Published on March 9, 2014
Opportunities & Challenges of Investment in Retail Sector of India Prepared By: Vishal Jhambia email@example.com M.NO:+91 8087186587 PGDM(Marketing) Balaji Institute of Managemnt & HRD Opportunities and Challenges of investment in Retail Sector of India
India with a population dividend of 1.03 billion and with one of highest economic growth of 6% is seen as 5th emerging market with potential of US$ 1.3 trillion by 2018 as next growth story for Retail Industry. But there is a word of caution as it is said” Retail is Detail”. Investor need to get all the detail right and take into consideration the holistic view of the investment that is required in infrastructure and supply chain management to get the return on investment(ROI). Marketer need a thought leap to capture the hearts and the soul of rural man of India and bring in synch with government policy of doing biz in challenging market of India. What stand as biggest pillar is cultural diversity and multiplicity of taste and preference of 28 different states? Focus needs to be on inclusive growth of SME’s, small entrepreneur and open doors of opportunities to all section of society from small farmer to a corporate entity. Taking into consideration Incredible India decision makers need to make hard decision about creating synergy of alliances with sourcing and logistics partner. Business format and product category need to be thought well enough to get upper hand in organize retail which is estimated to grow at rate fourfold by 2025 from 107 billion US$. Opportunities and Challenges of investment in Retail Sector of India
Retail Sector in India: Retail Sector of India is rated as fifth most promising market by Global Retail Development index by A.T.Kearney Global Retail Development Report. Retailing Industry in India is estimated at 450-500 billion growing at CAGR of 15 to 20 %. The retail and wholesale sector in India accounts for approx 14% of GDP. The Indian retail market is poised to reach USD 1.3 trillion by 2020. India's retail and logistics industry employs about 40 million Indians (3.3% of Indian population). In terms of employment, the sector is second largest employer providing over 10% of all formal jobs. Organized Sector: US $
Organized Retail accounts for 5-8% which is lowest compared to its peers in BRIC countries – Brazil (38%), Russia (33%) and China (20%).In US (85%) which is indicates strong growth potential for organized retail in India. The Organized Retail has been growing at 35% CAGR. Organized retail is expected to be 9 per cent of total retail market by 2015 and 20 per cent by 2020 Rapid emergence of organized retail outlets like mega malls and hypermarkets are augmenting the growth of organized retail in the country.
Unorganized Sector: There are over 12 million mom-and-pop stores. Traditionally, the small stores (kirana) retailing have been one of the easiest ways to generate self-employment, as it requires minimum investments in terms of land, labor and capital. These stores are not affected by the modern retailing as it is still considered very convenient to shop. In order to keep pace with the modern formats, kiranas have now started providing more value-added services like stocking ready to cook vegetables and other fresh product. They also provide services like credit, phone service, home delivery etc.
Strong Fundamental of India: India's economic growth was at 6.2 per cent for the 2011-12 fiscal. It had grown by 5.4 per cent, 5.2 per cent and 4.7 per cent in the first, second and third quarters, respectively, of 2012-13, according to data released by the Central Statistical Organization (CSO) today. From an overall perspective, given its high growth potential, India scores well among foreign investors compared to global economy peers; for example, in the FDI Confidence Index* 2012, India ranks second, up from third position in 2010 India was also ranked amongst the top 20 real estate investment markets globally with investment volume worth Rs 190 billion (US$ 3.05 billion) recorded in 2012, according to Cushman & Wakefield's report ‘International Investment Atlas. The IT industry, telecommunication industry and many other industries have seen unprecedented growth during the last couple of years. But one industry that has caught the eye of the common man at almost every turning on the road is the Booming Retail Industry.
