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Retail in India: An Overview

By Mohammad Anas Wahaj; MBA, University of Illinois at Urbana-Champaign, 2000, USA; BS in Mechanical Engineering, Aligarh Muslim University, 1993, India
Dated: 29 July 2008

Brief Introduction

Retail ensures that the product supply to the consumer is consistent. So the more simplified, efficient and streamlined the retail process, the better for consumers and in turn for the retailer and other constituents of the supply chain. India is currently in the retail awareness mode and all the constituents of the market whether businesses, regulators, policy makers, investors, entrepreneurs and so on are waking up to the new retail reality with great enthusiasm. Although retail is not new to India and its past innovations along with the employment that the existing retail sector provides to the population can't be ignored, it is surely getting transformed towards more organized form. This seems to be the result of liberalized policies and regulations and also the entry of big Indian corporations and their global counterparts in the sector.

India has the largest density of retail outlets in the world, for every 1000 persons there are 15 retail outlets. And also it is the country with the most unorganized retail market. More than 99% of retailer's function in less than 500 sq ft of shopping space typically in the format of a shop in front and the residence in the back or at the top.

In the 1980s with the opening of the economy the country saw the beginning of the organized retail in the textile sector with Bombay Dyeing, Raymonds, S. Kumars and Grasim opening their retail chains. Later on Tatas took the initiative with their exclusive Titan watch showrooms.

Latter half of the 1990s saw the entry of the retail businesses that didn't have serious plans of getting into manufacturing and were pure play retailers. Shoppers' Stop, Pantaloons etc got into the market to bring to the fore a new roadmap for retail growth in India.

But in the past decade the retail sector has evolved most significantly. Indian business houses and manufacturers have established multiple retail formats while the real estate companies and venture capitalists made sizeable investments in retail infrastructure. As a result supermarkets, hypermarkets, department stores, convenience stores and one-stop shops are becoming more visible and the organized retail is finally laying the foundation for sustainable growth and structural transformation of the sector.

India Retail Statistics

  • Technopak KSA has estimated the absolute size of the Indian retail market at around US$ 324 Billion. The rural-urban split ratio is about 55:45, with rural market at around US$ 178 Billion.
  • India has 12 million retail outlets at present, that is largest in the world. Of these nearly 5 million sell food and related products.
  • About 3% of the retail trade is the organized sector and the remaining 97% is unorganized. Overall size of the retail sector will be US$ 427 Billion by 2010 and US$ 637 Billion by 2015, organized segment would be 22% by 2010 up from the present 4%.
  • According to Ernst & Young organized retail will be US$ 30 Billion by 2010 and in the AT Kearney's Annual Global Retail Development Index, India is ranked at the top for the third consecutive year, maintaining its position as the most attractive retail market in the world.
  • According to the Credit Rating and Information Services of India, the industry brought in US$ 25.44 Billion turnover in 2007-08 as against US$ 16.99 Billion in 2006-07, a growth rate of 49.73%.
  • According to a study by Deloitte, Haskins and Sells, organized retail has increased its share from 5% of total retail sales in 2006 to 8% in 2007. The fastest growing segments have been the wholesale cash and carry (150%) followed by supermarkets (100%) and hypermarkets (75-80%)
  • 40 million people work in the unorganized retail sector in India and make up for the 97% of the US$ 330 Billion retail trade in India.
  • Additional 25 million jobs will be created by the end of this decade by retail industry in India.

Unorganized Retail in India

Unorganized retail sector is about 97% of the total Indian retail market and most shopping still happens in formats that include neighbourhood kirana stores, mom and pop stores, vegetable vendors, footpath stores etc. They come in all sizes and locations- in the inner city and suburban localities, metros and small towns and villages- and are spread across India.

Suboth Kant Sahay, speaking during the India Retail Forum 2007 said, "Engaging small shopkeepers as a part of the supply chain management and economic opportunities to the farmers is necessary". His concern seems to be well founded as unorganized retail provides employment to 40 million people. If there is any shakeup due to organized retail how and where will this unemployment shift be absorbed.

According to Pinakiranjan Mishra, Ernst & Young, "A large section of the population earns just enough to shop at kirana stores. Organized retail chains are not located close enough to neighborhoods, nor served by good public transport systems." This provides evidence of continued existence of the unorganized retail as it serves and fulfils the need of a prominent segment of the market.

