RETAIL MARKET OPPORTUNITIES AND FRANCHISING

By :Sudhanshu Gupta (34-MBA-10) Suraj Gandotra (35-MBA-10)

RETAIL
Retailing is the interface between the producer and the individual consumer buying for personal consumption. A retailer is one who stocks the producers goods and is involved in the act of selling it to the individual consumer , at a margin of profit.

As such retailing is the last link connecting individual consumer with the manufacturing and distributing chain.

RETAIL INDUSTRY INDIAN SCENARIO

Retail industry in India is hailed as one of the sunrise sectors in the economy

Kearney , well known consultant identified India as the second most attractive retail destination globally from among 30 emerging markets.

With contribution of 14 % of GDP and 7% total workforce employed , is one of the pillars of Indian economy.

THE INDIAN SCENARIO .

Components Share % in GDP (200203) Growth during 2002-03

Construction
Trade Hotels & Restaurants Railways

5.3
14.0 1.1 1.1

7.3
4.5 4.0 5.7

Other transport
Storage Communications Banking & Insurance

4.3
0.1 3.5 6.9

6.0
-7.8 22.0 11.6

Real Estate, Business/ legal Services

Defense Other Community & Social Services Total

6.1
5.9 7.8 56.1

5.9
5.3 6.2 7.2

THE INDIAN SCENARIO .

Retail industry is divided into organized and unorganized sectors. Organized Retailing trading activities undertaken by licensed retailers , i.e.; those registered for sales tax, income tax , etc. These include corporate-backed hypermarkets and retail chains and pvt. owned large retail businesses. Unorganized Retailing refers to the traditional formats of low-cost retailing , for example , the local kirana shops , owner manned general stores , paan/beedi shops , convenience stores ,hand cart and pavement vendors, etc.

THE INDIAN SCENARIO .

Unorganized retailing constitutes 98% of trade (2002-03) and remaining 2% as organized trade accounts. Kearney estimated the true size of retail business in India as Rs 4,00,000 crores. Out of the retail , food retail is most important and is increasing employment opportunities in times to come with food retail sales as 63% of the total retail sales. Efficiency enhancements and increase in the food retail sales activity would have a cascading effect on employment and economic activity in rural areas also.

Since there is no dearth of indigenous capital , the question arises :-

WHAT IS THE NEED OF FDI ????

FDI .
Foreign direct investment is a cross border investment where foreign assets are invested into the organizations of the target market excluding investment in stock.

Majors drivers of FDI have been :-

Availability of cheap labor.

Uninterrupted availability of raw material. Less production cost compared with other countries. Quick and easy market penetration.

WHY INDIA ?
Indias GDP growth is second highest in the world. India has worlds youngest population with 66 % Indians under 35 and 50 % under 25 years. According to national sample survey literacy rate will touch around 75 % by 2020. The number of female heads of households grew by 16 % from 2002 to 2003 and has been increasing since then.

Working women constitute 15 % of total urban female population and this is to rise to 20% by 2020.

WHY INDIA .
Expenditure on babies: Apparel Rs 2209 cr. IT products Rs 1978 cr. `Stationery - Rs.621 cr. Health & Beauty (not including cosmetics or services) - Rs.415 cr.

Toys Rs 389 cr.

Indian kids Spend nearly Rs 219 crores as pocket money

As per international survey , brand loyalty among Indians starts at age of 11 yrs.

F.D.I. GOOD OR BAD????

FDI GOOD .
Efficiency.

Greater integration into the global economy.

Improvement of living standards. Consumer will be benefited.

Technology introductions.
More jobs in Mfg. Benefits to local producer especially farmers.

FDI BAD .
Retail as forced employment Sector Indian retail is highly fragmented with lots of kiraana and paan /beedi shops, hardware stores ,bazaars etc. There are about 11 million outlets operating in the country and only 4 % of them being larger than 500 square feet in size.

One of the reasons for fragmentation of retail is the primary form of disguised unemployment/underemployment in the country.
Till 2005 413.88 lakhs job seekers registered at employment exchange and over period 1992-93 to 2001-02 , only a total of 30,000 jobs have been added in the organized sector in the whole country.

FDI BAD THE WAITING GIANT WALL MART .

The largest retailer in the world Wal-Mart has a turnover of $ 256 bn and is growing annually at an average of 12-13 %. In 2004 its net profit was $ 9000 mn. It had 4806 stores employing 1.4 mn persons of these 1355 were outside USA. The average Indian retailer had a turnover of Rs 186,075 and total turnover of the unorganized retail sector was Rs 735,000 crores employing 39.5 mn persons.

Wallmart has deep pockets to sustain losses for years.

This will entail job losses by millions.

WAITING GIANT - WALLMART

Walmart performance per store turnover of Rs 80,330 mn with only 10195 employees extrapolating this in India will mean displacing about 4,32,000 persons.

If large FDI driven retailers were to take 20 % of the retail trade , it would mean employing of 43,540 persons and displacing nearly 8 mn persons employed in unorganized sector.

WAITING GIANT - WALLMART

Once wall mart is set , it would sell everything from vegetables to electronic gadgets. Major chunk of these materials will be outsourced from foreign countries rather than India.( opening of a giant pipeline from China, Thailand ,ASEAN countries ). Indian manufacturing is not ready to cater to the giants thus forcing foreign spending rather than indigenous buying. Also countries like China , Malaysia who have opened their doors for retail FDI have now stared constantly monitoring these retails and forming policies to curtail them.

