Preface| Foreword| ExecutiveSummary| Methodology|
IndianRetailIndustry| Insights| InterviewSection| CompanyListing|
Sponsors| LaunchEvent| D&BEditorialTeam
Theorganised retail sector in Indiahasbeenwitnessingvarious
issuesandchallengeswhichareproving tobeahurdle for its
fastpacedgrowth.Even though the organised retail sector is in a
very nascent stage in India, it provides ample opportunities for
retailers, andmitigation of a
fewchallengeswillhelpthesectorattainhighereconomiesofscaleandgrowth.Elucidatedbelowarethechallengesandrisksthatthesectorfaces:
GlobaleconomicslowdownCompetitionfromtheunorganisedsectorRetailsectorhasnorecognitionasanindustryHighrealestatecostsLackofbasicinfrastructureSupplychaininefficienciesChallengeswithrespecttohumanresourcesMarginPressure
Globaleconomicslowdownimpactingconsumerdemand
ThecurrentcontractioninoverallgrowthhasnotbeensosevereeversincetheonewitnessedduringWorldWarII.Thesubprimetriggeredcrisisinthe
US during end of 2007 gradually spread across other parts of the
world as a the fallout of this crisis, credit availability dropped
sharply
inadvancedeconomiesandtheirGDPgrowthcontractedincessantlyduringthelastquarterof2008.Thefinancialcrisiscontinuedtotroubleadvancedanddevelopingeconomiesinspiteofpolicymakersattemptstoreplenishliquidityinthesemarkets.Manyfinancialinstitutionscollapsedandfiledforbankruptcy,asthesituationgotfrombadtoworse.Manybanks/institutionsmademassivewritedownsfollowingthisturnofevents.During200710,thewritedownsonglobalexposuresareexpectedtobeworthUS$4trillionwhilethewritedownsontheUSoriginatedassetsalonearelikelytobeworthUS$2.7
trillion11.Suchmassivewritedownwill affect the financial system
toagraveextent,as it is likely to further strainbanks
fundingcapabilities.Alreadythesewritedownsareturningintoamajorchallengeforbanks/financialinstitutionsbecauseofsolvencyissues,anddeepeningriskoffailureofbanks/financialinstitutions.FailureoftheUSinvestmentbankLehmanBrothers,forinstance,hashadanenormousimpactontheoverallglobalfinancialsystem,andhasconsequentlyshakentheconfidenceofbanks,investors,householdsetc.
AccordingtoIMFsWorldEconomicOutlook(Apr2009),theglobalGDPcontractedby1.8%inthefirstquarterof2009ascomparedwiththe4.5%growth
recordedduring the sameperiod in theprevious year. Likewise,
theadvancedeconomieswitnessed contraction inGDPgrowth
(by1.7%)duringthelastquarterof2008whiletheUS,EuroareaandJapanwitnessedarecessionarytrend12.AccordingtoIMFestimates,theworldGDPwillcontinuetocontractby2.4%duringthethirdquarterof2009.Goingahead,policymakersfaceadauntingtaskastheyneedtoputbackthingsasearlyaspossibleaccordingtoIMFsWorldEconomicOutlook(Apr2009),theworldeconomyisexpectedtorecovergraduallyonlyin2010by1.9%,bycorroboratingdemand,withappropriatemonetaryandfiscalmeasures.
Thefinancialcrisisandglobaleconomicslowdownresulted injob
lossesaroundtheworld,whichweakenedconsumerdemand.TheunemploymentrateremainedhighintheUSduringfirstquarterof2009,EuropeandemergingeconomieslikeBrazilforinstance,theannualunemploymentrateintheUSreached5.8%in2008from4.6%in2007,whichfurtherwentupto9.4%inMay2009.Infuture,therisingunemploymentratesinadvancedeconomiesaswellaseconomiesthatareheavilyexportorientedwillfurtherdampenconsumerspendingasaresult,theretailsectorsgrowthwillremainunderthreat.IntheUS,theretailtradesalesgrowth(bothretailandfoodservices)contractedby0.7%in2008from3.3%growthin2007.Thedownwardtrendinretailtradesalescontinuedduringthefirstsixmonthsof2009(JanJune),asitwentdownby9.3%13ascomparedwiththepreviousyear.InEU27countries,thetotalretailtradeinvolumetermscontinuedtocontractduringthefirstfivemonthsof2009forinstance,duringMay2009,theretailtradeinvolumetermsinEU27contractedby3.1%againstthesameperiodinthepreviousyear.
