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1 Indian Retail Industry Current Status

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1.1 INTRODUCTION1

The story of retail in India during the last decade has been nothing less than a

revolution shaped by world class designs, quality investment and engaging

stakeholders. The remarkable growth in the Indian economy over the last few years,

estimated at 8.6 per cent in 2010-11 (Ministry of Finance, 2011), is considerably

driven by the retail industry with a share of around 30 per cent of the GDP (Images

Group, 2011). With about 35 million people being employed, Indian retail industry is

the second largest employer after agriculture in the country (Ernst & Young Pvt. Ltd.,

2010). The Indian retail industry is the fifth largest in the world (Cygnus Business

Consulting and Research Pvt. Ltd., 2010), and has been ranked fourth attractive nation

for retail investment by The 2011 Global Retail Development Index (Ben-Shabat,

Moriarty, & Neary, 2011). Also, Indian consumer is the most confident consumer in

the world (The Nielsen Company, 2011).

Amidst such boom, the industry experts are stuck up in a vigorous debate as to

where India shops in the future. On one side of the debate are the millions of street

and pushcart vendors and small retail stores that have dominated Indian retailing for

centuries. On the other side are large Indian and multinational corporations seeking

new opportunities in retailing. Small retailers claim that large firms, especially

multinationals, will destroy entrepreneurship and rob them of their livelihoods. Large

businesses say that they can provide better and cheaper products and bring badly

needed investment, efficiency, organization, and know-how to retailing. Policymakers

in India are wary of making changes that might harm small businesses and erode

1There is no official machinery which regularly releases retail statistics. There have been a few private sources which give information on various aspects of Indian retailing. The present work has relied on data generated by such private sources.

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employment, but they also seek to promote greater efficiency and productivity in a

growing sector of the economy.

Despite the global economic gloom, the Indian economy remained isolated

providing the domestic retail sector with the impetus that it requires for the growth.

The present paper provides an overview of the trends in the industry, and highlights

briefing on how the modern retail evolved. The third section tries to identify the

distinction between organized retailing and unorganized retailing. Section four

reviews the recent performance of India's retailing sector followed by highlighting on

the trends in the industry across various categories and formats with a brief of rural

retailing. The trends across the drivers of retail market are discussed later. The paper

tries to highlight the key challenges faced by the industry. Finally, analysis of the

industry in terms of five impacting forces carried out.

1.2 WORLD RETAIL SCENARIO

The global economy is now two years into recovery. World real GDP growth

is forecast to be about 4.5 per cent in 2011 and 2012, down modestly from 5 per cent

in 2010 (Table 1.1). Real GDP in advanced economies and emerging and developing

economies is expected to expand by about 2.5 per cent and 6.5 per cent, respectively

(International Monetary Fund, 2011). According to International Monetary Fund, the

pace of recovery is geographically uneven. In advanced economies, investment is

recovering with the rebound of industrial production and consumption is being

spurred by reduced job layoffs, the gradual recovery of employment, and previously

postponed purchases of durable goods. Activity in emerging and developing

economies is being boosted by accommodative macroeconomic policies, rising

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exports and commodity prices, and in several capital inflows. World retail sales

are going strong in emerging market economies and have bounced back in advanced

economies, led by the United States. The outcome of the end of recession has brought

a new landscape for the global retailers. For global retailers today, reliance on

-to-

Table 1.1 GDP Projections GDP Growth Projections 2009 2010 2011 2012 2016 World -0.5% 5.0% 4.4% 4.5% 4.7% US -2.6% 2.8% 2.8% 2.9% 2.7% Euro Area -4.1% 1.7% 1.6% 1.8% 1.7% Japan -6.3% 3.9% 1.4% 2.1% 1.2% Russia -7.8% 4.0% 4.8% 4.5% 4.0% China 9.2% 10.3% 9.6% 9.5% 9.5% India 6.8% 10.4% 8.2% 7.8% 8.1% Brazil -0.6% 7.5% 4.5% 4.1% 4.2%

Source: International Monetary Fund

Global retail sales declined 3.7 per cent in 2009 to US$ 13.9 trillion (Table

1.2). While sales for 2009 were low, it is worthwhile to note that sales of the global

retail industry have doubled since 2003 when worldwide sales were US$ 7 trillion

(IMAP Inc., 2010). According to IMAP forecasts, global retail sales growth is

expected to be 7.3 per cent in 2010, before slowing to 5.8 per cent in 2011 and then

rising again to 7.4 per cent in 2012. In terms of volume growth, the global retail

market is expected to return to comparable pre-2008 levels only by 2011.

Table 1.2 Global Retail Sales 2005 2006 2007 2008 2009 2010* 2011* 2012* Retail Sales (US$ billion) 11,100 11,900 13,200 14,500 13,900 14,900 15,750 16,950

Retail growth rate (%) -- 7.2 10.9 9.8 -4.1 7.3 5.8 7.4

obal Report 2010 * Estimated figures

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As can be observed that economic growth is dispersed across the regions, the

retail growth will also continue to be geographically selective. Ranked by retail sales

growth, top 10 growth markets in the world will constitute 70 per cent of global retail

growth by 2015 (Table 1.3): but, significantly, 52 per cent of that growth will come

from BRIC (Brazil, Russia, India and China) countries with China alone contributing

above 21 per cent to the global retail sales (Gildenberg, 2011).

Table 1.3 Share of Projected Retail Growth by Country 2010-2015

Country 2015 Growth Share

2015 Cumulative Growth Share

China 21.5% 21.5% United States 19.1% 40.6% Russia 7.5% 48.1% India 5.9% 54.0% Venezuela 3.3% 57.3% Mexico 3.1% 60.4% United Kingdom 2.9% 63.3% South Korea 2.8% 66.1% France 2.2% 68.3% Brazil 1.7% 70.0%

Source: Kantar Retail

Given the severity of the global recession, retail sales for the Top 250 Global

Powers of Retailing rose a meagre 1.3 per cent in 2009 compared with 6.3 per cent in

2008 (Deloitte Touche Tohmatsu Ltd., 2011). Combined retail sales of the Top 250

totalled US$ 3.76 trillion in 2009, down slightly from nearly US$ 3.82 trillion

Retailing, the top 10 largest retailers contribute 30 per cent at combined sales of US$

1.12 trillion in 2009 down slightly from 30.2 per cent in 2008 (Table 1.4).

Table 1.4 Top Ten Global Retailers Retail Sales Rank (FY 09)

Retailer Country

of Origin

2009 Sales (US$

million)

2009 Sales

growth rate (%)

2004-2009 Sales

CAGR (%)

Dominant Operating Format

Countries of

Operation (nos.)

