Having presented the immense potential and current status of the entry of the global giants to Indian retail industry, this paper continues to flesh out the Indian retail story with the objective of highlighting some of the major concerns that organized retailers will have to consider as they venture into the Indian market.
The objective of the paper has following dimensions:
1. Discussion about the myths and realities of global giant’s entry to India.
2. Status of organised retailing in India with SWOT Analysis
INFORMATIVE DATA RELATED TO FDI
SWOT analysis is a tool for analyzing modern retailing. In this analysis, a study can be made regarding the strength, weaknesses, opportunities and threats of retail industry.
1. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing working women population and emerging opportunities in the service sector are going to be the key growth drivers of the organised retail sector in India.
2. Customers will have access to greater variety of international quality branded goods.
3. Employment opportunities both direct and indirect have been increased. Farmers get better prices for their products though improvement of value added food chain.
4. Increase in disposable income and customer aspirations are important factors.
5. Increase in expenditure for luxury items is also vital.
6. It has also contributed to large scale investments in the real estate sector with major national and global players investing in devolving the infrastructure and construction of the retailing business.
7. Large domestic market with an increasing middle class and potential customers with purchasing power.
8. Ranked second in Global Retail Development Index of 30 developing countries drawn up by AT Kearney.
9. The annual growth of departmental stores is estimated at 24%.
10. The benefits of larger organized retail segments are several. The consumers get a better product at cheaper price. So consumers get value for their money.
11. The governments of states like Delhi and National Capital Region (NCR) are very upbeat about permitting the use of land for commercial development thus increase the availability of land for retail space.
12. The growth of sachet revolution emerges for reaching to the bottom of the pyramid.
13. The size of Indian organised retail industry reached at Rs.1,30,000 crore in 2006.
14. The trends that are driving the growth of the retail sector in India are low share of organised retailing and falling real estate prices.
15. Typicality of customers in terms of varied tastes and demand for wide range of goods.
1. Will mainly cater to high-end consumers placed in metros and will not deliver mass consumption goods for customers in villages and small towns.
2. Retail chains are yet to settled down with proper merchandise mix for the mall outlets. Retailing today is not about selling at the shop, but also about researching and surveying the market, offering choice, competitive prices and retailing consumers as well.
3. Small size outlets are also one of the weaknesses in the Indian retailing. 96% of the outlets are lesser than 500 sq.ft. The retail chains are also smaller than those in the developed countries for instance, the superstore food chain, food world is having only 52 outlets where as Carrefour promotes has 8800 stores in 26 countries.
4. The rapid development of retail sector is the sharp improvement in the availability of retail space. But the current rally in property prices, retail real estate rentals have increased remarkably, which may render a few retailing business houses unavailable. Retail companies have to pay high rentals which are blockage in the turn of profits.
5. The volume of sales in Indian retailing is also very low. India has largest population in the world and a fast growing economy.
1. Once the concept picks up, due to demonstration effect, there will be an overall up-gradation of domestic retail trade.
2. Global retail giants take India as key market .It is rated fifth most attractive retail market. The organised retail sector is expected to grow stronger than GDP growth in the next five years driven by changing lifestyles, increase in income and favourable demographic outline. Food and apparel retailing are key drivers of growth.
3. Indian retail industry has come forth as one of the most dynamic and fast paced industry with several players entering the market.
4. It can become one of the largest industries in terms of numbers of employees and establishments.
5. Rural retailing is still unexploited Indian market.
6. One of the greatest barriers to the growth of modern retail formats are the supply chain management issues. No major changes are needed in the supply chain for FMCG products; these are well developed and efficient. For perishables, the system is too complex. Government regulations, lack of adequate infrastructure and inadequate investment are the possible bottlenecks for retail companies. The supply chain for staples is less complicated than the net groceries. But staples have a unique problem of non-standardization.
7. Difficult to target all segments of society.
8. Emergence of hyper and super markets trying to provide customer with -value, variety and volume.
9. Heavy initial investment is required to break even with other companies and compete with them.
10. Labour rules and regulation are also not followed in the organized retails. The
11. Lack of uniform tax system for organized retailing is also one of the obstacles. Inadequate infrastructure is likely to be an obstacle in the growth of organized retails.
12. Organized retailing in India is yet to get an industry status.100% Foreign Direct Investment (FDI) is not permitted in retailing in India. Ownership of retail chain is allowed only to the extent of 49% but without FDI, the sector is deprived of access to foreign technologies and faster growth.
