Indian Retail Sector Scenario

Compilation on Trends & Comments on Burgeoning Retail Sector in India

The growth of retail sector will lead to greater shift towards service economy in which need for real estate will be paramount. The retail boom currently being witnessed in India is likely to have a significant impact on the commercial real estate sector as the large metropolies will have sizable retail construction projects underway. A Paper brought out by ASSOCHAM on `Retail Scenario in India and Its Related Issues’, it has been stated that approx. 40 million sq. ft. is currently generating a business of about US$ 4 billion in organised retail. According to the Paper, the total retailing size in India is currently estimated at US$ 16 billion of which organised sector accounts for only 25% market share and remaining 75% is in the unorganised sector. Slowly and gradually, with boom in retailing continuing, the organised retail sector in small towns beyond metros will grow at a staggering level of 50-60% as compared to less than 35% in the large cities purely on account of scarcity of space which is in plenty beyond metros with reasonable land prices and without cumbersome procedure for land acquisitions, says the Paper.

Indian retailing industry has seen phenomenal growth in the last five years (2001-2006). Organized retailing has finally emerged from the shadows of unorganized retailing and is contributing significantly to the growth of Indian retail sector. RNCOS’ “India Retail Sector Analysis (2006-2007)” report helps clients to analyze the opportunities and factors critical to the success of retail industry in India. The Indian retail market scene is predicted to change significantly, in the coming years, not only due to new domestic entrants in the Indian retail industry, but also because of a large number of foreign retailers entering the retail industry. Thus new players in the retail sector are chalking out a new retail industry chart. Existing rules prevent foreign retailers to enter the gates of the Indian retail industry. However, now with change in policies, marketing and franchising is seen a lucrative way for foreign firms to make their presence in India. The current contract comes as worldwide retailers compete to come in the Indian retail market, something that they aren't permitted to do alone. Wal-Mart newly signed a contract with local firm Bharti Enterprises, and is projected to spend an approx. US$ 2.5 Billion in developing a chain in Indian retail market. Another major global retailer, Tesco, is rumored to be in discussion with the Tata Group to develop a partnership and enter the Indian market. that the organised retail sector was expected to generate 10 to 15 million jobs over the next 5 years, and that the value of the organised retail sector in India by 2010 would be around Rs.2,00,000 crore or US $ 45 billion. Organised retail in India has the potential to generate some 2.5 million direct jobs through retail operation and over at least 10 million additional jobs in retain support activities including contract production and processing, supply chain and logistics, retail real estate development and management etc.

Stating that the retail sector in India is undergoing a revolution, India’s Commerce Minister, Shri Kamal Nath said:
“…………… the phenomenal increase was stemming from the growing purchasing power of the people, which had led to a significant growth in the demand for a variety of goods, both consumables and durables. Apart from consumers, farmers will also benefit from the retail expansion, he said, citing the examples of several states which were allowing retailers direct access to farm produce, introducing a new revolution in rural India. “After centuries of economic exploitation, they are today dealing directly with companies without the involvement of middlemen or intermediaries… Organised retailing is thus set to boost infrastructure growth and create efficient backward linkages. In the process, the sector will also create efficiencies, reducing marketing cost, wastages and redundancies…………..”

The Indian format of retailing is going to retain its own touch, with numerous small retailers and other traders being located in the city centres and the large organized retailers coming up in the suburbs of the metropolitan cities.

Minister of Commerce & Industry, released the India Retail report 2007 which states as follows:

• After leading the IT bandwagon, India is poised to grow as a Retail hub. It is imperative to sustain the modernization of the retail sector and dispel the myth that the game is big Vs small or traditional Vs modern or organized Vs unorganized or local Vs foreign. What is needed is to create an appropriate environment to propel retail where all benefit.

• India has a huge population that has the potential to consume if given the power of spending and that is only possible through large scale development, generating employment which is already happening.

• Escalating real estate cost, scarcity of skilled workforce and structured supply of merchandise are the key challenge areas for the retail growth.

• Revealing key figures Mr. Amitabh Taneja, Chief Convenor of India Retail

Forum said that the organised sector accounted for Rs.55,000 crore (US$12.4 billion) business at current prices in the calendar year 2006 increasing its share to 4.6% of the total Indian Retail Value that stood at Rs.12,00,000 crore (US$270 billion). Going by the current growth trend and considering the fact that existing prominent players in organised retail have stepped up their expansion drive with Reliance announcing big plans and other Indian corporate houses too evincing keenness on investing heavily in this sector as also the inking of the joint-venture between the world's largest retailer Wal-Mart and Bharti – the organised retail in India has indeed gained top speed and is now on the verge of take-off.