1 Wal-Mart US 405,046 0.9 7.3 Hypermarket/Super center/Superstore 16

2 Carrefour France 119,887 -1.2 3.4 Hypermarket/Super center/Superstore 36

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3 Metro Germany 90,850 -3.2 3.0 Cash & Carry/Warehouse Club 33

4 Tesco UK 90,435 4.8 10.9 Hypermarket/Super center/Superstore 13

5 Schwarz Germany 77,221 1.4 9.8 Discount Store 25 6 Kroger US 76,733 1.0 6.3 Supermarket 1 7 Costco US 69,889 -1.5 8.2 Cash & Carry/Warehouse Club 9 8 Aldi Germany 67,709 3.8 6.3 Discount Store 18

9 Home Depot US 66,176 -7.2 -2.0 Home Improvement 5

10 Target US 63,435 0.9 6.8 DDS 1 Top 10* 1,127,381 0.2 Top 250* 3,763,535 1.3 Top 10 share of total 30.0

Source: Top 250 Global Powers of Retailing * Sales-weighted, currency-adjusted composite growth rate

1.3 EVOLUTION OF INDIAN MODERN RETAIL

Traditionally, retail sector comprised of small retailers (kirana stores), with

their shops being in the front and house at the back, where they would run their retail

he emergence of organized retail in India

dates back to the pre-

houses, mostly textile majors, ventured into the retail arena through company-owned

or franchisee outlets. As such the on-going journey of organized retail in India can be

broadly classified into four main phases (Cushman & Wakefield, 2010) (Figure 1.1):

Initiation (Pre 1990s)

Conceptualization (1990-2005)

Expansion (2005-2010)

Consolidation (2010 onwards)

1.3.1 Retail Initiation

The initial evolution of modern retail in India primarily transpired through

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era include Bombay Dyeing, the Raymond Group, the S Kumars Group and Bata to

name a few. Central and State Government departments and co-operative bodies such

as the Public Distribution System, Mother Dairy, Kendriya Bhandar, Super Bazaar,

etc., played a key role as prominent retailers in the Indian Market. These early years

also s

the southern region and some of these chains later established a nationwide presence.

These remained the only organized retailers in the country for quite a long period, till

the post 1990 period saw a fresh wave of entrants in the retailing business.

Figure 1.1 Evolution of India's Organized Retail

Source: Cushman & Wakefield

1.3.2 Retail Conceptualization

This phase saw the entry of pure-play retailers, and not the manufacturers,

expanding pan-India rather than operate regionally. It is interesting to note that most

on apparel and other related fashion categories. With the opening of Indian economy

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during this phase, first generation international brands like Nike, Reebok, Adidas,

1.3.3 Retail Expansion

As the name suggests, this is perhaps the most active phase in the Indian retail

industry, in terms of growth, entry of new players and development of new entrants.

A growing middle class, increasing disposable incomes as well as a large and young

consumer market led to rapid growth in the Indian retail industry. Having realized the

vast potential of the relatively untapped domestic market, large industrial

conglomerates like Mahindra and Mahindra, Reliance, Tata, Aditya Birla and Essar

entered the pan-India retail arena during this period. Their success brought in global

retailers such as Metro AG, Max Retail, Hypercity, etc. The period saw the

emergence of new formats like cash and carry, large format discounters, food courts,

estate front there

was frenetic activity with a large number of malls were proposed/developed across

major metros and upcoming tier-II cities. The size of the malls also went through

rapid transformation from an average size of 150,000-200,000 sq. ft. to 500,000-

1,000,000 sq. ft.

The rapid growth soon attracted the luxury product segment in an environment

of the economic liberalization along with rising purchasing power parity (PPP) index

of domestic consumers. With the FDI policy 2005-2006 allowing single brand

foreign retailers to take up to 51 per cent stake in joint venture with a local firm, the

intervening years saw the entry of several premium brands (Giogio Armani, Versace,

Gucci,etc.) mostly through joint ventures.

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1.3.4 Retail consolidation

Considering the challenges faced by the industry at present, retail chains are

likely to focus on consolidations to cut costs and survive in the market. In the present

scenario, companies are increasingly concentrating on strengthening existing

operations while assessing growth options through consolidation.

1.4 INDIAN RETAIL BUSINESS CLASSIFICATION

Businesses in India are commonly categorized as either formal or informal and

as organized or unorganized. To understand the Indian retail climate, we must define

these distinctions.

According to the Ministry of Labour and Employment2, the informal sector

consists of unincorporated businesses that are owned and run by individuals or

households. These businesses are not legally distinct from their owners, who raise

capital at their own risk and have unlimited personal liability for debts and

obligations. Informal businesses typically employ family members and casual labour

without formal contracts. Formal businesses are corporations, limited companies, and

businesses run by or on behalf of cooperative societies and trusts.

The organized sector comprises incorporated businesses. Information about

this sector is available from company budgets and reports. Importantly, partnerships,

private and limited companies, and businesses run by cooperative societies and trusts

are not considered to be organized businesses in India. Instead, they are classified as

part of the unorganized sector, which also includes all businesses in the informal

sector.

2 Labor and Employment, Government of India.

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As Figure 1.2 shows, organized retailing includes some large incorporated

stores, and all chain stores, supermarkets, hypermarkets, department stores and store-

in-stores. Unorganized retailing includes all informal retailers, including kirana stores,

paan shops, vegetable and fruit stalls, street hawkers, and pushcart and street vendors.

It also includes general merchants, chemists, appliance stores, and various specialty

stores that are part of the formal sector but that operate as partnerships, private and

limited companies, cooperatives, or trusts.

Figure 1.2 Classification of Retailers in India

1.5 INDIAN RETAIL MARKET SIZE AND GROWTH

Table 1.5 shows the Economist Intelligence Unit's (2008) estimates for total

retail sales in India between 2004 and 2009. It also shows Euromonitor International's

(2010) estimates for formal-sector retail sales over the same period. We infer informal

sector sales and the shares held by each sector using these two data sets. Differences

in data collection and estimation methods, and in the years in which the estimates

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were made, can introduce errors in the estimates. With this caveat, we can draw

several important conclusions about the status of retailing in India and trends in its

development.

Table 1.5 Estimated Retail Sales and Market Shares for Formal and Informal Retail in India Year 2004 2005 2006 2007 2008 2009 Total Sales (US$ billion) 294 331 359 448 481 496 Formal Sector Sales (US$ billion) 153.63 167.50 182.72 198.61 211.54 218.92 Informal Sector Sales (US$ billion) 140.37 163.50 176.28 249.39 269.46 277.08 Formal Sector Share (%) 52.25 50.60 50.90 44.33 43.98 44.14 Informal Sector Share (%) 47.75 49.40 49.10 55.67 56.02 55.89

Source: Economist Intelligence Unit, Euromonitor International

First, total retail sales increased by approximately 70 per cent between 2004

and2009, from US$ 294 billion to US$ 496 billion. Second, sales grew over this

period by about 43 per cent for retailers in the formal sector and about 97 per cent for

retailers in the informal sector. The compounded annual rate of sales growth was

about 11 per cent for all retailing, 7.34 per cent for formal, and 14.57 per cent for

informal retailing. Thus, from 2004 to 2009, retail sales grew almost twice as fast in

the informal sector as in the formal sector and at a substantially faster rate than India's

GDP, which grew at about 8.5 per cent over the period. Third, in 2007, total retail

sales in the informal sector surpassed those of the formal sector. By 2009, the

informal sector held about 56 per cent of retail sales, 8 per cent higher than its 48 per

cent share in 2004. These data suggest that informal retailing is more than surviving;

it is flourishing. At present growth rates, the gap between formal and informal

retailing will continue to widen family-owned stores and street vendors will take a

larger share of retail sales.