13. Problem of car parking in urban areas is serious concern.
14. Sector is unable to employ retail staff on contract basis.
15. The unorganized sector has dominance over the organized sector in India because of low investment needs.
Challenges of Retailing in India
In India the retailing industry has a long way to go and to become a truly flourishing industry, retailing needs to cross various hurdles. The first challenge facing the organized retail sector is the competition from unorganized sector. Needless to say, the Indian retail sector is overwhelmingly swarmed by the unorganized retailing with the dominance of small and medium enterprises in contradiction to the presence of few giant corporate retailing outlets.
The trading sector is also highly fragmented, with a large number of intermediaries who operate at a strictly local level and there is no _barrier to entry‘, given the structure and scale of these operations (Singhal 1999).The tax structure in India favors small retail business. Organized retail sector has to pay huge taxes, which is negligible for small retail business. Thus, the cost of business operations is very high in India. Developed supply chain and integrated IT management is absent in retail sector. This lack of adequate infrastructure facilities, lack of trained work force and low skill level for retailing management further makes the sector quite complex. Also, the intrinsic complexity of retailing-rapid price changes, threat of product obsolescence, low margins, high cost of real estate and dissimilarity in consumer groups are the other challenges that the retail sector in India is facing. The status of the retail industry will depend mostly on external factors like Government regulations and policies and real estate prices, besides the activities of retailers and demands of the customers also show impact on retail industry. Even though economy across the globe is slowly emerging from recession, tough times lie ahead for the retail industry as consumer spending still has not seen a consistent increase. In fact, consumer spending could contract further as banks have been overcautious in lending. Thus, retailers are witnessing an uphill task in terms of wooing consumers, despite offering big discounts. Additionally, organised retailers have been facing a difficult time in attracting customers from traditional kirana stores, especially in the food and grocery segment. While in some sectors the restrictions imposed by the government are comprehensible; the restrictions imposed in few others, including the retail sector, are utterly baseless and are acting as shackles in the progressive development of that particular sector and eventually the overall development of the Indian Inc. The scenario is kind of depressing and unappealing, since despite the on-going wave of incessant liberalization and globalization, the Indian retail sector is still aloof from progressive and ostentatious development. This dismal situation of the retail sector undoubtedly stems from the absence of an FDI encouraging policy in the Indian retail sector.
Also FDI Encouraging Policy Can Remove the Present Limitations in Indian System such as Infrastructure
There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.
Intermediaries Dominate the Value Chain
Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.
Improper Public Distribution System (“PDS”)
There is a big question mark on the efficacy of the public procurement and PDS setup and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-tofork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
Globally, retailers maintain a direct relationship with their suppliers. Due to the complex taxation structure and geographic spread of the country, most FMCG companies have developed regional distribution and re-distribution network. Cutting out the distribution network will hurt operating structures of distributors, who as an industry body in the past have opposed FMCG companies selling directly to retailers. There exists a need for a retailer to work closely with the suppliers in an attempt to shorten the supply chain network resulting in saving time and money.
Unique Indian Customer
The Indian consumer experiencing modern retail has now warmed up to this idea. Buying habits have still not changed, where people prefer to buy most of the fruits and vegetables on a daily basis. The Indian consumers have a strong preference for freshly cooked food over packaged food mainly attributed to dietary patterns, poor electricity supply, low penetration of refrigerators and a family structure where one of the primary roles of the housewife is feeding the family. There is also an impact on the basket size because of nonavailability of personal transport facilities, due to which the consumers prefer to buy smaller quantities from stores conveniently located near their homes.
Currently, indirect taxation structure is complex in India with varying tax rates, multiplicity of taxes and multiple tax enforcement authorities. Goods and Service Tax likely to be implemented in 2011 will replace a host of levies like excise, sales tax, value-added tax, entertainment tax and luxury tax. This is likely to have an impact on the supply chain model and cost structure of distributive trade, followed by consumer packaged goods companies.
Opening a new store requires a lot of licenses, which have to be obtained from different government departments leading to considerable lead time in opening up of the stores. A push has been made by existing retailers to get the government to have a single window clearance for getting all the licenses at one place to speed up the process.
Private labels enable retailers to offer products at a better price point attracting footfalls to the store. This, in turn, not only translates to better margins by cutting out middlemen but also enhances retailers bargaining power with supplier. Penetration of private labels in emerging markets is expected to be about 6% of retail sales which in India is estimated to be about 10 – 12%. The concept is still at a very nascent stage in India given the age of modern retail in India. Few players have introduced private labels in the category of Food & Grocery, Apparels, Consumer Durables etc. but reservations still exists towards acceptance of these products with the Indian consumer. Private labels offering competitive pricing proposition has helped to generate interest and a slow but steady acceptance from the Indian consumer.