Socio cultural: Changing mindset of customers: The customer mind set is gradually shifting from low price to better convenience, high value and a better shopping experience. People have become aware of the value of money. Nowadays the Indian consumers are well versed with the concepts about quality of products and services. Modern retailers in India find it quite challenging to sell meat products because a large number of Indians would deliberately avoid visiting stores dealing in meat, fish and poultry. There is a separate channel for these fresh produce which is largely in the traditional format the majority of the Indian consumers are shifting from brand loyalist to value conscious, which would require greater efforts on the part of a retailer to satisfy the billion demands and provision of enduring services. Studies like the MasterCard Worldwide Index of Consumer Confidence have ranked Indian consumers as some of the most confident in the world. The more confident the consumers are about the strength of the economy, their personal finances, their career growth, etc., the more they tend to increase their consumption, purchase non-essential products, experiment with products, brands, categories, etc.
A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector are going to be the key growth drivers of the retail sector in India. Expansion in the size of the upper middle class and advertisement has led to greater spending on luxury products and high brand consciousness.
Rural Market: Rural consumption per person has increased by 19 per cent yearly between 2009 and 2012; two percentage points higher than its urban peers. In incremental terms, spending in rural India during this period, increased by US$ 69 billion, significantly higher than US$ 55 billion by urban populations. With rural consumers increasing their appetite for better products and high-standard services, fast-moving consumer goods (FMCG) companies intensified their efforts in rural India in 2012-13. FMCG majors like Dabur India and Hindustan Unilever (HUL) vouch for their rural markets and consider them to be extremely critical for the growth of their businesses. With increasing investment in infrastructure, retailers will be able to increase their access to high-growth potential rural market Rapid urbanization with increasing purchasing power has led to growing demand; consumers have also become more brand conscious ITC went one step ahead to revolutionize rural retail by developing ‘Choupal Sagar’ a rural mall.
Online Commerce: THE CLICK MARKET E-commerce in India has grown from Rs 19,249 cr in 2009 to Rs 47,349 cr in 2012 expected to grow to Rs 62,967 cr in 2013 Expected to contribute around 4% to GDP by 2020 Online travel, which grew 30% last financial year, makes up for 71 % of e-commerce in India E-tailing segment has increased 59% from last year; share in e-commerce rose to 16 per cent in 2012 from 10 per cent in 2011 Internet reaches 11% of India's population against 34% world average It is an online shopping facility for buying and selling products and services; the facility is widely used for electronics, health and wellness .Highly convenient as it provides 24X7 access, saves time, and ensures secure transaction Against a mere 137 million internet users in India, the number of mobile subscribers is 951 million. The study projects mobile commerce would account for a quarter of the e-commerce pie by 2015 and non-metros would be the biggest driver in digital consumption. Bringing e-commerce to the centre stage is the government's drive to open the sector to foreign direct investment (FDI), after being inactive on the issue for long. At present, 100 per cent Foreign Direct Investment (FDI) is allowed only in businessto-business (B2B) e-commerce and not in retail trading.
Not just Amazon and eBay, even brick-and-mortar players such as Walmart have made it known ecommerce is the future and FDI must be allowed in this space. Policy Framework: The rationale behind allowing FDI in Indian retail sector comes from the fact, that it will act as a powerful catalyst to spur competition in retail industry, due to current scenario of limitations of India, low completion and poor productivity. Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. Government opens up retail with 51 per cent FDI in multi brand retail with following terms: Minimum investment cap is $100 million 30 per cent procurement of manufactured or processed products must be from SMEs Minimum 50 per cent of total FDI must be invested in back-end infrastructure (logistics, cold storage, soil testing labs, seed farming and agro-processing units) Removes the middlemen and provides a better price to farmers Development in the retail supply chain system
50 per cent of the jobs in the retail outlet could be reserved for rural youth and a certain amount of farm produce could be required to be procured from poor farmers To ensure the Public Distribution System (PDS) and Food Security System (FSS), government reserves the right to procure a certain amount of food grains FDI up to 100 per cent in single brand retail: a. Only single brand products would be sold. Retail of goods of multi brand, even if produced by the same manufacturer is not allowed. b. Single brand product retail would cover the products which are branded during manufacturing stage only. c. Any addition to product categories to be sold under the single brand requires fresh approval from the government d. Product should be sold under the same brand name internationally. e. Retailers may be able to sell multiple products under the same brand name. E.g. product range under the same brand name. f. Existing policy does not clearly clarify whether retailing of goods under sub brands, grouped under major parent brand can be considered as single brand retailing and eligible for 51% FDI.