• Of the Rs.12,00,000 crore retail market, Food & Grocery retail is by far the single largest block estimated to be worth a whopping Rs.7,43,900 crore, but the share of organised sector in this is miniscule. Clothing, textiles and fashion accessories constitute the second largest block, but the largest segment as far organised retailing is concerned is the timewear sector with nearly 46 per cent share of the segment being organised. Moving forward, organized retailing is projected to grow at the rate of about 37 per cent in 2007 and 42 per cent in 2008.

• As India emerges as one of the most potential markets for global brands and retailers and retail reinvents the way modern Indians celebrate their spending power, India that takes pride in its rich culture, heritage, art, craft and variety of wares must capitalize on this ever escalating trend and channelise the spending towards healthy consumption for overall development of the country, Shri R.S. Roy, Editorial Director of India Retail Forum, said.

Another study done by Associated Chambers of Commerce and Industry of India.
(ASSOCHAM) and industry association mentions:

1. The organized retail sector is expected to grow at 6% by 2010 and touch a retail business of $ 17 billion as against its current growth level of 3% which at present is estimated to be $ 6 billion.

2. It has revealed that the retail sector will grow at GDP 7% by 2010 and enlarge its market share to $ 280 billion from its present estimated level of $ 200 billion.

3. Releasing the Study on `Retail Scenario in India’, ASSOCHAM President, Mr. Mahindra K. Sanghi has revealed that the organized sector retailing is all set to grow at much faster speed than unorganized sector and the higher growth speed will alone be responsible for its higher market share which has been projected for $ 17 billion. Cities and metropolies in which retailing will show booming prospects include Mumbai, Delhi, Chennai, Kolkata, Bangalore and Kanpur, said Mr. Sanghi adding that the popular mode adopted for building shopping malls in these cities will be based on build, operate, lease and sell basis.

4. As per the findings of ASSOCHAM there will be closer linkages and relationship between real estate developers, state governments, financial institutions and retail industry. As per ASSOCHAM’s estimates, investment opportunities that the retail sector will create in next 4-5 years will result into continued urbanization and increase the per capita income of Indian populace which will finally lead to greater consumerism.

5. The growth of retail sector will lead to greater shift towards service economy in which need for real estate will be paramount. Franchising in retailing will emerge as a popular mode of retailing as their will be proliferation of availability of brands with both foreign and Indian companies acquiring strong brand equity for their products in near future.

6. The retail boom currently being witnessed in India is likely to have a significant impact on the commercial real estate sector as the large metropolies will have sizable retail construction projects underway. However, there will be few stumbling blocks that may restrict the growth of retail sector. These include very high stamp duties on transfer of property which vary from state to state level. A case in example is Gujarat, Uttar Pradesh and few other states where the stamp duty is charged at 12.5%, while there are certain states like Delhi in which the stamp duty levied is within the range of 8%. Urban Land Ceiling Act, Rent Control Act and Land Acquisition Act until amended will continue to distort property markets and cities, leading to exceptionally high property prices. Presence of strong pro-tenancy laws will also make it difficult for retailers to grow as this problem is compounded by lack of clarity over titles to ownership. The government should encourage People of Indian Origin (PIO) to invest in real estate and township building should encourage People of Indian Origin (PIO) to invest in real estate and township building and foreign investment in real estate business and retailing should also be opened up.

Commenting on the study, leading industrialist, Mr. Venugopal N. Dhoot said that, “India’s vast middle-class and its almost untapped retail industry are key attractions for global retail giants wanting to enter newer markets and India provides for the ideal locations”.

It is believed that the retail business that will pre-dominantly stay with malls put up in metros and large cities will include apparel, pharmaceuticals, luxury goods and consumer durables. The key cause for inefficiency is the poor integration between the retailer and supplier. None of the retailers, has so far an automated system for information exchange with their suppliers. In developed countries, retailers practice Vendor Management 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 available at the retailer. On the other hand, best practice retailers globally have implemented techniques like milk runs – having continuous orders to suppliers as the inventory depletes and doing multiple small lot shipments from the supplier to stores.

The question arises is Indian retail in mind - explosion: boon or bane?

