Issues In Retail Project

JAIPURIA INSTITUTE OF MANAGEMENT LUCKNOW ISSUES IN RETAIL

Submitted to: Dr. Ranjanabh Chatterjee

Ravi Pratap Singh (CFTR08-37)

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ACKNOWLEDGEMENT

We express our sincere gratitude to our respected Dr. Ranjanabh Chatterjee, faculty of JAIPURIA INSTITUTE OF MANAGEMENT who has helped us to clarify our concepts by sharing her valued experiences in her teaching, research and training which have thereby become an unconscious part of our ideas and thoughts while analyzing one of the major issue of retail industry and help for this project report. Without her sincere help and guidance the project report would have not been a grand success. We thank all our members of the team who had worked hard to make the report to its present form. Lastly we would like to give our sincere thanks to the computer lab staff who had given us the opportunity to use all the resources available.

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ORGANIZED

& UNORGANIZED RETAIL

MEHTODOLOGY: We use a very simple process that is, we got data from different sources like A T Kerney, Price Water House Cooper and others. Then gone through various shopping malls to gather data and information about organized retail. Firstly we did data collection then analyze it that, what it’s effect on consumers as well as on unorganized retail. We also did work on potentials, obstacles and whatever the impact on small mom ‘n’ pop stores also been analyzed. Population segmentation is play very significant role in this industry so we also worked on that particular context, so we can know what is the impact and what are there thinking and views about organized and unorganized retail. Latest consumption rate, class and trends are also used as they have strong impact in this concern. Rural and urban retailing also discussed because there are growth factors which should not be ignored. In future they will become revenue hub. So, in this way we used all above methods to analyze the retail industry (organized & unorganized) of India.

FINDINGS: We find organized retail as a helping hand of unorganized retail and also find out what is the impact of population segments, consumption patterns, shopping malls, rural & urban retailing on retail industry of India. Small retailers will grow and employment in both direct & indirect will also increase. We find that small shopkeepers should not afraid of big retailers.

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Overview: This report examines the current trends and patterns demonstrated by Indian consumers. Studying the trends of consumption in India will assist in gaining knowledge about the potential of India’s economy, both currently and in the future. Not only do consumption patterns provide insights into the future areas of strength in the country’s economy, but they also paint a picture of the relative standard of living levels that are likely in the future. In addition, understanding consumption habits of the country’s consumers will also serve to explain the reasons for recent multi-national companies’ successes and failures in the region. Over the last few years, retail has become one of the fastest growing sectors in the Indian economy. In fact, India has topped the annual list of the most attractive countries for international retail expansion, according to AT Kearney’s Global Retail Development Index 2006. Of the currently estimated $270 billion Indian retail market, organized retailing comprises of just 4.6 percent. However this segment grew nearly 40 percent in 2007. With the entry of major global players and larger Indian corporate houses into the arena, the Indian organized retail sector is estimated to grow to about 15 percent of the total retail sales by 2010. The booming services sector combined with the growth in disposable income is considered to be providing impetus to this boom. In spite of the size and scope, retailing is not yet recognized as an industry. India does not allow 100 percent foreign direct investment (FDI) in the retailing sector. However the Indian government does allow FDI (100 percent) in wholesale cash-and-carry trade as well as in single-brand retail outlets with 51 percent foreign investment. Several international companies are taking advantage of these as well as franchising and strategic licensing routes to enter India. The Indian organized retail pie offers huge opportunities to U.S. companies offering: packaged foods, house wares products, apparel and accessories, cosmetics, footwear and watches. The Indian consumer is very price sensitive and expects value for money. U.S. exporters need to keep this in mind while devising pricing strategies for India. In addition, there are new opportunities for retail industry equipment and services suppliers to cater to the booming Indian market