1. Farmers – prime beneficiaries…… Investment in back end infrastructure will help reduce wastage of farm produce, improve livelihood of farmers, lower the prices of products and ease supply side inflation, food safety, hygiene and quality. Direct farm initiatives shall also provide better remuneration to farmers. More investment is likely in farming sector. Since each retailer is expected to bring $ 100 million, it will have notable investment in back end and logistics and likely to push employment further. Farmers have chances to gain greater market access, higher profits, better technology and linkages with consumers due to direct back end linkages. Key farmer issues can be addressed which would help agricultural productivity. 2. Real Estate sector likely to upscale their operations……. The decision to allow 51% in Multi brand retail is expected to prompt realtors to revive their plans to build malls and shopping complexes, which were shelved down in the past few years due to economic slowdown. As per Jones Lang Lasalle India Consultant, Rs. 22,000 crores retail real estate market shall grow at CAGR of 25 % a year for the next five years, growing at 50- 100 %. With this, much needed capital too is expected to come into the country for retail which means more job creation in future.
3. Consumers and Common man to become real kings and queens now…….. The off quoted term- consumer as a king and queen - is finally wearing a garb of reality. Entry of global retailers is expected to have direct impact on consumers as well as common man. It is expected to bring down commodity prices for the common man. Large scale and high volume sourcing and technology edge of global retailers help in realizing greater operational efficiency and wide assortment of goods at lower prices may be made available to consumers. Food safety, hygiene and quality are value additions. More than 60% of the wastage can be prevented if specialized cold storage chains are built up on mass scales, which eventually shall help common man. 4. Other fringe benefits...... Long term cash liquidity: FDI will provide necessary capital for setting up organized retail chain stores. It is a long term investment because unlike equity capital, the physical capital invested in the domestic company is not easily liquidated. Lead driver for the country’s economic growth: FDI in MBR would create a competition among the global investors, which would ultimately ensure better and lower prices thus benefiting people in all sections of the society. There would be an increase in the market growth and expansion. It will increase retail employment and suppress untrained manpower and lack of experience. It will ensure better managerial techniques and success. Higher wages will be paid by the international companies. Urban consumers will be exposed to international lifestyles.
FDI opens new doors for Franchising: Retail giants who are at their wings, seeking entry into foreign market look for other available alternatives. These restrictions on the global retailers regarding the inflow of Foreign Direct Investment, leads them towards acquiring the market entry through franchises. Thus, countries which offer promising market potentialities for retail growth offers substantial growth in the franchising sector as well. 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. The current policy is expected to be an enabler by allowing each state to take a decision suitable to them. However, the implementation has been restricted to only those states which have the same ruling party as at the Centre. This limits the impact of the policy.