Since all organized retailing is part of the formal sector, we estimate retail

sales for the organized sector as approximately US$ 5 billion (3.3 per cent of US$

153.63 billion) in 2003 and approximately US$ 11 billion (5 per cent of US$ 218.92

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billion) in 2009. The remaining sales in the formal sector, then, represent unorganized

retailing. We can infer that while organized retailing grew at a CAGR of 17.1 per

cent, unorganized retail grew at CAGR of 7 per cent from 2004 to 2009. While

organized retail grew at a faster pace, it is important to note that a larger part of the

US$ 65.29 billion growth in formal sector has come from unorganized retail. There

may be few important reasons for this trend (Gupta, Bhatiani, & Gupta, 2010).

First, growth in private final consumption expenditure in India3 is so sizable

that even with 30 per cent plus growth rates, organized retail will not be able to garner

a larger share of the total market. Second, in certain consumer categories like apparel,

footwear, and consumer durables and electronics, organized retail has established a

strong value proposition with the Indian consumer. However, in some very large

categories like food & grocery, furniture and home, and pharmacy it is not same. So

the same shopper visits organized retail for the former categories and traditional retail

for the latter. And third, inherent strengths of traditional retail (entrepreneurial drive,

relationship management with catchment, real estate and labour costs not fully

accounted for in P&Ls, flexibility to deliver very small quantities home, and the MRP

regime) coupled with the fact that many mom & pop stores have geared up for

competition from new age stores (through improved store ambience, better product

mix and support from brands/manufacturers in training, retail operations, etc.) puts

them on a strong footing.

Organized retailing has grown in the last decade but at a substantially lower

rate than predicted by industry analysts a few years ago. Both the Economist

Intelligence Unit and Euromonitor International project that retail sales will grow at

3 Technopack Perspective Vol. 3, 2010

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about 15 per cent per year for at least the next five years. Joseph et al. (2008)

predicted 10 percent annual growth for unorganized retailing and 40-45 per cent

annual growth for organized retailing between 2008 and2012. They projected that the

share of organized retail would grow from about4per cent in 2008 to 16 per cent by

2011-12. However, the performance of the organized retail sector has fallen far short

of these expectations, and future prospects are less optimistic. Overall retail sales are

also likely to grow more slowly than projected for at least two reasons (Kohli &

Bhagwati, 2011). First, retail purchases are not likely to grow as fast as household

consumption, of which they are a part. Second, household consumption itself is not

likely to grow as fast as GDP in India. Taken together, these two considerations

suggest that the rate of overall growth in retail sales is likely to fall below the GDP

growth rate for the next several years.

1.6 RETAILING ACROSS CATEGORIES

final consumption expenditure. Food and groceries is the highest retail spending

category with 62 per cent share of the total retail sales (Lohchab, Kakkad, & Mehta,

2011) (Table 1.6). According to Technopak (Singhal, 2010), consumer spending in

this segment is expected to grow at a CAGR of 4.56 per cent from 2009 to 2014.

Clothing and textile and beauty and healthcare are the next largest categories

contributing 12.2 per cent and 10.7 per cent, respectively, to the total retail sales. It is

estimated by Technopak, while consumer spending in healthcare is expected to

increase at a CAGR of 10.1 per cent, the consumer spending in clothing and textiles is

estimated to increase at a CAGR of 6.1 per cent from 2009 to 2014. While food and

grocery account for the largest quantum of retail sales (US$ 198 billion), followed by

textiles and clothing (US$ 39.3 billion) and then healthcare (US$ 34.4 billion), the

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consumer spending on communication, jewellery and watches, and personal transport,

comprising two/four-wheelers and related spending on fuel and repairs/maintenance is

likely to drive the overall retail sales in the future due to the shift in the consumption

pattern beyond the basic survival needs.

Table 1.6 Category-wise Share and Penetration (FY09) Verticals Total retail

market size Share in

total retail

Organized retail

market size

Share in organized

retail

Penetration

(US$ billion) % (US$

billion) % %

Food & Beverages 198.7 61.9 3.9 18 1.9 Clothing and Textile 39.3 12.2 6.6 31 16.6 Consumer durable 14 4.3 3.7 18 26.3 Communication 10.5 3.3 0.98 5 9.3 Home décor & furnishing 11.2 3.5 0.7 3 6.0

Beauty &healthcare 34.4 10.7 1.98 9 5.8 Footwear 7.3 2.3 1.3 6 17.1 Equipment, paper & stationary 5.7 1.8 1.99 9 34.6

Total 321.1 100 21.1 100 6.5 Source: Crisil Research

The modern retail in India has been primarily driven by the apparel (31 per

cent) & footwear (6 per cent) category, with players like Raymonds, Madura

Garments, Arvind Brands etc. setting up their outlets in 80s and 90s. While the

margin offered by this category was high, the back-end too was fairly organized i.e.

strong supplier base. The consumers especially the men at that time were also

graduating from ready-to-stitch to ready-to-wear segment, which helped these

retailers in creating significant differentiation from the local mom & pop textile

stores. While footwear market is 17.1 per cent penetrated in the organized retail,

clothing and textile category has the highest share of organized retail sales with 16.6

per cent penetration. This segment is expected to modernize further with major

growth coming from the entry new and expansion of present international retailers.

The hypermarkets, which currently get almost 30 per cent to 40 per cent of their

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revenues from apparel, will also help the category to modernize across various tiers of

towns.

The other categories which had a significant impact is consumer durables and

communication, where modernization has gained momentum not only due to retailers

like Croma, Reliance Digital, Next and e-zone, but also due to major investments

made by giants in consumer products like Sony, Samsung and LG. Most of these

brands have established their own exclusive stores for their expansion strategy as it

helps them in showcasing their latest and high value products in a very high service

environment. Going forward, the big-box formats like hypermarkets and cash & carry

will also contribute significantly in the growth of modern retail in this category. Due

this, consumer durables have the highest penetration of 26.3 per cent in the organized

retail sector.