The upmarket retail sector seems set for a virtual explosion with the entry of a whole host of domestic players while foreign companies are waiting and watching eagerly on the sidelines. With India being one of the biggest emerging markets, it is no wonder that retail giants like Wal-Mart and Carrefour are eager to make an entry.

India is estimated to have around 15 million retail outlets, making it the country with the highest retail outlet density in the world. It also tops AT Kearney's list of emerging markets for global retailers. Currently the value of the retail market is estimated at around $270 billion with a growth rate of 5.7 percent per annum according to the India Retail Report 2007. For the time being, however, domestic giants like Reliance, Pantaloon, ITC, RPG, Rahejas and the Bharti group have jumped into the fray. These big retail chains seem to be visible at virtually every street corner lately but the question is, what happens to the neighbourhood grocer?

96 per cent of the total retail trade in the country is in the unorganised sector. The size of the organised retail market in 2006 was estimated at Rs 485 billion, making up 4.7 per cent of the retail market. As for job potential, the retail industry is the second largest employer after agriculture, employing about 6-7 per cent of the total work force. Data clearly shows that the retail sector is not only extremely large but provides a huge amount of jobs in this country. The entry of the organised large retail chains may not have an immediate impact on the trading community. But in the long run, it is clear that small traders and retailers will be affected and the government cannot ignore the issue.

While one would ideally like to take the side of the consumers and the farmers on the issue, it is evident that the muscling in of the big retailers may lead to large-scale closures of small trading outlets. And this in turn could affect many families relying on jobs in this sector.

The overall retail business in India is expected to grow to USD500 billion s out of which the organized retail will get USD300 billion. According to this year's Global Retail Development Index India is positioned as the leading destination for retail investment. This followed from the saturation in western retail markets and we find big western retailers like WalMart and Tesco entering into Indian market. India's retail industry accounts for 10 percent of its GDP and 8 percent of the employment to reach $17 billion by 2010. There are about 300 new malls, 1,500 supermarkets and 325 departmental stores being built in the cities very soon.

A shopping revolution is ushering in India where, a large population between 20-34 age groups in the urban regions is boosting demand by 11.1 percent in 2004-05 to an Rs 23,308 purchasing power. This has resulted in huge international retail investment and a more liberal FDI.

RNCOS, in its market research report "Indian Retail Sector -- An Outlook (2005-2010)" analyzes the greatly divided Indian retail market and the trends in its business. Issues such as foreign investment restrictions, modern merchandizing in India, logistics and payment terms for distribution, role of channel members and growth trends in different regions are discussed. The market research report further analyzes the sustainability of the Indian retail sector and on the basis of 25 domestic and international companies the report has given a suitable business model.

Again the new question arise in the mind is what about FDI in retail :

The size of the organized sector in retailing will witness at least three-fold growth to USD 3 Billion by end of 2008 from the present USD 1 Billion, says the study. According to the study, unorganized sector would continue to have it edge over organized retailing till the time Foreign Direct Investment is allowed in the sector.

Some facts about retailing sector in India are mind boggling. There are 11 million outlets as against 9 million in USA even though their economy is 13 times larger. According to KPMG’ survey, India has emerged as the top FDI destination offering a higher return on investment than emerging markets like Mexico, Brazil and even China. The AT Kearney’s 2004 Global Retail Development Index ranks India as the second most attractive retail destination among the 30 odd emerging markets and places it next to Russia pushing China to 3rd position. Gradual opening up of the retail segment for FDI will work to the advantage to both the consumers and existing retailers. While consumer will have variety of global standard branded goods and services to choose from and that too at reachable cost. The existing retailers will be saddled with a host of unseen opportunities like joint ventures with foreign partners apart from avenues to upgrade their technologies, systems etc.

In conclusion, FDI in retail sector would certainly enable to optimize youth employment in India. For those fearing the effects of FDI in retail in India, the examples of Thailand and China should give comfort. Entry of foreign players in Thailand and China gave a big boost to retail and the exports in both countries got a shot in the arm. Notwithstanding the mounting pressure from left wing parties, the present Indian government has decided to allow FDI in retail outlets meant exclusively for single brands which means that multinationals can invest upto 51% in joint

Prepared by: Vishal Wadekar (E-mail: wadekar_vishal@rediffmail.com).
Guidance of: Prof. Mohan B.Rao (E-mail: raomb@mbrvisionaries.com)