Goods and Service Tax (GST) would simplify tax structure Supply chain structure • Introduction of Goods and Service Tax (GST) as a unified tax regime will lead to a reevaluation of procurement and distribution arrangements • Removal of excise duty on products would result in cash flow improvements Cash flow Pricing and profitability • Tax refunds on goods purchased for resale implies a significant reduction in the inventory cost of distribution • •Distributors are also expected to experience cash flow from collection of GST in their sales, before remitting it to the government at the end of the tax-filing period • Elimination of tax cascading is expected to lower input costs and improve profitability • •Application of tax at all points of supply chain is likely to require adjustments to profit margins, especially for distributors and retailers System changes and transition management • Changes need to be made to accounting and IT systems in order to record transactions in line with GST requirements • Appropriate measures need to be taken to ensure smooth transition to the GST regime through employee training, compliance under GST, customer education and inventory credit tracking
Investment Avenue: Retail component of real estate is an attractive opportunity which is currently attracting 29 per cent of total investment in real estate 26 per cent of the overall investors are interested in investing in Tier II and III cities Training and warehouse spacing are the other viable options for investments Strategic License Franchisee Route agreements Cash and Carry Manufacturing Distribution Joint Ventures wholesale Banking This route involves a This entry route is 100% FDI is allowed A company can An international International firms foreign company widely used by many in wholesale trading, establish its company can set up can enter into joint entering into a international brands, which involves manufacturing unit in a distribution office ventures (JVs 51% licensing agreement who opt for the building a large India along with in India and supply stake) with domestic with a domestic master franchise distribution network standalone retailing products to local players in single retailer or partnering route and the outlets retailers. Franchisee brand retail. with Indian regional franchise outlets can also be promoter-owned route for an entry set up by this route companies into India
Existing Player in Market: The sector is experiencing exponential growth, with retail development taking place not just in major cities and metros, but also in Tier-II and Tier-III cities Future group Revenues expanded at a robust CAGR of 22.7 per cent during FY08-12 FY12 revenues stood at USD2.72 billion Partnership with Clarks International UK to sell premium footwear label RPG Group Partnership with Chad Valley, UK (owned by Woolworths plc.) to offer its range of toys through standalone exclusive stores and shop-in-shop formats within the same layout DLF Group Mother care plc partnered with DLF Brands Ltd for maternity clothing, baby clothes and nursery items Tata Group •Tesco signed a deal worth USD115 million with the retail arm of Tata Group, wherein the former will supply products, services and expertise to the latter’s hypermarket business Star Bazaar
Shopper Stop: 177 stores in 18 cities with 3.4 million sq ft space across 8 store formats Successfully introduced a number of international brands Improved product mix and brand profiles to attract new customers Over 2.5 million customers are a part of the First Citizen Loyalty Programme. Foreign entrants in the Indian segment are as follows: • Germany-based Metro Cash & Carry opened six wholesale centers in the country. • Wal-Mart with Bharti Retail, owner of Easyday stores. • British retailer Tesco Plc (TESCO) signed an agreement with Trent Ltd (Trent), the retail arm of Tata Group to set up cash-and-carry stores. • Carrefour opened its first cash-and carry store in New Delhi. Reliance Industries Limited Partnership arrangement with Marks & Spencer to open 50 stores •Exclusive franchise agreement with Hamley’s to open 20 Hamley’s toy stores with an investment of USD26 million in April 2010
Private Label: Private labels enable retailers to offer quality products and earn higher margins. The retailer also derives many advantages of using private labels. In-store labels are at least 5-20 percent cheaper across various categories. This is because they cut out middlemen costs and pass on the benefit to the consumer. Private labels enhance the bargaining power of the retailer while negotiating with manufacturer (national/ international) brands. The recipe for success in private labels is scale leading to high volumes and, hence, higher margins and better profitability Private label products indicate all merchandise sold under a retailer’s brand. Its growth is correlated to the outlook for modern retail market penetration. For Tata Group-owned Star Bazaar, over 30 per cent of its total food sale comes from in-house brands. Similarly, The Rs 10,000 crore retail giant Future Group, owned by Kishore Biyani, generates Rs 200 crore in revenues from them. Almost 20% of the FMCG business of the group’s flagship value format, Big Bazaar comes from its in-house brands such as Cleanmate and Sach Rabo International’s Head (Food and Agribusiness), Asitava Sen, said: “While it took 50 years for Europe to achieve 28 per cent market penetration of private food labels in retail, Rabobank expects India and China to reach the same level in just 15 to 20 years.”
Challenges for Investment: Supply Chain Constraint: Most Indian retail players are under serious pressure to make their supply chains more efficient in order to deliver the levels of quality and service that consumers are demanding. Long intermediation chains would increase the costs by 15 per cent. There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.