Statistical Snapshot: Marketers are just beginning to understand the full potential of the Indian market. First and foremost, the economy of India is growing rapidly at the rate of 6% each year. In comparison to the growth rates of Western Europe and the USA at 2 and 3%, respectively, the Indian market demonstrates notable growth. From the principles of macroeconomics, economic growth suggests an improvement in the standards of living. This is true; however, the increase in economic growth and output has also broughtabout an increase in inflation: consumer prices increased by 5.3% in 2004, compared to 3.2% in 2003. Foreign direct investment, a good indicator of confidence in the potential of a country’s 4

economy, also serves to demonstrate India’s importance as a globally significant market. Foreign direct investment in India, as measured in inflows of US dollars, has increased from $3.6 billion in 2000 to $4.6 billion in 2003 and $5.3 billion in 2004. The population of India is comprised of over 1 billion people in 164.8 million households. As a result of India’s growing population, now 35 cities in India have over 1,000,000 citizens. Indian GDP reported in the Atlas method measured $620 per person in 2004, ranking 159th in the world. As a basis for comparison, the USA per capita GDP ranked as the fifth highest in the world, with $41,440. Despite the comparatively lower GDP per capita, statistics on phone and internet usage suggest an increasingly sophisticated and technologically-savvy population. The amount of internet users has increased exponentially since 2000: from 5.4 users per 1,000 members of the population, to 17.4 users per 1,000 in 2003, to 32.4 users per 1,000 in 2004. The same exponential growth also applies to land line and cellular phone usage in India. In 2000, 35.4 per 1,000 members of the population utilized phone technology. This figure increased to 64.0 per 1,000 in 2003 and further to 84.5 per 1,000 in 2004. In addition, according to the MATRADE report published in October 2005, e-commerce in India represented $0.1 million in revenues in 2000. By the end of the current year, this number is expected to climb to $5.8 billion, $5.41 billion of which will be spent in the business-to-business sector. Clearly, the use of both mobile phones and the internet is contributing to the increasing sophistication of the Indian population.

Population Segmentation: According to The National Council of Applied Economic Research, India’s population of 1.1 billion is considered to consist of five distinct socio-economic segments. The largest of these population segments is the Climbers. About 54.1 million households who earn between 22,000 and 45,000 Rupees annually are members of this segment. This segment is followed in size by the Aspirants, who make up a total of 44.0 million households that earn 16,000 to 22,000 in income each year. Destitutes, the poorest of the socioeconomic segments, earn below 16,000 Rupees each year and comprise 33 million of India’s households5. The Consumers make up 32.5 million households who earn 45,000 to 215, 000 Rupees each year, and the Rich, who earn over 215,000 Rupees each year, constitute just 1.2 millionhouseholds. Please see below: A: Population Segments:

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Population Segments

B: Population segment growth of India’s socioeconomic classes: The Rich Consumers 20%

1%

Climbers 32%

Destitutes 20%

Aspirants 27%

Socioeconomic class growth in India from 1994-2006.

As shown in Figure B, the Destitutes segment has nearly halved in size over the pastdecade, while The Rich, Consumers, and Climbers have all doubled in size. From these trends, it can be deduced that the economic growth India has been experiencing is evening the distribution of wealth in the country, enabling more of the population to partake in consumption activities.

Consumer Spending Specifics: Increases in disposable incomes throughout the population represent significant opportunitiesfor marketers. According to the MATRADE Report, the middle and lower income classes combined constitute 60% of the aggregate value of the Indian market. Also reported in the MATRADE Report,the growth of the Indian middle class has caused discretionary incomes and consumer spending to increase. In 1992-1993, the typical Indian consumer spent just $133.60. The following graph, Figure A, demonstrates the relative sizes of each of the five Indian socioeconomic population segments. The graph clearly depicts the Indian middle class’s dominance over the other population segments, 6

particularly The Rich. Below, Figure B depicts the growth of the five socioeconomic population segments from 1994 to the current year.

India's consuming class:

Table I Estimated households annual income

by

Table II Structure of the Indian consumer market (1995-96)

Annual Annual income No. of income (in Rupees) at households (in Rupees) Classification 1994-95 prices (in million) at 1994-95 prices

Number of households (in million) Urban

Rural

Total

<25,000

80.7

<16,000

Destitutes

5.3

27.7

33.0

25,001-50,000

50.4

16,00122,000

Aspirants

7.1

36.9

44.0

50,001-77,000

19.7

22,00145,000

Climbers

16.8

37.3

54.1

77,001-106,000

8.2

45,001215,000

Consumers

16.6

15.9

32.5

>106,000

5.8

>215,000

The rich

0.8

0.4

1.2

46.6

118.2

164.8

Total no. of households: 164.9 Total no. of households million Source: National Council of Applied Economic Research (NCAER).