With the modern retail expected to take a 10% share of the retail sector in the next 4 years, the overall size of the market will grow creating more consumerism and hence space for both organized and unorganized retail. Innovations and market dynamics will make smaller unorgaized retailer to become more organized, like it happened in the jewellery industry and pharma retail, with better billing procedures and tax compliance.

Moreover to compete with corporate retail and to be profitable, small traders and shopkeepers have to find out innovative ways and methods to attract customers. They have to become 'innovative kiranas'. Although kirana's already provide personal touch and local convenience to shopping consumers but they also have to work to evolve themselves into 'innovative kiranas' by providing better product range, customized offerings and efficient mechanism to compete on prices. This can be done in two ways one by a single large store that shelves varied product range and provide customization and the other can be by a group of shopkeepers building a cooperative where different small shops put together make a diverse product range and a complete shopping experience for the consumer. Something like distributed shopping network when put together competes directly with a shopping mall or supermarket. But the challenge is whether they can coordinate their efforts and streamline their interests.

Addition of value added services like ticketing (air and rail) and billing (mobile and utility) center, mobile phone recharge etc can further become differentiating factors for small retail shops. At this time no agency has data to measure the impact of value added services on retail success but the approach seems promising.

In Chennai where supermarkets account for 20% of Chennai's household expenditure, local kirana stores are competing directly with the corporate retail with their innovations. Amma Naana, 7 Stars and Murugan stores are some of these local kiranas. They have grown aggressively and have replicated organized retail store formats, look and feel, merchandizing and in-store promotions. As stand-alone stores, they are operating a highly profitable business model.

Moreover India's leading high streets such as Connaught Place or Khan Market in Delhi, Mumbai's Linking Road, Colaba or Breach Candy, Bangalore's Brigade Road, T. Nagar in Chennai, Kolkata's Park Street and Pune's FC Road have adapted themselves to cater to the changing aspirations of consumers as well as changing retail trends.

Although traders and small shopkeepers are trying to do their bit to compete in the present competitive retail scenario. But they are also looking towards the government and the policy makers to assist them in their quest to be formidable, relevant and value added players in the overall retail development.

The internal survey commissioned by the Confederation of All India Traders (CAIT) in 18 cities, revealed that 82% of the traders were inclined to transform their traditional business format by upgrading their existing business structure. The survey was conducted by the CAIT Research Trade Development Board (CRTB) between April to June 2008 with a sample size of 7643.

94% opined that government should initiate steps to form a national trade policy for small retailers and bring reforms in the taxation structure and other law governing trade. Nearly 87% of the traders viewed that retail trade should be placed for priority sector advances under the present banking system to make it feasible for the banks to facilitate financial assistance to traders without much paperwork. About 80% wanted primary focus of government for providing infrastructural facilities in commercial markets.

Apart from efforts by the public sector financial institutions, private banks and financial companies should also view the unorganized sector with a positive approach and expectations. According to V. Vaidyanathan, ED ICICI Bank, 'Unorganized retailing has potential to grow at the rate of 20% per annum. The bank has an exposure of Rs 10,000 crore towards the unorganized retail sector.'

ICICI bank has already opened 1 million accounts for the shop-keepers. By extending finance to them, the operational efficiency of the shop-keepers would increase. The bank also recently launched B2B internet banking model for customers.

Thus unorganized sector can become organized in its own way and continue to attract consumers but the process of evolution has to be speedier or the sector will find shift of consumers towards other more organized avenues. The consumer doesn't want to wait for fulfilment of his needs and would try to explore the other options whenever required.

Organized Retail in India

According to Peter Child and Irene Vittal of McKinsey, "Organized retail activity boosts overall economic growth, eventually benefiting all along the consumption and production chain. Organized retail has an enormous multiplier impact. A streamlined supply chain links the producer to end consumer directly, thereby ensuring better returns to those at the top. It's one industry that will close the gap between the urban and rural India."

Organized retail operates on a model that constitutes economies of scale, better cost management, broad and diverse product range, better quality, customer focus, convenient location and pleasant shopping environment. These elements differentiates it from the unorganized retail which might be missing one or the few of these elements.

The organized retail supply chain constitutes consumers, retailers, specialized agents, processors, producers. The concept of supply chain, efficient inventory management and customer focus are essential for retail businesses and to achieve operational efficiencies. A typical pan-national retail operation would have multiple regional warehouses, offices and retail outlets. The ability to have current information on a real time basis and analyzing that data for better forecasting are some of the payback provided by the retail technology within organized retail.