WEAK MANUFACTURING IN INDIA

Agriculture employs nearly 60% of our total workforce , and is in dire need of shedding excess baggage. That leaves us with manufacturing with only 17 % workforce employed. This sector can hardly absorb anything without major expansion.

China has been expanding with GDP around 10 % from manufacturing as major driver whereas India has been growing around 5.6 % with services as the main driver.
The underlying point here is that Retail is not a n activity that can boost GDP by itself, It is only an intermediate value-adding process.

WHAT INDIA CAN DO

More availability of bank finance to retailers. National commission be setup for policies for foreign retailers to curtail their monopoly.

Entry of foreign players made gradual and high entry costs. Location of giant stores to be far (at least 15 km) away from main markets. Improve manufacturing sector in India. Co-operative stores to be setup.

Attention should be given to agro producers.

Infrastructure facilities should be made to facilitate the setup of big stores by Indian players.

FRANCHISING
Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building chain stores to distribute goods and avoid the need for investments and liability for a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

BENEFITS OF FRANCHISING
Franchising allows the franchisor to : Have greater access to capital Expand rapidly Save operating costs

Capitalize on the abilities of independent entrepreneurs

BENEFITS OF FRANCHISING
Franchisees joining a franchise system enjoy the following benefits: Backing of a bigger organization Shorter learning curve Established trade mark or service mark

Economies of scale Joint advertising and promotion Transfer of management expertise Training & support from the franchisor

FRANCHISING IN INDIA
Acceptability growing by the day. Fairly conventional industry spread. Approximately 600 franchisors spread across industries like education, retailing, professional services, healthcare etc. Over 40,000 franchisees. Annual turnover from Franchising anywhere between Rs.8000-Rs.10,000 crores. Total investments made by Franchisees over Rs.5000 crores . Over 300,000 people directly employed by franchised businesses.

Variety of hybrid formats in practice.

Number of International franchises already existing, more coming in.

FACTORS DEFINING THE GROWTH OF FRANCHISING IN INDIA

Positive Factors
Huge consuming class Fast-growing consumerism Shift towards Services from Agriculture & Manufacturing Franchising has already proven to be successful in several sectors

Large entrepreneurial pool

FACTORS DEFINING THE GROWTH OF FRANCHISING IN INDIA

Negative Factors Lack of regulatory framework Financing mechanisms not in place

Skewed real estate markets

FRANCHISING TRENDS IN INDIA

The Education sector dominates the Indian franchising scenario, although Retail is fast catching up. Most of the franchisors are relatively new and small. Several large Indian corporate also going the franchising way Newer & innovative concepts being introduced.

Substantial interest from international franchisors as well as Indian business houses for master franchises. Franchising is now spread across the country, thereby providing opportunities to entrepreneurs everywhere.

RETAIL FRANCHISING WITHIN INDIA

Grew initially in the apparel & footwear sectors Has gradually grown to cover a wide variety of sectors including food, consumer durables, jewelry, books, home dcor etc Two varieties of Retailers: the manufacturer-retailers : Typically Product Distribution Franchises have been around for a while The aggregators typically Business Format Franchises only now beginning to show up

Existent & likely to be successful only in smaller formats Substantial action also happening in non metro locations Thereby spreading organized retailing over a larger footprint

Has had to contend with the peculiarities of the Indian real estate markets Result MG (Minimum Guarantee) has become the key driver

THE FRANCHISED RETAIL MODEL

BENEFITS TO FRANCHISOR (RETAILER)

Store Employee Salary / Number of Employees Reduction Only back end operation Control Electricity Stock Loss Pilferage/Theft Capital Investment /Interest Cost Other Miss Exp Expansion without Investment IT Cost Title Controls One Point Sale Ware House Out Source One Time franchisee Fee Maximum Promotion of Private label

BENEFITS TO FRANCHISEE
Centralized purchase & the single-point delivery of all products! Opportunity of Multi Store Ownership Proven & never-ending business!

Readymade & ever-growing customer base!

Groceries, food products and vegetables at challenge prices in the industry! No investment risk in the inventory! Remarkable payback period - Just 1 yearsLow on investment, high on returns! Advisory for site selection, store design and visual merchandising! Reliable recruitment and training support.Very high success in delivery! Strong Customer Loyalty! Very high success in delivery! An established brand!

Great vendor base!

Excellent relationships! Exclusive RightsInitial Start up TrainingProven Support Systems! Aggressive brand-promotion, advertising and marketing campaign! Mega Launch!

PANTALOON INDIA
Pantaloon Retail, a Future Group venture started its operations with Pantaloon Shoppe in 1993. Emerged as the retailing giant of India with over 5 million. Square feet of retail space spread over 450 stores across. 40 cities in India. Pantaloon Retail operates in over twenty. Diverse store formats, with a spectrum of offerings ranging from food and grocery to carpentry services.

CONCLUSION
The retail is no doubt the buzz sector today and in recent times to come but government can check the entry of foreign players to an extent where they dont disrupt the market but compliment a healthy competition. Moreover the big ingenious retails of India like Pantaloons and shopper stop should be promoted more vigorously to open more franchised stores to help the local shop keepers in keeping tandem with the big retail stores.

THANK YOU

DHANYAVAAD