I An Overview of Indian Retail Sector

The retail sector has helped in giving strong impetus to overall economic growth as a significant
driver of the growth of services sector, which contributes as mush as 54 per cent of GDP. It has
strong backward and forward linkages with other sectors like agriculture and industry through
stimulating demand for goods and through mass marketing, packaging, storage and transport.
Moreover, it creates considerable direct and indirect employment in the economy. Also, the
consumers have benefited in terms of wide range of products available in a market.

Size of the Modern Retail Sector

The emergence of new formats and the evolution of modern retail in India has attracted attention
in recent years. [The data sets published by different authorities are not strictly comparable as
they are based on surveys, but they give some idea of the trends and prospects.] The retail
sector, currently, is said to contribute 10 per cent of India’s GDP (Confederation of Indian
Industry), and is expected to grow at a robust rate of 36 per cent per annum by the end of 2008
(Associated Chambers of Commerce and Industry of India, ASSOCHAM). This growth would
expand the size of the market to over Rs 14,79,000 crore from its current level of Rs 5,88,000
crore. The Indian retail market is estimated at Rs 9,300 billion and is expected to grow at a
compounded rate of 30 per cent over the next five years (Retailers Association of India).
Moreover, the retail sector employs over 7 per cent (21 million) of the national workforce
(Aggarwal, 2000), the second only to agriculture. The retail density more than doubled between
1978 and 1996 and the number of outlets per 1000 people at an all India level, increased from 3.7
in 1978 to 5.6 in 1996. For the urban sector alone, the shop density increased from 4 per 1000
people in 1978 to 7.6 per 1000 people in 1996 (Venugopal, 2001). Because of their small size,
Indian retailers have very little bargaining power with manufacturers, unlike in the case of retailers
in developed countries, (Sarma , 2000).

Structure of Indian Retail Sector

The retail sector is classified broadly into two:

Organised Retail Sector and, Unorganised Retail Sector

The organised segment is mainly characterized by typically large number of retailers, greater
enforcement of taxation mechanisms and better labour law monitoring systems. It is not just a
stocking and selling, but is more about efficient supply chain management, developing vender
relationships, quality customer service, efficient merchandising and timely promotional
campaigns. It, however, constitutes a very little share of at around 3 per cent (Rs 300 billion) of
the total retail market. (In China 20 per cent of the retail is organized and in the ASEAN countries
it is more than 40 per cent - Ministry for Commerce & Industry, February 2005) According to the
Retailers Association of India, the share of organised sector to the overall retailing market in India
is expected to grow from 3 per cent to 20 per cent in the next 10 years. The KSA Technopak’s
estimate is that by 2005, the organised retail sector would be employing in excess of 2,50, 000
individuals directly and perhaps 8-10 times as many indirectly in the supply chain.

The organised retailing has been successful in metropolitan cities so far, more so in the south and
west India . It is expected that the tier II cities would take another 5 years to absorb modern
retailing opportunities. Moreover, the case for Indian retailers to explore rural markets is also
strong due to the size of rural population and agricultural income growth in last couple of years. A
clear indicator of this potential is the share of rural market across most categories of consumption
(Table 1 as shown below)

The unorganised sector, on the other hand, which represents 97 per cent of the total retail market
is mainly characterised by typically small retailers, more prone to tax evasion and lack of labour
law supervision. India is one of the largest unorganised retail markets in the world and more than
96 per cent of the retailers work in less than 500 sq ft of area.

Components of Retail Sector

The major components of the retail sector are:

Food and Grocery, Fast Moving Consumer Goods (FMCGs), Consumer Durables, Apparel,
Footwear and leather, Watches, Jewellery, and Health and Beauty

The anatomy of the retail market has shown that the clothing and textiles constitutes 39 per cent
of the organised retail pie, followed by food and grocery, which accounts for 11 percent of the total
retail market.
However, according to the survey conducted by KPMG for Federation of Indian Chamber of
Commerce and Industry (FICCI), among these, the food and grocery is expected to witness the
fastest growth followed by clothing as the second-fastest growing segment.