Consumptiondeclinesintheadvancedeconomies
Privateconsumptionexpenditureisanimportantindicatorofoveralleconomicgrowth.Inthelastcoupleofquarters,thedeclineinconsumptionhasfurtheraffectedtheglobaleconomicdownturn.Moreover,widespreadfinancialcrisisseverelyhitcreditavailabilityandhouseholddisposableincome.Forinstance,UShouseholdslost20%(US$13trillion)14oftheirnetworthasapercentageofdisposableincomefromthesecondquarterof2007tothefourthquarterof2008.Thestockpricesacrosstheworldstartedfallingduringthesecondquarterof2007andcontinued
its
lossesthroughout2008theglobalstockmarketslostbetween4060%indollartermsthattranslatedtoahugelossofglobalwealthin2008.Thepersonaldisposableincome(atcurrentprices)intheUSregisterednegativegrowth(3.9%and2.1%)duringthelasttwoquartersof2008,respectively.Theconsumerdemandsituationwasaggravatedfurtherbyreducedcapitalavailabilityandconsequentfallininvestments.
As mentioned earlier in the section, the financial crisis
triggered massive layoffs globally, which pushed up the
unemployment rates. Further,uncertain future market conditions
raised precautionary household savings that curtailed investments
and consumer demand. The
investmentactivitiesin27highincomecountriesoutof30countriesfellby4.4%(ata16.5%annualisedrate)duringthefourthquarterof200815.Ontheotherhand,inanuncertainsituationlikethis,thehouseholdsavingswouldgoupasaprecautionarymeasurewiththeglobaleconomytryinghardtorebuildinthecomingmonths.Forinstancethehouseholdsavingsrate(notseasonallyadjusted)inEU27jumpedto12.5%duringQ42008from8.6%inQ12008,whileinvestmentsdippedto9.0%from9.9%duringthesameperiod.
ThepersonalconsumptionexpenditureintheUSregisteredmerely0.2%yoygrowthin2008,downfrom2.8%growthin2007.Further,thepersonalconsumptionexpendituregrowthturnednegativeduringthesecondhalfof2008andfirstquarterof2009.ThepersonalconsumptionexpenditureintheUS
contributes over 70%of itsGDP at constant prices. The severity of
the current recession (slowdown) can also further bemeasured
frompreviousrecessionsin1975,1982and199116.Forexample,theaveragepercapitaconsumptioninthepreviousthreerecessions(1975,1982and1991)grewby0.28%,whilein2009,itisestimatedthatthepercapitaconsumptionwillcontractby1.1%ascomparedwiththepreviousyear.Indiaisnotentirelyinsulatedfromthisweakeningdemand.Forexample,duringthefirsthalf(H1)ofFY09,PFCE(atconstantprices)grewby3.3%,whichwaslessthanhalf(7.9%)ofthatwitnessedinthecorrespondingperiodofpreviousyear.Duringthesecondhalf(H2FY09),thetrendcontinuedasPFCE
further slowed down to 2.5% as compared with 9.0% in the
corresponding period in the previous year. An interesting
observation on theeconomicslowdownand itseffectsonconsumption in
Indiacanbemade fromthevolumeofcreditcard
transactionsgrowth,whichdeclined from34.6%inFY08to13.7%inFY09.
Competitionfromtheunorganisedsector
Organised retailers face immense competition from the
unorganised retailers or kirana stores (momandpop stores) that
generally cater to thecustomers within their neighbourhood. The
unorganised retail sector constitutes over 94% of Indias total
retail sector and thus, poses a serioushurdle for organised
retailers. If put numerically, the organised retailers are facing
stiff competition fromover 13million kirana stores that
offerpersonalisedservicessuchasdirectcredittocustomers,freehomedeliveryservices,apartfromthe
loyaltybenefits.Duringthecurrenteconomicslowdown,thetraditionalkiranastoresadoptedvariousmeasurestoretaintheircustomers,whichdirectlyaffectedorganisedretailers.Generally,ithasbeenobservedthatcustomersshopimpulsivelyandendupspendingmorethanwhattheyneedatorganisedretailoutletshowever,inkiranastores,theysticktotheirneedsbecauseofthelimitedvariety.Duringadownturn,manycustomersmaynotliketospendmoreasisevidentfromthepastfewmonthstrendthatshoppersareincreasinglyswitchingfromorganisedretailstorestokiranas.