One interesting pattern here is that, even though the food and beverages has

the largest share of overall retail sales, the penetration of this sector in organized retail

is very low. Other large categories like furniture and home and pharmacy also show

the same patterns. This may be due to two reasons. First, as mentioned earlier,

organized retailers in these categories could not able to establish value proposition

with the Indian consumers in comparison to other categories. Second, according to a

study done by Technopak (Gupta, Kumar, & Bhatiani, 2009), these categories rate

lower on margins as well as capital employed compared to other sectors like apparel,

watches, etc., and hence need higher space productivity and large business scale to

create a viable long term business proposition.

With the entry of large corporates, the momentum in modern retail is building

across categories, with food & grocery expected to see a lot of action in the coming

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years. This growth is due to entry of large Indian corporates like Reliance, Aditya

Birla, TATA, Bharti, regional entrepreneurs and global retailers like Wal-Mart,

Tesco, Carrefour, SPAR and others establishing their presence in the country.

1.7 INDIAN RETAIL FORMATS

The Indian retail landscape today is still characterized by owner operated local

shops (neighbourhood kiranas) and by local street markets. According to the

Investment Commission of India (ICI), there are over 15 million such outlets exist all

over the country (Knight Frank, 2010). The vast majority of these shops have sales

area of approximately 500 sq. ft. and below. This has led to the strange dichotomy

that Indian retail space per capita is the lowest in the world, while its retail density is

the highest in the world. While traditional formats and modern formats coexist in

India, the former dominate the market even after the presence of organized retail since

two decades. The traditional formats have emerged largely due to the absence of

alternative employment and typically require employees with very low skills. These

formats can, and do, serve to absorb agricultural labour. There are four main

traditional formats in India (McKinsey Global Institute, 2003):

Rural Counter Stores Rural counter stores (kirana) are multi-purpose

stores and sell items of essential needs, both food and non-food. These stores

ncome

from agriculture.

Kiosks These small, pavement stalls stock a limited range of food and

beverage items. Kiosks are convenient for impulse or emergency purchases,

and are located in busy commercial and market areas.

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Street Markets Held at fixed centres in urban and rural areas on a daily or

weekly basis, street markets comprise multiple stalls (often more than 200)

selling a wide range of food and non-food products. These markets compete

on both variety and price, and also sell counterfeit goods and smuggled items.

Street Vendors These are mobile retailers, providing perishable food items

prices are higher than alternative retail channels, they compete on

convenience.

Notwithstanding the many stories of gloom and doom about the fate of

organized retailers, Indian retail market saw the existence of following major formats

since its origin (Table 1.7).

Table 1.7. Organized Retail Formats in India Format Description Example

Hypermarkets

Average size varies between 50,000 sq. ft. and 100,000 sq. ft.

Offers a large basket of products, ranging from grocery, fresh and processed food, beauty and household products, to clothing and appliances.

Spencers, Big Bazaar

Cash-and-Carry

Average size 75,000 sq. ft. Offers several thousand stock keeping units and generally has bulk buying requirements.

Metro, Bharti-Wal-Mart

Department Stores

Average size varies between 10,000 sq. ft. and 60,000 sq. ft.

Offers a large layout with a wide merchandise mix, usually in cohesive categories, including fashion accessories, gifts and products for the home.

Shoppers Stop, Lifestyle

Supermarkets Large in size and typical in layout. Offers not only household products but also food as an integral part of their services.

Apna Bazaar, Food Bazaar

Shop-in-shop Shops located within the premises of large shopping malls in major cities.

Infinity (Magma Group)

Specialty Stores

Single category stores. Focus on individuals and group clusters of the same class, with high product loyalty.

Brand Factory, Food Bazaar

Category Killers

Average size 8000 sq. ft. Large specialty retailers focusing on a particular segment. These retailers are able to provide a wide

The Loft (footwear mall), Central

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range of choice to consumers, usually at affordable prices, due to scale economies.

(readymade garments mall)

Discount Stores

Average size 1000 sq. ft. Offers a wide range of products, mostly branded at discounted prices.

Subhiksha,

outlet

Convenience Stores

Average size 800 sq. ft. Relatively small retail stores located near residential areas.

In & Out, Safal

Source: India Brand Equity Foundation, Market Overview Retail, November 2010

Also, as noted by Sinha and Kar (2007), it is difficult to fit a successful

international format directly and expect a similar performance in India considering the

diversity in terms of tastes and preferences existing in India. As they have predicted,

and in line with the casualties and grappling challenges of achieving desired

profitability levels, there has been large scale experimentation in the adoption of

winning retail format to suit different geographies and segments. Apart from above

mentioned store-based formats, Indian retail market witnessed the emergence of

following non-store based retail formats. Apart from the entry of pure-play retailers in

these non-store formats, due to heightened competition, cuts in margins and evasive

shopper loyalty, existing brick-and-mortar players have adopted multi-channel

retailing to reach the target segment.

Direct Selling

Homeshopping

Internet Retailing

Mobile Retailing

Even though direct selling had been in the Indian market since ages, its impact

on the overall retail sector was very limited. Eureka Forbes was first organized direct

selling company to enter the Indian market three decades ago. Later on Amway along

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with Oriflame and Avon brought their international beauty and home products for the

first time. But their presence was very much limited to small network-oriented upper-

class segment as the products are usually priced higher. Being more than a decade in

the Indian market, the retail contribution of homeshopping segment is even lesser as

compared to direct selling format. This may be because of two reasons. First, there is

a presence of international successful brands in the direct selling segment compared to

homeshopping brands. Second, there is large amount of distrust among the Indian

consumers on the quality of the products sold through homeshopping format (Joshi,

2011). Even though the homeshopping market has a very low sales volume compared

to direct selling, according to Euromonitor (2011), it grew at a CAGR of 26.7 per cent

over the period 2005-2010 while direct selling grew at a CAGR of 15 per cent over

the same period. While direct selling is expected to grow at CAGR of 9 per cent,

homeshopping is projected to grow faster at CAGR of 15 per cent over the next five

years.

According to Euromonitor (2011), even though internet retailing is the second

fastest growing retail channel with 37 per cent share of value sales in non-store

retailing in 2010, it is still an extremely nascent retail channel. This low level of

overall sales contribution is attributed to three factors: lack of infrastructure

investment leading to higher costs, low penetration of internet in India and consumer

scepticism about the use of internet as a shopping channel. Also the internet retailing

is very much confined to few non-grocery products like apparel, media, consumer

electronics and appliances than grocery products due to the huge density of traditional

stores present across the country. But as the ownership of computers and internet

usage is projected grow at a healthy rate, this sector is expected to become a US$ 2

billion market by 2015 at a CAGR of 21.1 per cent. Amidst these experiments, newly,

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mobile

has, mobile commerce/mobile retailing promises exceptional business market

potential (Naqvi & Tiwari, 2010). An aggressive player who is active in this field is

still take some time to grow, the use of mobile phones as in-store shopping assistants

will start to be seen very soon in the Indian Context.