Key Players in the Retail Sector

The main players in the sector are classified as big corporate houses, dedicated brand outlets
and multi-brand outlets. Some of the market leaders are:

Corporate Houses: Tatas (Tata Trent), RPG Group (Food World, Health & Glow), ITC (Life Style),
Rahejas (Shoppers’ Stop), Hiranandani (Haike)

Dedicated Brand Outlets: Arrow, Nike, Reebok, Zodiac, Louis Phillip etc.

Multi Brand Outlets: Vijay Sales, Apana Bazar, Viveks etc.

Manufacturers/ Exporters: Pantaloons, Bata, Weekender etc.

Among these, the formats like supermarkets (eg. Food Bazaars) have the highest potential for
growth in India followed by hypermarkets (eg. Big Bazaar, Spencer’s).

Rural-Urban Share in Retail Sector

A distinctive feature of organised retailing in India is that it is largely an urban phenomenon.
Organised retail has been more successful in metros and cities, more so in the south and west of
India . The reasons for this regional variation range from differences in consumer buying
behaviour to cost of real estate and taxation laws. Nonetheless, the case for Indian retailers to
explore rural markets is strong. Factoring the size of the rural population and agricultural income
growth in rural India , the rural market is certainly an opportunity for retailers with an innovative
retail proposition. A clear indicator of this potential is the current share of rural market across
major categories of consumption.

Table 1: Share in Retail Market:

Urban vs. Rural (per cent)
Segment Rural Urban
Food 64 36
Clothing and Footwear 61 39
Misc Consumer Goods 57 43
Consumer Durables 50 50
Consumer Services 44 56
Entertainment 33 67
Source: NSSO and KPMG Analysis

III Growth and Future Prospects

With the economy growing at a robust rate at near 8 per cent, the retail sector has also been
witnessing notable growth due to an unprecedented consumption boom. The multiple factors
driving this boom are:

First, favourable demography with roughly 60 per cent of the total population below 30 years of
age group.

Higher disposible incomes of young middle class consumers due to employment in IT,
management and increasing number of working women,

Change in consumption pattern with high aspiration levels. The AC Nielsen Online Omnibus
Survey 2005 has rated India in the highest category of Aspiration Index (especially in consumer
durables segment) in Asia along with China , Indonesia and Thailand .
Easier consumer credit with low interest rates and,

Aggressive marketing by companies

A notable growth in the retail sector is characterised by the performance of various retail
segments:

Growth in Major Retail Segments

Apparel Industry

The robust performance of an apparel industry has been largely an outcome of a buoyant growth
of the textile industry. The Indian textile industry has increasingly benefited since the post-quota
regime [The multi-fibre arrangement (MFA), which governed global trade in textiles and clothing
since 1974, came to an end in December 2004)] in terms of higher textiles export, especially due
to the demand from UK and US retailers. Though, according to Directorate General of
Commercial Intelligence and Statistics (DGCIS), the textiles and apparel exports have
decelerated in 2005, according to the import data from US and UK , the exports have grown by
15 per cent in 2005 to about US $ 15 billion. Nevertheless, currently the overall apparel market is
worth Rs 88,000 crore and though the share of branded segment may be limited, is growing at a
healthy 25 per cent. Moreover, in the home textile market, India currently exports about Rs
21,000 crore of home textile products to the US alone and the share of domestic market is about
one third of it.

(ii) Food and Grocery

The food industry is the second largest growing industry after the clothing segment. According to
the FICCI study, the size of the food and beverages industry is Rs 3,58,000 crore and it is
expected to grow between 8 to 8.5 per cent in value terms during 2005-06. The highest growth is
expected in the semi-processed or readymade food segment, which is estimated, to grow by 22
per cent. Other segments, which are expected to expand rapidly, are fruit juices, pulp and
concentrates (18 per cent), followed by sauces (17 per cent) and branded milk products (15 per
cent). The FICCI has urged the government to have pro-active approach for helping the industry
to achieve the lower cost, quality improvement and better performance in the competitive
environment.
(iii) FMCG (Fast Moving Consumer Goods)