Retailsectoryettoberecognisedasanindustry
The retail sector is not recognised as an industry by the
government even though it is the secondlargest employer after
agriculture. Lack
ofrecognitionasanindustryaffectstheretailsectorinthefollowingways:
Duetothelackofestablishedlendingnormsandconsequentdelayinfinancingactivity,theexistingandnewplayershavelesseraccesstocredit,whichaffectstheirgrowthandexpansionplansTheabsenceofasinglenodalagencyleadstochaos,asretailershavetoobligetomultipleauthoritiestogetclearancesandforregularoperations
Highrealestatecosts
Eventhoughtherealestatepriceshavesubsidedrecentlyduetotheslowdownineconomiesandthefinancialcrises,thesepricesareexpectedtogoupagaininthenearfuture.Presentlythesectorfaceshighstampduties,protenancyacts,therigidUrbanLandCeilingActandtheRentControlActandtimeconsuminglegalprocesses,whichcausesdelaysinopeningstores.
Earlier on the lease or rents on properties were very high
(among the highest in the world) at some prominent locations in
major cities.
Theprofitabilityofretailcompanieswereaffectedseverelybecauserealestatecostsconstitutedamajorpartoftheiroperatingexpenses.Nowcompaniesaremovingout
fromprominentmallsof tier I citiesandare renegotiating the rental
agreementswith landlords to reduce
costs.SomeareevenfocussingonsettingupshopsintierIIandtierIIIcities.
Lackofbasicinfrastructure
Poor roads and lack of cold chain infrastructure hampers the
development of food retail in India. The existing players have to
invest
substantialamountsofmoneyandtimeinbuildingacoldchainnetwork.
Supplychaininefficiencies
Supplychainneedstobeefficientlymanagedbecauseithasadirectimpactonthecompanysbottomlines.PresentlytheIndianorganisedretailhasan
efficient supply chain but it appears efficient onlywhen
comparedwith the unorganised sector.On an international level the
Indian
organisedretailersfallshortofinternationalretailerslikeWalMartandCarrefourintermsofefficienciesinsupplychain.Inthefollowingparagraphssomekeychallengesthattheretailersfaceduringprocuringgoodsfromsupplierstodeliveringthesametoendcustomersarediscussed.
Inventorymanagementisthefirstchallengethatretailersfaceatthelocalstorelevelaswellasatthewarehouselevel.Excessinventoryoftenleadstoan
increase in inventorycosts,andthento lowerprofits,soretailers
likePantaloonsandShoppersStophaveITsystems inplacefor
inventorymanagement.SCMIThashelped retailers toplan their
stockouts, replenish their stockon time,move stock fromwarehouse to
stores,maintainadequatestockatastoretomatchconsumerpreferencesetc.However,theretailermaystillfaceabigchallengeintermsofefficientlyimplementingthe
supplychain software across stores and integrating it with the
central warehouse, which can be a timeconsuming process, requiring
trainedpersonnel.
Logisticsisanotherchallengerelatedtothesupplychain.Itisimperativeforanyorganisedfoodandgroceryretailertoestablisharobustcoldchain.Amulisthebestexampleofthisscenario,asithasdevelopedacoldstoragechainacrossIndia.UntilandunlessorganisedretailerslikeRelianceandFoodBazaarfullydevelopintegratedcoldchains,theywouldcontinuetoincurlossofconsiderableamountofmoneythroughwastagesofperishableitemswhilemovinghugequantitiesfromoneplacetoanother.
Thethirdchallengerelatedtothesupplychainisprocurement.Bigorganisedretailersenjoyeconomiesofscalebasedontheirsizeandexpansionplans.Theeconomicalbenefitsofscaleinprocurementareachievedwhenprocurementismadeinthousandsormillionsofunitshowever,themainchallengehere
is toprocureadequateamountofstockaccording tocustomerrequirements,
failingwhich theresultant rise in
inventorycanaffectbottomlines.
Challengeswithrespecttohumanresources
TheIndianorganisedretailplayersshelloutmorethan7%ofsalestowardspersonnelcosts.ThehighHRcostsareessentiallythecostsincurredontrainingemployeesasthereisaseverescarcityforskilledlabourinIndia.Theretailindustryfacesattritionratesashighas50%,whichishighwhencomparedtoothersectorsalso.Changesincareerpath,employeebenefitsofferedbycompetitorsofsimilarindustries,flexibleandbetterworkinghoursandconditionscontributetothehighattrition.