According to a report "Impact of organized retailing on the unorganized sector" by Indian Council for Research in International Economic Relations (ICRIER), "Organized retail can appear small but is spread in all local markets, providing the convenience of a neighbourhood kirana store but with procurement on a mass scale keeps prices low and provides greater variety to consumers."

But it has to be understood that if falling prices for food are achieved by making transportation, logistics and procurement more efficient then both producers and consumers benefit. Reduction in consumer prices should not be done by suppressing prices for producers. Hence all the corporations and big players involved in the organized retail should also assure the interests of the farmers and producers which would one day be there consumers also.

Organized retail in the present format of supermarkets, hypermarkets, malls etc is a recent phenomenon in the Indian context. But organized retail has been present in pockets all over India with early representation from Raymond showrooms, cooperative 'sahakar bhandars' and 'kendriya bhandars' like Super Bazaar in Delhi, family managed large departmental stores like Akbarally's in Mumbai, the first South Mumbai mall called Crossroads that came in 1990s etc.

Current organized retail focusses primarily on the 300 million urban middle class and additional 200 million rural rich, who form consumer market worth more than US$ 100 Billion. Aspirational classes (middle middle and lower middle) are the real potential as they want to lead better lives and believe in good education, hard work and to absorb knowledge. Success of Big Bazaar, Pantaloon's version of Walmart is proof that there is enormous potential in providing products and services to this class of consumers.

Metros namely Delhi, Mumbai, Chennai, Kolkata and Bangalore, already have a base of metropolitan consumers with ready cash and global tastes and hence the initial rush of retailers to this market. But the spending power of the populations is pretty much distributed across India and is not only concentrated in metros. So now retailers are also focusing on tier II and tier III cities. These upcoming cities where spending capacity of population is on the rise are Chandigarh, Coimbatore, Pune, Ahmedabad, Baroda, Trivandrum, Cochin, Ludhiana and Shimla.

Apart from the metros and the cities the retailers should also assess the needs of the rural consumer as bulk of Indian population still lives in rural areas. Hence no organized retail would be fully organized if it doesn't reach the India's rural heartland efficiently.

Although there are rural initiatives for inclusive growth that are currently happening with the lead from ITC's eChoupal and HLL's Project Shakti but lot of effort is still desired from other corporates and financial institutions in the form of public-private partnerships. Recently Dabur has tied up with State Bank of Indore to lend money to farmers working in its herbal parks, Dabur's guarantee to buy produce (purchase guarantee), supplies saplings to farmers at cost price and gives technicals assistance for cultivation.

Moreover to source produce from the Indian farmer who constitutes rural India, retailers have to build long term alliances with them and while improving their own processes to source produce should also align their efforts in participating in rural infrastructure development and also provide them with products in a better format.

Big corporations and their foreign partners alongwith their multiple formats and stores are entering into all sectors and regions of the Indian retail market. Some of the big names that have pledged huge sums of money in their retail initiatives include Bharti Enterprises, Reliance Retail, Aditya Birla Group, Tata Enterprises, Future Group, RPG and Vishal Megamart.

Then there are new entrants like Mahindra and Mahindra, Parsvnath, DLF, Hero Honda and India Bulls that are chalking out their retail plans. Also there are regional localized players that have already made their mark in their respective territories such as Vitan and Nilgiri in Chennai, Subhiksha Delhi/NCR and UP, Trinetra in Bangalore and Margin Free in Kerala.

Not to be left behind, foreign players like Walmart, Carrefour, Tesco, Metro Cash & Carry and ShopRite are also rushing in through various arrangements with their Indian partners. What is holding them right now to enter with full speed is the government's FDI policy in retail that restricts the foreign partner to enter front end multi brand retail with the controlling stake. Retail industry insiders had indicated that foreign partners bring with them expertise and management bandwidth that can be utilized even in the front end of the retail business.

Presently organized retail is entering and expanding in all sectors that include Clothing, Textiles and Accessories; Food and Grocery; Consumer Durables; Footwear; Furniture and Furnishings, Catering Services, Watches, Jewellery, Mobile Handsets; Books, Music and Gifts; Entertainment; Health and Beauty Products; Health and Beauty Care Services. But the fastest growing ones are food and groceries at about 33%. Books and music is growing at 24-25% followed by apparels, textiles, accessories and footwear.