In the last couple of years, the FMCG segment has grown at a rapid pace, especially due to
increasing number of big FMCG outlets like Big Bazaar. According to the AC Nielsen India study,
the Rs 48,000 crore FMCG industry grew by 5.3 per cent in value terms in 2005 over the previous
year. A rise in food and personal care categories is fuelling this growth in value terms, with
biscuits growing at 13.8 per cent, shampoos by 17.5 per cent as against 9.8 per cent and 8.6 per
cent, respectively, registered in 2004. Interestingly, the FMCG growth (in value terms) in rural
markets has far outpaced the sector’s growth in urban markets during April-December 2005. The
products, which have shown significant growth in rural markets, are toothpaste, hair oils and
shampoos. Shampoo sales, for eg., in rural areas have gone up by 30.8 per cent as compared to
just 11 per cent in urban areas. The reasons attributed to such buoyant growth in rural markets
are highly saturated urban markets (tier I and II cities), successive good monsoons and a
resultant growth in farm income coupled with increasing awareness towards better lifestyle in
rural areas.

(Please note that the data for ‘food and grocery’ and FMCG market are not comparable due to
the overlapping nature of these industries and different sources mentioned)

(iv) Consumer Durables

The size of the Indian consumer goods industry is at around Rs 20,000 crore. After three years of
buoyant performance, the consumer durables industry has shown a moderate growth (in terms of
production) of 13.6 per cent during the period April-January 2006 as compared to 14.8 per cent
over the corresponding period in the previous year (Ministry of Statistics and Programme
Implementation). According to the study by Investment and Credit Rating Agency (ICRA), based
on recent trends, the Indian colour television (CTV) market is estimated to increase from 8.3
million number of units during 2003-04 to 10.1 million during 2005-06. Similarly, the refrigerator
and washing machine markets are also expected to increase by 13.5 per cent and 14.2 per cent,
respectively, in the same period.

Investment in Indian Retail Sector

According to the KSA Technopak Retail Summit 2005, investment in the Indian retail sector is
estimated at Rs 2000 crore to Rs 2,500 crore in the next two to three years and over Rs 20,000
crore by the end of 2010. Large Indian corporate houses like Tata, Reliance, Raheja, ITC,
Bombay Dyeing, Murugappa Group and Piramal Group have continued to show interest in huge
investments in organised retailing. The buying volumes for many of these players are in the range
of Rs 1000 to Rs 2000 crore per year with the plans to increase it to Rs 10,000 to Rs 15,000
crore within the next three four years. Similarly, foreign investors and private equity players are
also firming up plans to identify investment opportunities in the Indian retail sector.

The medium to long-term prospects for the Indian retail industry appears positive. The growth
prospects for individual items, would, however, depend on specific demand drivers.

IV Key-Challenges in Indian Retail Market

Given the robust growth observed in various retail segments, the current scenario of the Indian
retail sector is certainly bright and promising. However, there are number of issues which need
attention:

1. Foreign Direct Investment (FDI)

The most vital ongoing policy issue in the retail sector is one of the foreign direct investment
(FDI). Prior to 1997, there were no regulations restricting the entry of foreign players. The two
major companies, namely Nanz and Spencers were granted permission to sell products directly
to customers. In 1997, it was decided that FDI would not be allowed for mere trading as it would
lead to the outflow of foreign exchange, drive out the unorganised retailers from business and
increase unemployment. Recently, the government has notified the guidelines for FDI in single
brand by stating that 51 per cent FDI would be allowed only in those single brand products that
are branded during manufacturing and sold under the same brand internationally. (At present the
brands are available through a network of local franchisees.) This rules out third-party sourcing of
the kind that, say, Bata does in the case of shoes. The rationale behind this move is generating
greater employment and encouraging multinationals to set up manufacturing bases in India .

This move by the government has raised number of dubious issues like adverse impact on small
shops (kirana stores) in terms of possible loss of jobs in unorganised retail sector and lack of
business coupled with reduced requirement of middlemen. According to FDI proponents, some of
the major benefits of opening up the retail sector are:
Employment generation,

Competitive environment resulting in price and quality advantage to consumers,

Expansion of manufacturing base and foreign investment,

Reward to farmers if direct purchase of produce from farmers and,

Better standard of living to meet rising aspiration levels of middle and higher-middle income class.