In line with the developments occurring in the global retail market and as the

Indian retail journey moves forward, the sector is expected to see expansion of retail

in new avenues like rural retailing, airport retailing and other travel retail formats with

a mix of both international and domestic nature.

1.8 EMERGING TRENDS IN THE INDIAN RETAIL

1.8.1 Increasing Share of Private Labels

Private labels or products manufactured and marketed by retailers have been

growing in India. Though shoppers have been migrating toward private labels long

before the economic slowdown started, the slowdown has significantly increased the

pace of this shift, thus favourably affecting the private label sales of almost all large

retailers. But still, penetration by private labels in India is quite low compared to other

developed countries (Malhotra, Agarwalla, & Choudry, 2010) (Figure 1.3).

The rise of private labels has resulted in many conflicts between retailers and

brands owing to issues like margins, display and shelf space. However, this migration

to private labels by retailers is expected to be limited to those product categories

which are at the thresh-hold of commoditization and erosion of brand loyalties. From

the national brands side, there is also the option of growing the brand through

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unorganized retail, as the market is largely under-penetrated. Nonetheless, as the

market evolves, it is expected that both private labels and national brands create a

mutually beneficial coexistence creating a win-win situation.

Figure 1.3. Private Label Share in Overall Organized Retail Sales

Source: Booz & Company

1.8.2 Rural Retailing

The global economic crisis of 2008, which slowed down consumption by the

urban middle class, played a role in turning attention to the rural markets. The large

rural population of the country (more than 60 per cent

population) has drawn the attention of organized retailers looking for new areas of

growth. But the growth trends, issues and challenges in rural markets are somewhat

different from those in urban areas. Income is largely agricultural, which is dependent

on monsoons. Supply chain is constrained by poor infrastructural development.

However, government initiatives such as the National Rural Employment Guarantee

Act (NREGA), increasing minimum support prices of crops, Sampoorna Grameen

Rozgar Yojna, Pradhan Mantri Gram Sadak Yojana and Swarnjayanti Gram

Swarozgar Yojana are changing the rural landscape of India (Malhotra, Agarwalla, &

Choudry, 2010). These initiatives along with government-sponsorship of self-help

22

and improvement of social indicators in the rural economy. Recognizing the huge

potential of this untapped market, a slew of supermarket chains, including those from

top business houses such as the Godrej Agrovet (Aadhaar), ITC (Choupal Sagar) and

DCM Shriram Consolidated Ltd (Hariyali Kisaan Bazaar) have set up shop. Major

differentiating factor for rural retailing is that it focuses largely on the needs of the

farmers both from the point of view of farming and household requirements.

According to Nangia S. (2010) there are a number challenges to be met: fragmented

consumer base, limited infrastructure, low unit spending power, a strong regional

influence on consumption and communication and reach out to 6,00,000 plus villages

and centers.

Figure 1.4. Retail Growth in Rural and Urban India

Source: Booz & Company analysis

1.8.3 Changes in Real Estate Equation

The growth in organized retailing in the present decade may be gauged by the

rise in number of shopping malls. In 1999, India had just 3 shopping malls measuring

around 1 mn. sq. ft. and by the end of 2006, the total mall space rose up to 28 mn. sq.

ft. with an average annual addition of 3.9 mn. sq. ft. Post 2006, on an average 8 mn.

sq. ft. of retail space has been added annually pan India taking the mall space to over

23

52 mn. sq. ft by the end of 2009 (Knight Frank, 2010). Anticipating the growth of the

retail sector to further shoot in times to come, industry players announced mega retail

projects and expansion plans during the peak. However, owing to the slowdown, the

growth of the retail sector dropped to almost 15 per cent 2008-09, resulting in project

deferments by nearly 12-24 months (Cushman & Wakefield, 2010). According to

Knight Frank research, the organized retail real estate stocks will more than double

from the existing 41 mn. sq. ft. to 95 mn. sq. ft. between 2010 and 2012. Also, during

2010-12, 55 mn. sq. ft. of retail space will be ready in 7 major cities like Mumbai,

Pune, Hyderabad, Delhi, Kolkata, Bengaluru and Chennai. It is expected that a higher

pace of real estate development in comparison to the pace of organized retail market

growth, will create an oversupply situation to the magnitude of 21 mn. sq. ft. in 2012

in these 7 cities, escalating the vacancy problem which is presently about 20 per cent

or 8 mn. sq. ft. of mall space (Figure 1.5).

Figure 1.5. Estimated Oversupply Situation in 7 Major Cities

Source: Knight Frank Research

24

The concerns of decreasing footfalls, conversion rates and vacancy pressures

have made both developers and retailers to renegotiate lease rentals and a substantial

correction in the rental rates have taken place. Apart from rental corrections, various

lease rental models have evolved as a corollary to coping strategies adopted by the

stakeholders of organized retailing during 2008 and 2009. Zero rental schemes and

revenue sharing models are options that are proving increasingly attractive to retailers

looking to trim costs and to property owners seeking to maintain occupancies (Knight

Frank, 2010).

1.8.4 Growing FDI Concerns

The government in a series of moves has opened up the retail sector slowly to

foreign direct investment (FDI) (Figure1.6). There were initial reservations towards

opening up of retail sector arising from fear of job losses, procurement from

international market, competition and loss of entrepreneurial opportunities. To

evaluate the impact of international players on domestic markets, in 1997 FDI in cash

and carry (wholesale) with 100 per cent ownership was allowed. In 2006, 51 per cent

investment in a single brand retail outlet was permitted. Since then retailing through

franchisee route has been explored by several global brands. Since then a series of

discussions were carried out by the government the most recent of which is a meeting

of Committee of Secretaries, headed by Cabinet Secretary in the month of June 2010.

25

Figure 1.6. FDI Policy - Milestones

Source: Deloitte Touche Tohmatsu Ltd.

There seems to be increased optimism about the opening the FDI since last

year but the caution factor is still carried with. The debate around opening up of the

sector is expected to include among other the key points around: entry in cities with

population above one million, local sourcing requirements, mandatory investment in

back-end operations, cash and carry model to support the local retailers to benefit

from large scale sourcing and employment to rural youth to help spur employment

growth for people who may be affected by this move. The push for proposed

investment seems to be around creating a supply-chain infrastructure for agriculture to

help alleviate the income levels of farmers and reduce wastage of crops which are

currently pegged at about 30-40per cent of total produce (Deloitte Touche Tohmatsu

Ltd., 2010).