To extraordinarily satisfy consumer's needs, the trend of specialized malls has also picked up in India. Malls like Gold Souk and the Wedding Mall have been conceptualized to cater to the specific needs of the buyer, so that he can find all possible brands of a particular segment like jewellery or trousseau under one roof.

As the retail continues to grow, activities in joint ventures with international corporations, private equity, acquisition (inorganic growth) and initial public offering (IPO) are becoming prominent. Carrefour, Starbucks, Australian major Woolworth are scouting for joint ventures with Indian companies. Navis invested in Nirulas and Citicorp in Flemingo Duty Free Shops while IL&FS in Digital Shoppy Reliance acquired retail biz of Adanis and AV Birla Group acquired Trinethra.

Subhiksha raised PE from ICICI Ventures, while Actis took a controlling stake in Nilgiris. After initial rounds of PE funding companies such as Vishal Megamart and Koutons took the IPO route. Large players like Shoppers Stop, Trent and Pantaloons are already listed on the exchanges.

Future Prospects for Indian Retail

The future of the retail industry looks positive and moving towards the growth path with the expansion of the market, more favourable government policies and innovative technologies that facilitate retail operations. With the growth in purchasing power of the urban consumer branded products in categories like apparels, cosmetics, shoes, watches, beverages, food and even jewellery are evolving into lifestyle products and getting wide acceptability by the urban Indian consumer. Indian retailers and their foreign partners are using this growth and are focusing to grow with it, diversify and introduce innovative formats to build long term retail brands.

According to Subodh Kant Sahay, Minister of State for Food Processing Industries, 'Organized retail, backed by an efficient supply chain, has the potential of raising the rate of growth of the food processing sector from 13% to 20% in next 3 to 5 years.' He further said that during the 11th plan, the ministry would launch a revamped comprehensive scheme for creating integrated cold chain infrastructure at different levels- farm level primary processing centers-cum-cold chain, collection/aggregation centers. This will further boost the growth of retail in the times to come.

Further more some of the retail sectors that have already shown promise and are on the rise are kid's retail and personal care products.

India is the second fastest growing economy in the world and the third largest economy in terms of GDP in next five years. It is fourth largest economy in PPP (purchasing power parity) terms after USA, China and Japan and is among the top 10 FDI destinations. It is also the fastest growing Asia-Pacific market for international tourist spending. India's 8% economy growth is expected to exceed that of China by 2015. By 2032 India is expected to become the third biggest economy in the world after US and China. All these indicators point towards the future prospects of the Indian market and hence the promise that it holds for retail sector.

Moreover India has the largest young population in the world: over 890 million people below 45 years of age and over 550 million under the age of 20 by 2015. Also the number of effective consumers is expected to increase to over 600 million by 2010 sufficient to make India as one of the largest cosumer markets in the world.

By the year 2011, 1200 hypermarkets and 3000 supermarkets would function across India. During this period retail would be attracting an investment of as much as US $25 Billion, more than 12 times the investment that was during the last one decade. Most of this growth is estimated to come from greater than 1000 tier II towns of India.
According to CB Richard Ellis (Commercial Real Estate Firm) Report: "India has been identified as the most sought after market by retailers who are looking to the world's emerging markets to drive the success of their businesses in the future. 40% of retailers expect emerging markets to provide their main source of growth over the next five years, while only a quarter expect to see growth concentrated in their home market."

The report also reveals that 27% of international retailers surveyed have opened their first store in India in the last year or are planning to do so. The country is considered particularly attractive because of the size of its market compared to its low presence of international retailers. With foreign ownership rules being gradually relaxed, foreign investment is also now possible allowing single brand retailers to own upto 49% of their Indian operations.

Indian retail seems to have a buoyant future substantially due to the transformations in the socio-economic fabric that would include: fast growth in economy, rapid urbanization, deaging population, younger workforce, greater affluence, economically empowered women and growing number of double income families.

Also consumers are now seeking the convenience of one-stop shopping, speedy and efficient processing as most lead busy lives and seek efficient utilization of their time. Consumers are also on the look-out for more information, better quality and hygiene as well as increased customer service. All these point towards more organized and efficient retail sector in future.
From the human resources perspective the challenge of growing a new industry from the ground up, and contributing in its success, similar to telecom a decade ago, is one main reason that is attracting professionals to organized retail at this time. And adding to the sector's attractiveness are various service formats the industry is experimenting with that provides further dynamism to the work environment for those with entrepreneurial spirit.