Given these, the FDI in retail sector, is expected to benefit the economy considerably. The
apprehensions raised by some of the industry experts regarding the job displacement is expected
to be compensated by creation of jobs by allied sectors such as food-processing industries and
there is no harm in jobs moving from one sub-segment to another sub-segment. It is said that the
retail industry has the potential to create 8 million jobs. Moreover, as far as the small shops are
concerned, the advantage of convenience that they hold over the far-located big malls will always
remain. Similarly, personal relations with the small shop owners had been found to be
advantageous over the period of time. What is more, comparing internationally, almost all major
developed and developing countries have allowed FDI, whether with restrictions such as
minimum capital requirements, sourcing conditions etc or with FDI in a phased manner. For e.g.
China has opened retail sector partially in 1992 and allowed 100 per cent FDI only in 2004. Thus,
for a decade, it allowed only one foreign outlet per province. It seems that the government of
India too, can also open the retail sector in a phased manner. Instead of over-protecting ‘mom-
and-pop’ stores (which are fewer than both producers and consumers), especially when they are
not at risk in terms of survival, the government may continue with allowing FDI in a phased
manner.

2. Unbalanced Growth

Most of the modern retail opportunities are in the urban areas and the rural retail potential has
remained untapped. While there is a large potential in rural areas, fragmentation and cost of
market access are real deterrents. No doubt that rural retailing is gradually gaining grounds with
the explorations by the corporates like ITC’s Choupal Sagar (rural hypermarket), HLL’s Shakthi
and Mahamaza. However, the pace at which the retail sector has been expanding in rural areas
should have been much more faster. The higher purchasing power in rural and semi-urban areas
has significantly modified peoples’ lifestyle; for e.g. the sachet phenomenon is a thought to reach
to the bottom of the pyramid. Lot of people in rural India are just not willing to buy a whole bottle
of shampoo, but that doesn’t mean they won’t buy it. Thus, the key is in slicing the relevant
customer segments and developing appropriate formats. If the specific needs of consumers are
recognised, there would be a considerable market expansion, which would divert a part of retail
business to rural areas and help in reducing rural-urban imbalance.

Real Estate: Availability and High Costs

The most crucial infrastructural problem of modern retail development is the availability of quality
retail space in India . The preferred form of retail real estate acquisition is through long-term
leases in India . Few retailers prefer a mix of owned and leased real estate space and some own
it. A pressing issue today is the cost of commercial property, especially in the urban and semi-
urban areas, which is expected to increase due to the rapidly rising demand.

Currently, the total retail mall space, as shown in the chart above, is 22 million sq.ft. and is
expected to be at around 90 million sq. ft. by the end of 2007, a huge increase of 309 per cent.
The projected share of the mall space across the four Indian zones is shown in the chart below:
Finance Related Issues

According to the findings of FICCI, it is relatively easy to raise finance for retail business in India
as compared to other countries, provided the business case is sound. The analysis of retailers
indicated that debt contributes to between 15 to 40 per cent of the sources of funds for retailers in
India , equity financing is the most preferred mode followed by self-ownership. However, it is
generally a very time-consuming and complicated process. Moreover, according to KPMG Retail
Survey (2005), the cost of retail capital is also quite competitive in India . Therefore, easy and
quick availability of finance at competitive rates is a key enabler for growth in retail. Retail space
availability and costs are the issues to which probably the only answer is the diversification of
retail business across the country in stead of concentrating on already saturated markets.

The Retail Supply Chain: The Weak Link

The key imperative facing retailers in India is a robust and scalable supply chain. One of the
measures of efficient operations is the inventory turns ratio. The inventory turnover is a ratio that
shows the number of times the inventory of a firm is sold and replaced over a specific period. The
US retail sector has an average inventory ratio of about 18. Similarly, the best global retailer like
the ‘7-Eleven’ has over 50 turns of inventory. Most Indian retailers KPMG surveyed have
inventory turns levels between 4 and 10. Another indicator of an efficient supply management is
the stock availability on the retail shelves. The global best retailers achieve more than 95 per cent
availability of all products on the retail shelves translating into a stock out of level of less than 5
per cent. The stock out of levels among Indian retailers surveyed ranged between 5 to 15 per
cent. Thus, looking at the inventory turns and stock availability status, retailers in India clearly
need to augment their operations.

Apart from these indicators, there is fragmentation of supply chain due to sales tax laws, which
lead retailers to prefer state level procurement and storage rather a national warehousing
strategy. In some cases, such decentralized strategy leads to excess holding of inventories.
Nevertheless, post full implementation of value added tax (VAT) and removal of central sales tax
(CST), is expected to streamline the supply chain.