1.9 DRIVERS OF RETAIL SECTOR

1.9.1 Stable and Promising Economy

In relation to the global economies, India was relatively insulated from the

slowdown caused by the global financial crisis of 2007-09. Although the GDP growth

was affected by both foreign and domestic factors, which fell below 7 per cent, the

turnaround has been fast and strong and expected to grow by 9 per cent in 2011-12

26

(Ministry of Finance, 2011)

estimated level of growth in GDP for 2010-11 was composed of: growth of 5.4 per

cent in agriculture, which rebounded from a downturn in the 2009-10; growth of 8.1

per cent in industry, which had a growth of 8.0 per cent in 2009-10; and a decelerated

growth of 9.6 per cent in services as against 10.1 per cent in 2009-10. The growth is

expected to be restricted because of the concerns of high food inflation and slowdown

in industrial growth. Even though there was some moderation, the Wholesale Price

Index elevated again mainly due to certain food articles and also petroleum products.

On the demand side, a rise in savings and investment and pickup in private

consumption have resulted in strong growth of the GDP at constant market prices at

9.7 per cent in 2010-11.

1.9.2 Shifts in Consumption Patterns

Since ages, roti, kapda aur makaan have been the primary motto of private

consumption in India. Now, with the impact of the sustained economic growth of the

last two decades, for a large part of the population, consumption has moved beyond

these basic survival needs. With increase in the disposable income, availability of

easy credit and a large number of brands to choose, the Indian consumer has increased

the base of its consumer spending increasing the private final consumption

expenditure (PFCE), an economic indicator for expenditure on goods and services.

The size of consumption in India is expected to have seen a spending of almost US$

435 billion at current prices in 2009 (Singhal, 2010) (Figure 1.7).

As per Technopak (Singhal, 2010), while food and grocery continue to

account for the largest quantum of spending followed by healthcare and textiles and

clothing, more interestingly, spending on non-basic needs like mobile phones,

27

jewellery, watches and transportation and their related items, is growing much faster

now. Even consumer spending on personal computing (including internet) and

personal grooming services is picking up its pace in strong double digit growth. Based

on a tracking of consumer spending patterns done by Technopak over last 18 years, it

found that the average Indian household spending of 80 per cent of its discretionary

income on various categories increased from just 7 in 1991 to 19 in 2009. While the

last decade has seen significant addition to consumption and retail market, it is

expected that consumption is likely to double in India over the next 5 years, (nominal

growth of US$ 750 billion). Considering these trends, there is going to be significant

changes in the overall consumption basket and the hierarchy will be roti, doctor,

mobile aur sona.

Figure 1.7. Size of Consumption in India

Source:Technopak Analysis

1.9.3 Population as Growth Driver

The sheer population size of India, and its demographics, is itself a major

fascination to the retailers. The population of India, at 1.21 billion (second largest in

the world), is almost equal to the combined population of USA, Indonesia, Brazil,

Pakistan, Bangladesh and Japan (Census of India, 2011). Of this overall population

28

48.46 per cent constitutes women population carrying a literacy rate of 65.46 per cent,

while male literacy rate stands at 82.14 per cent.

Over the previous census literacy rates, the growth in the female literacy rates

at 11.79 percentage points is greater than the male literacy rates at 6.88 percentage

points. This means that the proportion of women in the workforce is going to increase

further. According to Technopak analysis, in 1981 the proportion of women in

workforce was 20 per cent, and it rose to 23 per cent in 1991, further rising to 26 per

cent in 2001 (Rajpal, Singh, Jain , & Agrawal, 2010). It is estimated to be around 30-

35 per cent at 2009, translating into 150-170 million women. Traditionally most

women have been working in the unorganized sector. There were very few women

working in the organized sector as shown in Figure 1.8. This number has been on the

rise in the past decade from 3.7 million in 1991 to about 5 million in 2001. This is

estimated to be around 7-10 million for 2009. There are three major factors driving

this growth: greater acceptance and empowerment of females, delayed family phase

and reduced child bearing responsibilities. It is expected that there is a potential of

trebling the current situation in the next 5 years. This will result in a big shift in the

consumption and shopping behaviour of this segment-paving the way for several

opportunities for consumer goods and service provider companies, marketers,

retailers, etc. As per estimates of Technopak, a potential of generating an additional

spend of US$ 5-10 billion by 2015 can be created by sheer increments in spends of

women (necessary and indulgent) because they are working. This is in addition to

what they would buy or consume if not working.

29

Figure 1.8. Women in the Workforce

Source: Technopak analysis

On the age front, Indian population is young compared to those in developed

economies. As per Booz & Company, 60 per cent of the Indian population falls in the

range of 15 44 years (Malhotra, Agarwalla, & Choudry, 2010) (Figure 1.9). There

are multiple ways in which the burgeoning younger population is supporting

consumption. First, the profile of the young population reveals more actively

employed people. This means, increased incomes available in households to spend on

expendables. Second, young people tend to spend more compared to their parents and

grandparents, and are easily attra -

more exposed to the media and its influences, specifically new platforms such as the

internet, mobile phones etc. Their awareness levels are higher, and they are better

informed about developments around them. Continued favourable age distribution is a

driver for retail consumption in the future as well.

30

Figure 1.9. Estimated Age Distribution of Indian Population, 2010

Source: Booze & Company analysis

Another population demographic variable which is hugely impacting the

Indian retail consumption is the rise in income across different economic classes

(Table 1.8). This increase in income of Indian consumers has accelerated the trend

as called by Booz & Company or consumer up-trading.

The premiumization trend can be observed prominently in the top two income groups;

the rich and the upper middle class (Malhotra, Agarwalla, & Choudry, 2010).

According to Booz & Company, while these two income groups account for only

three per cent of the population currently, it is expected that by 2020 their numbers

will double to constitute seven per cent of the total population. As per estimates, the

proximately 30 million people in 2020, which is more than the

current total population of Sweden, Norway and Finland put together. Similarly, the

the current population of the UK. While consumer up-grading is consumption

characteristic describing the rich and the upper middle-class, category evolution is

primarily observed among the upper middle and lower middle income classes. While

these consumer groups in India account for approximately 150 million people

currently, their size is expected to increase to about 500 million people in 2020, which

31

is approximately 1.5 times the current population of the US. The last economic class,

usually called the bottom-of-the-pyramid or BOP, currently constitutes about 900-950

million people in India (Malhotra, Agarwalla, & Choudry, 2010). Unlike the middle

class segment, which is rather urban, already well-served and competitive, the BOP

markets are largely rural, poorly-served and uncompetitive. The second characteristic

of BOP markets is that a lot of their basic needs are yet unmet: financial services,

mobiles phones and communication, housing, water, electricity and basic healthcare

are lacking. Rural BOP population is estimated to be about 78 per cent of the total

BOP population in the country.

Table 1.8. Household Distribution of Income and Profiles

Consumer Class

Household Annual Income (US$)

Estimated Share of

Population in 2010 (%)

Estimated Share of

Population in 2020 (%)

Consumption Characteristics

Rich Above 22,000 1 2 Spend high proportion on personal care, entertainment, etc.; want luxury and exclusivity.