Lack of adequate infrastructure with respect to roads, electricity, cold chains and ports has further led to the impediment of a pan-India network of suppliers. Due to these constraints, retail chains have to resort to multiple vendors for their requirements, thereby, raising costs and prices. Skilled Manpower: The available talent pool does not back retail sector as the sector has only recently emerged from its nascent phase. Further, retailing is yet to become a preferred career option for most of India’s educated class that has chosen sectors like IT, BPO and financial services. Even though the Government is attempting to implement a uniform value-added tax across states, the system is currently plagued with differential tax rates for various states leading to increased costs and complexities in establishing an effective distribution network. Stringent labor laws govern the number of hours worked and minimum wages to be paid leading to limited flexibility of operations and employment of part-time employees. Further, multiple clearances are required by the same company for opening new outlets adding to the costs incurred and time taken to expand presence in the country. The retail sector does not have ‘industry’ status yet making it difficult for retailers to raise finance from banks to fund their expansion plans.
Non-availability of Government land and zonal restrictions has made it difficult to find a good real estate in terms of location and size. Also lack of clear ownership titles and high stamp duty has resulted in disorganized nature of transactions. International Standards: Even though India has well over 5 million retail outlets of different sizes and styles, it still has a long way to go before it can truly have a retail industry at par with International standards. This is where Indian companies and International brands have a huge role to play. Cultural Diversity: India's huge size and socio economic and cultural diversity means there is no established model or consumption pattern throughout the country. Manufacturers and retailers will have to devise strategies for different sectors and segments which by it would be challenging. Strategy to overcome Challenges: Manage Costs: •Optimize costs (Cut costs in a way that doesn’t harm the business) and optimize resources. Key amongst them are: improve labor productivity manage inventory efficiently, renegotiate the rentals •Adopt a revenue share model against fixed share model Optimize technology usage • Implement technology especially in areas of manpower training, real estate management, supply chain and logistics management and day-to-day store operations Efficient store management • Streamline store processes, increase store visibility, manage staff effectively and look into store layout and product range Re evaluate store viability and expansion plans
•Classify stores clearly into categories: profitable, high cost-high sale, low cost-high price and unviable and take action accordingly for each category Decode consumer behavior Invest in consumer research, paying close attention to the diversity present in India’s geography, to be sharper in delivery Enter into alliances and leverage expertise Foreign alliances and partnerships to leverage on each other’s financial muscle and expertise Develop private labels Offer competitive in store labels to earn higher margins a win-win situation for both customer and retailer (the key is to improve quality of in store brand) Although the private label market has not matured in India, it is growing rapidly given the early stage of modern retailing. These products for were most prominent across supermarkets and hypermarkets, accounting for between 15% and 30% of total value sales of these two sectors respectively. Non-grocery retailers, especially clothing, electronics and appliances, also offer private label portfolios to increase the variety. Build competent supply chain management: Focus on logistics in terms of minimizing the costs and Knowledge aggregation Leverage on technology and expertise of foreign players Tap under penetrated markets: Think beyond the metropolitan cities, target the opportunity offered by the rapidly developing and largely under-penetrated Tier II, Tier II and rural markets
Innovate: Stand out of the crowd and keep offering new ideas services, experiences to the customers_ Learning from the Past: During 2005 2007, the sector was in a hyper growth phase. In pursuit to capture market, companies made strategic as well as operational errors which has been broadly classified as follows I. Race for increasing retail space resulting in haphazard growth Ii.Unviable formats Iii.High lease rentals Iv.Man power costs and productivity issues V.Poor back end infrastructure Vi.Entry of too many new players NEXT LEVEL OF RETAIL GAME: In near future we will see Big Boyss in the world of retai and will change rule of game .Exisitng player have to tigten their belt to remain competitive in market Existing player have to strengthen their competency and form strategic alliance or partnership with foreign player to serve the market in better and efficient manner. One more big change that we will see is that many unorganized vendor will restructure to run business in the organized manner. What stand a bit of obstruction is the political will but recent development and trends are sign that this will be no more a reason to prevent growth of retail.
Key to success lie in the patience that investor need to have and a long term perspective to see what big opportunity is standing before them to be grabbed. Conclusion: Considering the growth over the time that retail sector have show over the time and strong fundamental that back the Indian economy show a Win- Win deal for invest in Indian Retail Market
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