Moreover, not many retailers in India have long-term purchase agreements with suppliers. From
time to time, orders are placed to leverage the various trade schemes that manufacturers come
up with. This leads to retailers taking larger inventories at the time of good trade promotion
schemes, whereas a giant successful retailers tie up with manufacturers to develop ‘Every Day
Low Price’ strategies where prices and discounts are kept uniform throughout the year. Retailers
in India also face constraints due to regulations like APMC (Agricultural Produce Market
Committee) Act, which prohibits transactions outside the ‘mandi’ system and prevent large
volume, direct purchases of fresh produce from farmers. Nevertheless, the model Act, named as
State Agricultural Produce Marketing (Development and Regulation) Act 2003, sought to amend
the APMC Act redefines the role of present APMC to promote alternative marketing system,
contract farming and direct dealings with farmers.

Lack of Integrated Management

Operations of retailers and suppliers are not integrated in India . Most of the Indian retailers still
have manual information exchange with their suppliers. In developed countries, retailers practice
‘Vender Managed Inventory’ (VMI) systems, where the supplier has access to the point of sales
data of the retailer and plans automatic replenishments responding to the stocks availability at the
retailer. For e.g. The Tesco which has implemented the technique called ‘milk-runs’. Interestingly,
if such efficient systems are being implemented in auto and auto component industry in India ,
why not in retail? The retailers can leverage such expertise available to implement efficient
supply chain management techniques.

Supplier maturity in terms of adherence to delivery schedules and delivering the quantity ordered
is an issue in India . In this context, some of the multinational retailers like McDonalds, operating
in India , had spent significant time and efforts to augment the capability of local suppliers.

Dearth of Skilled Manpower

Retailing is a highly labour-intensive sector. As mentioned above, India employs 7 per cent of the
workforce in retail as compared to 10 to 11 per cent of the workforce employed in the developed
economies. According to the survey conducted by FICCI and KPMG, there is a paucity trained
personnel suitable for retail sector, both at store as well as managerial level. Given the working
population of 337 million (NSSO 55th round, 1999-00 on current daily status), there should be no
manpower shortfall in India . However, the gap lies in finding people with the right skill-sets like,
customer orientation and selling which are critical. According to the study by Images Retail (a
magazine on Indian retail industry), this gap in the managerial cadre is narrower since managers
from industries like FMCG are able to learn and adapt to the demands in the industry quickly.
Therefore, proactive training is a key imperative for store level employees. Some of the retailers
like RPG and ITC have taken steps in this direction by starting formal retail management training
facilities in some cities.

Summing up

Given the developments and prospects, the Indian retail sector is in its nascent stage of
evolution. While there are obstacles, there are clear opportunities in modern retailing in India .
There are many lessons that India can take from other countries, which have moved along the
path of retail evolution. The retail sector has proved to be of immense significant from macro-
economic point of view. The sector’s capability to give strong growth momentum by creating
multiplier effects on other sectors is not in dispute. It is now necessary to cautiously expand and
develop the sector, as the government, at present, has done by permitting partial FDI in the
sector. Given the scope, the retail sector is certainly expected to fetch the long-term economic
benefits for the country.

Effects of retail boom:

As we have seen earlier in the report, the retail boom has some specific implications on
various aspects of the country. This aspects can be negative as well as positive. The retail
sector as a whole has made tremendous changes in the country which shows the effects of
it on functions such as consumers, other retailers, government, farmers as well as the
economy as a whole.
Thus the following are the effects of the retail boom on these
various aspects of the country:

 Consumers:

The consumer is the function that is most affected by the retail boom. Consumers include
all the major classes such as upper, middle and lower class. Also they include various
genders, age groups, races and people having different perceptions.

o Positive effects:

The retail boom has brought in a vast change in consumer behaviour. The entrance of
organized retail has given the consumers more number of options to choose from and
hence they can be more satisfied with there purchases.

Also more number of competitors in the industry has increased the bargaining power of
the consumers. Thus the consumers are able to purchase at a comparatively low price.

The organized retail has given the opportunity to the consumers to buy several products
under a single roof. Thus major cost and time of the consumers is saved which enhances
there satisfaction.