Among the big Indian corporations, Aditya Birla Group plans Rs 5,000 crore investment in retail while Reliance has dedicated Rs 25,000 crore for retail initiatives over a period of time. As mentioned earlier, others have also either already invested and or have pledged huge sums for their retail initiatives.

With all the good things that are observed about the retail sector in India and its future prospects it is not bereft with challenges of its own particularly one about the controversy over involvement of FDI in multibrand retail and protest by small traders. The government increased limit of FDI to 51% in specific categories like electronic goods and sport items but it is still far for the foreign retailer to own a front end multi-brand retail store in India.

But the long term prosperity of the sector will depend upon the convergence of the unorganized and organized sector and the retention and growth of employment in the sector along with inclusion of the rural market and emphasis on rural development. Consolidated approach to the overall retail and to manage the dynamics of the various stake-holders of the sector would be a challenging but achievable road map and goal for all those who want to benefit from the retail industry.

List of References

1. "Reading the fine print of retail boom in India"; Tarun Joshi, MD, Brand House Retail; Biz Publications, Financial Express Web; July 16, 2008
2. "ICICI Bank to focus on unorganised retailing"; Financial Express Web; July 15, 2008
3. "Marketers have adapted to changing retail trends"; Rajesh Unnikrishnan; The Economic Times; July 14, 2008
4. "Traders opt for modernising retail business format"; PTI, The Economic Times; July 13, 2008
5. "Divide And Rule"; Piya Singh; BusinessWorld; July 04, 2008
6. "The Phenomenon Called Retail (Part II)", Jack Albert;; July 02, 2008
7. "Indian Retail Scenario"; Shalini Bahadur;; July 2008
8. "India Shopping Trends 2008: Food & Grocery"; Technopak Advisors Pvt. Ltd.; May 2008
9. "Organised retail enhances gains for consumers"; Business Daily; THE HINDU Business Line; May 28, 2008
10. "The emergence of super-kiranas"; Bijoy Ghosh; Business Daily; THE HINDU Business Line; May 22, 2008
11. "Retailers focus is shifting from metros to tier I and tier II cities- Shyamak Tata";, Dhruv Tanwar; May 21, 2008
12. "India identified as most sought-after market by retailers"; Business Daily, THE HINDU Business Line; April 15, 2008
13. "Technology In Retail"; Hukum S Negi;; April 12, 2008
14. "Buzz areas in Indian retail"; Business Daily, THE HINDU Business Line; March 27, 2008
15. "Memoirs of Tomorrow: Perspectives on Retailing in India & Rural Marketing"; Nitin Srivastava; [ ]; March 16, 2008
16. "KSA Technopak Analysis: India's organized retail sector strengthens into 2008";; February 07, 2008
17. "Retail boom in India opens society to more brands and newer lifestyles"; TNN, The Economic Times; January 26, 2008
18. "Private labels outperform manufacturer brands"; Nirmalya Kumar & Jan-Benedict E M Steenkamp; The Economic Times; January 24, 2008
19. "Retail, wholesale SMEs record growth in business, Divya Trivedi, Business Daily from THE HINDU Business Line, Jan 22, 2008
20. "Squaring Up To Survive: Small retailers give big retail a run for its money"; Vishal Krishna; ABP Pvt Ltd Publication; January 18, 2008
21. "FDI in retail will be allowed if kirana stores are unaffected"; R. V. Moorthy; Business Daily; THE HINDU Business Line; December 18, 2007
22. "India Retail Forum 2007"; Rohan Rao; R Reflections; October 13, 2007
23. "The plot thickens: According to estimates, India Inc will pool in $22 billion into retail over the next 5 years"; Pummy Kaul; Outlook Business; October 05, 2006
24. "Outlets in Retail- Organized retail is almost a proxy to the country's strong economic growth and young demographics. Plan a career here for the long run"; Amanpreet Singh; Business Today; December 18, 2005
25. "The Foreign Retailer-With foreign investment in retail looking imminent, global giants are drawing up their India plans and the home grown majors, their defences"; Priya Srinivasan; Business Today; May 08, 2005
26. "ITC vs HLL- The fight for India's rural heartland"; Indrajit Gupta & M Rajshekhar; BusinessWorld; May 02, 2005

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