure
Poor roads and lack of cold chain infrastructure hampers the development of food retail in India. The existing players have to invest substantial
amountsofmoneyandtimeinbuildingacoldchainnetwork.
Supplychaininefficiencies
Supplychainneedstobeefficientlymanagedbecauseithasadirectimpactonthecompanysbottomlines.PresentlytheIndianorganisedretailhas
an efficient supply chain but it appears efficient only when compared with the unorganised sector. On an international level the Indian organised
retailersfallshortofinternationalretailerslikeWalMartandCarrefourintermsofefficienciesinsupplychain.Inthefollowingparagraphssomekey
challengesthattheretailersfaceduringprocuringgoodsfromsupplierstodeliveringthesametoendcustomersarediscussed.
Inventorymanagementisthefirstchallengethatretailersfaceatthelocalstorelevelaswellasatthewarehouselevel.Excessinventoryoftenleads
to an increase in inventory costs, and then to lower profits, so retailers like Pantaloons and Shoppers Stop have IT systems in place for inventory
management. SCMIT has helped retailers to plan their stock outs, replenish their stock on time, move stock from warehouse to stores, maintain
adequatestockatastoretomatchconsumerpreferencesetc.However,theretailermaystillfaceabigchallengeintermsofefficientlyimplementing
the supplychain software across stores and integrating it with the central warehouse, which can be a timeconsuming process, requiring trained
personnel.
Logisticsisanotherchallengerelatedtothesupplychain.Itisimperativeforanyorganisedfoodandgroceryretailertoestablisharobustcoldchain.
Amulisthebestexampleofthisscenario,asithasdevelopedacoldstoragechainacrossIndia.UntilandunlessorganisedretailerslikeRelianceand
FoodBazaarfullydevelopintegratedcoldchains,theywouldcontinuetoincurlossofconsiderableamountofmoneythroughwastagesofperishable
itemswhilemovinghugequantitiesfromoneplacetoanother.
The third challenge related to the supply chain is procurement. Big organised retailers enjoy economies of scale based on their size and expansion
plans.Theeconomicalbenefitsofscaleinprocurementareachievedwhenprocurementismadeinthousandsormillionsofunitshowever,themain
challenge here is to procure adequate amount of stock according to customer requirements, failing which the resultant rise in inventory can affect
bottomlines.
Challengeswithrespecttohumanresources
TheIndianorganisedretailplayersshelloutmorethan7%ofsalestowardspersonnelcosts.ThehighHRcostsareessentiallythecostsincurredon
trainingemployeesasthereisaseverescarcityforskilledlabourinIndia.Theretailindustryfacesattritionratesashighas50%,whichishighwhen
comparedtoothersectorsalso.Changesincareerpath,employeebenefitsofferedbycompetitorsofsimilarindustries,flexibleandbetterworking
hoursandconditionscontributetothehighattrition.

Shrinkage
Retailshrinkageisthedifferencebetweenthebookvalueofstockandtheactualstockortheunaccountedlossofretailgoods.Theselossesinclude
theft by employees, administrative errors, shoplifting by customers or vendor fraud. According to industry estimates, nearly 34% of the Indian
chains turnover is lost on account of shrinkage. The organised industry players have invested IT, CCTV and antennas to overcome the problem of
shrinkage.
11IMFGlobalFinancialStabilityReport2009
12IMFWorldEconomicOutlookApr2009
13BureauofEconomicAnalysis
14BISAnnualReport2009

15GlobalDevelopmentFinance2009

16AsperIMFWorldEconomicOutlookApr2009edition