Even the lower end consumers get a chance to purchase high quality goods at
comparatively lower costs which otherwise is not available.

Due to high competition, the consumers get various discounts as well as offers.

The organized retail provides the consumers with better services which otherwise was not
possible.

o Negative effects:

Due to various options available to the consumers, they keep on shifting from one
service provider to another. This shows a decrease or negative effect on consumer
loyalty.

Due to organized retail getting a foot-hold in the market, the consumers can be exploited
if the forerunners get a glimpse of monopoly setting in.

 Small retailers:
The small retailers form the second major group which is affected by the retail boom.
There are various reasons for this which are explained below:

o Positive effects:

Small retailers get a chance to understand various complexities of retailing. Thus they
have to compete with major players.

Small retailers can exploit the vast industry by becoming organized themselves. Thus
they can form unions or groups to compete with the organized sector.

The retail boom has brought in various new products to the market including newer and
better technologies which was otherwise not available. Hence they have the opportunity
to adopt these technologies in their business.

Young entrepreneurs are now attracted towards retail sector as a whole due to its boom.
Thus they start up with small retail shops that are modern in nature and fully equipped to
compete with major players. Thus the small retail sector also gets a boost.

o Negative effects:

The threat posed by new entrants in the form of organized retailers is a big concern for
the small retailers. Hence the competition has increased.

Due to various new competitors and services being made available to the consumers by
the organized retailers, the customer base for the unorganized retailers has decreased.

Other major negative effect of the entrance of organized sector is that it has forced some
of the smallers players to shut down their business due to increasing competition.

The small retailers are not able to provide the high quality at competitive cost which is
done in the organized sector.

The expectations of the consumers from the small retailers (lorries, kirana stores) has
increased which poses negatively to the retailers.

Government:
Government is the body that decides on the rules and regulations in any particular
industry. Thus the government has to control the working of the economy, standard of
living, various industries and there working cycles etc. and to control these aspects, the
government needs to impose policies and laws. Thus the boom in the retail sector has
made the government think on various aspects and redefine and re-evaluate the rules and
regulations.

o Positive Effects:

The retail boom requires the government to increase its expenditure on the infrastructure.
This has been the major concern for the government as well as the industry itself. Thus
the economy has seen drastic changes in the infrastructure.

The government has to enact laws that reduce the tax evasions to increase the attraction
for new entrances. Thus the new laws will enable new entrepreneurs to indulge in
retailing.

The retail sector has brought in more income to the entrepreneurs. This shows in the
increased tax paying population in the economy which increases the government income.
This income in turn can be utilized to finance retail as well as other sectors.

The government has to keep better control over law and order due to opening of new 24
hr retail shops. Also the government needs to safeguard the interest of the retailers as a
whole.

o Negative effects:

The retail sector has shown a boom in recent years. This has increased government
expenditure towards this sector to maintain stable growth. Hence some of the other
sectors that actually require major capital investments are overlooked.

The government has played a major role in the retail boom by supporting the small
retailers. This has shown a negative effect in states where in the organized retail has been
banned.

The major concern for the government is consumer interest. Thus the government has to
enact laws which favour consumers more. This proves to be an hindrance in the
expansion process.

Since the government has liberalized the policies for foreign entrance in this sector, these
foreign majors might drain money out of the economy, which is a negative concern for
the government.

 Economy:
The retail boom has the biggest effect on the economy as a whole. Since the above factors
together contribute to the economy, the economy is affected in a larger sense.
Thus the retail boom’s effect on the economy can be summarized as follows:

o Positive effects:

Due to high growth in the retail sector, the GDP of the economy has risen. Thus there is
an increase in investments through stocks and savings.

The retail boom has attracted foreign direct as well as portfolio investments. Thus the
economy has more foreign exchange to support other transactions.

Employment opportunities in the economy has increased manifold. Thus the overall
productivity of the economy has increased which shows a better standard of living for the
population at large.

Due to increase in infrastructure, other sectors get a boost and thus economy as a whole
prospers.

The boom has brought in newer and better technologies in the country which helps the
economy to develop such better technologies in the long run. Also the economy is able to
compete with other developed countries.

o Negative effects:

The retail boom has in functionality no real negative effects in the economy as a whole.
This means that individual functions of the economy are affected but not the economy as
a whole in negative terms.