Upper Middles

11,000 22,000 2 5

Have similar needs as the rich and purchase inexpensive brands of known companies.

Lower Middles

4,000 11,000 11 29

Increasingly want sophisticated products in categories; desire products which improve their appearance and are good for their healthy; want products meeting their specific needs.

Bottom-of-the-

Pyramid Below 4,000 86 64

Spend mostly on essentials, no/very limited demand for expensive lifestyle products

Source: Booz & Company analysis

1.9.4 Growing Urbanization

As the economy of every major country in the world grows, it is observed that

the country experienced a shift in its urbanization rates. India is not an exception in

this case. From 2001 through 2008, India's urban population grew 58 per cent faster

than the population of the country as a whole (Kohli & Bhagwati, 2011). A study by

32

the McKinsey Global Institute (2010) predicts that by the year 2030 India will have a

population of 1.47 billion and 40 per cent of the population will live in urban areas.

Thus, the urban population will grow to about 590 million, roughly 250 million more

than recorded in the 2008 census. The number of cities with more than a million

residents is projected to increase from 42 in 2010 to 68 in 2030. Six cities are

expected to have populations of 10 million or more. Mumbai's population is expected

to exceed 33 million, Delhi's population to exceed 25 million, and Kolkata's

population to exceed 22 million. The McKinsey study also projects that the urban

share of GDP will rise to 69 per cent by 2030, up from 58 per cent in 2008, and that

about 120 million new urban jobs will be created between 2008 and 2030. The

number of urban households earning less than US$ 2,000 per year is expected to fall

below 20 per cent, and the number of people earning between US$ 4,000 and US$

20,000 per year is expected to increase fourfold from 32 million to 147 million. More

income and wealth is likely to be concentrated in urban areas, which in turn will affect

where and how retailing grows. In contrast, 75 per cent of urban populations today are

in the lowest income segment with average earnings of about US$1.80 per day.

Three major implications are expected to be experienced because of this

urbanization. First, retailing will not grow evenly; rather, it will grow at a higher rate

in urban areas that can accommodate and will require both organized and unorganized

retailers. Second, urban retailing is likely to remain the strategic focus of organized

retailers because there will be increasingly more numerous and more affluent

consumers to serve in that market. Third, whatever investments organized retailers do,

some of these are likely to be made in rural areas close to towns and cities pushing the

much needed stimulus to rural economy.

33

1.10 KEY CHALLENGES IN IND

1.10.1 Infrastructure Constraints

India is a large and fragmented country and the absence of strong

infrastructure and logistics systems make it challenging to reach consumers located in

urban, semi-urban and rural India. India is the seventh largest country (land mass: 3.2

million sq. kms.) with varying climatic conditions over the country (Deloitte Touche

Tohmatsu Ltd., 2010). Taste and preferences of people vary strongly all across the

country. Catering to people in 35 states and union territories is equivalent to catering

to people in 35 countries, leading to complexities in merchandise/ inventory

management. As modern retail grows, three infrastructural sectors need to develop to

the demands of this sector:

Logistics According to PricewaterhouseCoopers (2010), Cushman &

Wakefield estimates that the Indian logistics industry will grow at around 15

to 20 per cent per annum, reaching revenues of US$ 385 billion by 2015.

Market share of organised logistics companies are expected to be 12 per cent

by 2015.

Cold chain units Secondary research indicates that total market for cold

chains in India was worth approximately US$ 2.2 billion in 2008 and is

estimated to reach US$ 8.7 billion in 2015 (PricewaterhouseCoopers, 2010).

Warehousing Cushman & Wakefield estimate that Indian warehousing

sector will be US$ 55 billion by 2010-2011. Forty five million square feet of

warehousing space and 110 logistics parks will be developed in India by 2011.

34

Warehousing activities account for 20 per cent of the total Indian logistics

industry and offer robust growth potential (PricewaterhouseCoopers, 2010).

The Government o

expenditure of US$ 1 trillion in the 12th five year plan for strengthening this sector.

There exists a need for retail to concentrate on developing a strong back-end support

especially for perishable products to help reduce wastages which is estimated to be at

40 per cent of national produce (Deloitte Touche Tohmatsu Ltd., 2010). Infrastructure

has been developing at a rapid pace over the past decade but has still a significant

ground to cover.

1.10.2 Supply Chain Issues

In the Indian context, most retailers are in the early stages of developing their

supply chains, although there are specific instances of higher levels of supply chain

maturity. But issues like presence of multiple intermediaries, lack of suitable

infrastructure, lack of integration with suppliers and increasing demand from

consumers, are adding to the complexity (PricewaterhouseCoopers, 2010). Such

complexity has added to the higher costs of supply chain for Indian retailers in

comparison to global retailers (Table 1.9).

Table 1.9. Indian Retail Supply Chain Performance

Logistics cost as per cent of price

Inventory turns

Stock-out per

cent

Shrinkage per cent

Indian Retailers Approximately 10 3 to 14 5 to 15 3.1

Global Retailers 5 Average 18 Below 5 Average 1

Source: PricewaterhouseCoopers estimates

To add to the complexity, Retail participants in India vary according to

size, for

35

supermarkets, hypermarkets, specialty outlets, etc.). Addressing these supply chain

issues with limited number of opportunities like use of advance information

technology systems is still a small step compared to the rising demand levels in the

retail sector.

1.10.3 Finding Good Retail Space

As per PricewaterhouseCoopers (2010) research, the main challenge for

retailers in expanding outlets has been the absence of good retail space at the right

price that opens at the right time (since openings can be delayed, etc.). The pace of

expansion is a challenge since it is difficult to find developers who maintain a long-

term view of partnership. As per Castle Consulting (2010) report on site

Hyderabad, Bengaluru and Chennai), which were traditionally been the focus of

organized retail, have become increasingly saturated. Even a number of Tier II cities

are saturated with the markets being over served.

1.10.4 Workforce Management

Growth in the Indian retail sector and the corresponding demand for talent has

highlighted the need for effective workforce management systems. Hiring in the retail

sector is projected to increase in the future due to several new entrants, including

well-known global names, entering the sector as well as the range of formats that

retailers plan to adopt. A closer look at the industry suggests that in general, HR

practices in workforce management are in the nascent stages of development. The

challenge in acquiring, developing and retaining talent can be reflected in three

contexts:

36

Since organised retail is an emerging sector in India, experienced retail talent

is somewhat scarce.

Globally, retail has a high turnover of greater than 40 per cent, with even the

larger and more established retailers facing attrition rates, which can be higher

than in other sectors.

The talent crunch in retail is exacerbated by the lack of requisite training

infrastructure.

1.11 TOP COMPETENT INDIAN RETAIL PLAYERS4

On a pan-India big-scale level, there are at least 10 credible players in India

who have the requisite experience of retailing in India (with some having formidable

global experience), have the management and financial strength to deploy for

sustained growth in the coming years, and also have the determination and

commitment to succeed in this particular sector. While the Future Group continues to

not many recognise that the Tata Group is already the second-largest retail group in

India, and perhaps poised to be the most formidable (or among the most formidable)

in the country in the coming years. With many successful retail formats and

businesses within the group (Titan/Tanishq, Westside, Croma, Landmark, and Star

India Bazaar to list the major ones), and some solid global partners (Woolworths of

Australia, Tesco, and Inditex of Zara and many others), they are not only already

profitable to a degree but also have a very interesting portfolio of businesses in some

of the most promising categories of future consumption growth (food and grocery,

4 Perspectives, vol. 3, Technopak Advisors Pvt. Ltd.

37

apparel, consumer durables and electronics, books, music and gifts, and jewellery).

Reliance has made exceptional progress since its first launch not more than three

years ago, and is well poised to pick and choose formats to focus on from the wide

repertoire they launched. They also have a formidable array of partners-which include

-to support their

specialty ventures. It would surprise no one if more such partnerships are announced

by them in the near future. Defying na

The Bharti/ Wal-Mart partnership also promises to be one of the most successful ones,

if early results from their first 40-odd retail stores are anything to go by. Metro (of

Germany), having established a solid presence in the country, is now poised to grow

largest retail business after Wal-Mart) in India. Completing this pantheon of capable

and potentially successful big-scale retail businesses are Spencer, Shoppers Stop, and

the Landmark Group (from Dubai).

1.12 INDIAN RETAIL INDUSTRY ANALYSIS FIVE FORCES ANALYSIS

1.12.1 Threat of New Entrants

As discussed in the above section, there is mix of domestic and international

players operating in India and many international players are waiting for entry. Entry

into retailing in unorganized setup is very easy, but in the organized sector, a new

entrant has to have capabilities in terms of time and cost to scale up its operations to a

sustainable level. Because of constraints in finding a good location and space needs

higher investment, and higher operating costs, the time for gestation also increases

which tests the new entrants severely in terms of financial strength. Even if the entry

38

is made, building economies of scale through setting and developing efficient supply

chains, marketing programs, workforce management strategies, dedicated suppliers

and other cost benefit strategies require a long term view. Adding to the issues is the

existence of a large number of traditional retailers who are very much close to the

customers and cater to customer needs in a more customized manner and more

geographically capable than organized retailers. The regulatory framework for the

entry purpose for getting clearances and licenses is lengthy (Joseph, Soundararajan,

Gupta, & Sahu, 2008) along with FDI limitations. On the other side, factors like sheer

size and the growth potential offered by the industry, optimism in the government to

development reforms, increasing customer acceptance to innovations and the

knowledge and financial strength that a foreign firm is expected to carry outweigh the

barriers said above. Hence, in this way, the industry is expected to have high threat of

new entrants once the FDI norms are liberalized.

1.12.2 Threat of Substitutes

According to Joseph et al (2008), there shall be coexistence of both organized

and unorganized retailing. Such coexistence itself brings a major threat of substitution

for organized retailers. Different modern retail formats can act as substitutes to each

other as well. For example, a hypermarket can substitute a supermarket or a specialty

store and vice-versa. Even the non-store based retailing such as direct selling and e-

retailing are expected to become strong alternatives with the modern store based

retailers. Hence, there exists a high substitution threat with the industry.

1.12.3 Bargaining Power of Suppliers

Major categories of suppliers for retailers are suppliers of retail space and

suppliers of products/services. Availability and affordability of spaces have stayed as

39

critical issues for modern retailers. As a result of the economic slowdown in the last

couple of years, bullish sentiments have given way to the much needed cautious and

consolidative approach among developers and retailers. This led for renegotiated and

a substantial correction in the rental rates. All this is gradually giving modern retailers

some power to bargain against Real estate developers for lower rentals or adoption of

alternate lease models such as revenue sharing.

Since, there exist many suppliers and multiple sourcing options for large

number of product categories; bargaining power of suppliers is low except in cases of

very established brands. Branded products suppliers are in a better position to bargain

as compared to local/unbranded products suppliers. As the market is largely

unorganized, branded suppliers can easily shift to unorganized sector in case of failure

of margin negotiations with organized retailers. The reverse can also be true that in

case organized retailers do not get required margins from branded players, they can

easily shift to unbranded suppliers and develop their private brands. Overall, the

supplier power to bargain in this industry is medium.

1.12.4 Bargaining Power of Buyers

With increase in multi-channel retailing and deeper segmentation through

specialist retailers, the buyers are in a better position to choose among increasing

options for various products and services. Availability of substitutes and increased

buyer information along with value conscious characteristic, the Indian buyer today

has higher bargaining power.

40

1.12.5 Competitive Rivalry

Modern retail in India has just taken off and by value it is only 5-6 per cent of

the total retail market. As far as the size of untapped market is concerned, there exists

enough room for new players to enter and grow. In last few years many players have

entered the market. Future group, Raheja Group, Landmark Group, Reliance retail,

Aditya retail, Vishal retail, Bharti-Wal-Mart and a few others are being seen as big

players with huge potential and aggressive plans in retail sector. The present level of

competition exists because all the players are operating in few urban pockets only. As

they are all trying to grow and grab business in the same geographies, it is leading to

relatively higher competition among players. On the other side, in modern retail, the

prevalent practice is to take retail space on lease. Even the warehouses are on lease.

There are no other huge capital investments as well. All this results in lower exit

barriers. This also helps in reducing the level of competitive rivalry as a non-

performing player might exit the market without much loss. In this respect, there

exists a medium competitive rivalry in the industry.

Figure 1.10. Indian Retail Market Analysis - Five Forces Model

Competitive Rivalry -- MEDIUM

Threat of New

Entrants --HIGH

Threat of Substitutes -- HIGH

Bargaining Power of

Suppliers -- MEDIUM

Bargaining Power of Buyers --

HIGH

41

1.13 CONCLUSIONS

Organized retailing in India is at present in its initial stages and experiencing

high growth. High growth rate is on account of existing lower penetration of

organized retail and presence of huge untapped market. Under the wake of present

global slowdown, organized retail market in India has seen some corrections in entry

and growth plans by the prospective and existing players. However, most of them

continue to be aggressive and plan huge investments with an intention to make early

mover advantage and increase their presence pan India.

In the long run, large corporate retailers can survive if they improve system-

wide efficiency and productivity in the distribution chain, something that the country

needs and that can benefit small retailers as long as appropriate incentives and

regulations are provided. The economic growth of rural areas will become a bigger

concern, and policy-makers should find ways to direct investments by corporate

retailers to benefit the rural economy and citizens. It is not likely that small retailers

will disappear from India. Both large and small retailers can and should coexist to

serve different consumer segments and needs, and to contribute in complementary

ways to the economic development of the country.