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Proportion of goods India in 2003.

consumer purchased in

In contrast, just a decade later in 2002-2003, the typical Indian consumer spent a total of $350.74. This represents a 10.13 compound annual growth rate. Not only have consumer expenditures increased, they have also evolved in their nature. Whereaspreviously, the 8

majority of discretionary incomes have gone towards food expenditures, current trends suggest that this pattern is dissipating. The more available discretionary income Indiansallocate to non-food expenditures, the more pronounced the development of the population. Currently, according to the MATRADE Report, Indian consumers have decreased their share of food expenditures from 54.07% of total disposable income in 1992 to 44.8% of disposable income a decade later in 2002. As detailed in the chart to the left found in the KPMG Indian Consumers Report, in 2003, Indian consumers still spent the bulk of their income on food purchases(41.1%). Other sizable expenditures included personal care items, which comprised 8.8% of consumer expenditures, footwear, which comprised 7.6% of consumer expenditures, and clothing, which constituted 6.6% of total consumption expenditures. According to the MATRADE Report, growth of Indian consumer expenditures is closely linked with the growth of the country’s output and economy. The Compound Annual Growth Rate of consumer spending in India has measured a consistent 12% each year, rate which has increased “in tandem” with the GDP.

Consumption: Age of Organised Sample Outlet Size

Turnover Growth (%)

Profit (%)

Up to 1yr

-22.80

-23.50

Above 1yr up to 551 2yrs

-7.50

-6.30

Above 2yrs up to 196 3yrs

-7.40

-9.90

Above 3yrs up to 130 4yrs

-8.30

-8.10

Above 4yrs up to 39 5yrs

-1.90

-12.60

Above 5yrs

170

-0.30

-0.80

Total

1999

-8.00

-8.90

913

Growth

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Unique Trends: According to the MATRADE report Indian consumers are particularly attracted by free gifts with purchases. The most popular free items are personal goods items, such as toothpaste and soap. Another unique aspect of Indian consumption habits centers around the desire for ecologically-responsible packaging. According to the MATRADE report, Indian consumers are more sensitive to the environmental impact of their consumption habits than their other global counterparts. In addition, while India has historically been famous for its town market businesses, the current trend in Indian consumption is away from habitual visits to the smaller town markets and toward larger purchasing on a more infrequent basis in hypermarkets. As a result of increasing urbanization, bulk purchases have increased, and so too has the popularity of larger supermarket stores.

Rural vs. Urban: Consumer expenditures have great variance atthe rural and urban levels. Rural Indians spent an average of $12.34 each month per capita on food and non-food expenditures, $6.78 and $5.56, respectively. The most significant non-food expenditures for rural consumers were $3.45 or 28% spent on clothing and footwear, and $1.11 or 9%, spent on energy. At $23.53, the monthly amount of money spent by inhabitants of urban areas in India was double the expenditure of the rural level. Only $10.00 or 42.4% of their consumption involved food purchases, compared to the 54.9% of their rural counterparts. While energy expenditures were higher, $2.11, this expenditure still represented 9% of the total money spent on the urban level. As an interesting contrast, however, only $1.65 was spent each month by the average urban Indian, which is significantly lower than the $1.11 spent by rural dwellers. While the distribution of wealth currently suggests an overall shift from greater consumption at the rural level to the urban level, the rural Indian population represents an important market. According to the Malaysia External Trade Development Corporation, 75% of the Indian population is dispersed in rural regions. These rural residents represent a market that grows 3-4% annually, adding 1 million new members to its ranks every year. These rural residents represent a large portion of the country’s non-durable items consumption, which is currently valued at $11.6 billion. This figure is projected to increase to $23.25 billion by 2011.

The Indian Retail Industry: 10

The unique nature of the Indian retail industry reflects the trends of middle class growth and discretionary spending growth. Demand for retail sector growth is currently fueled both by the increasing middle class, increasing proportion of the population living in an urban setting, and by the rise in discretionary income among all population segments. According to the Images Report 2005 on shopping center development in India, the middle class makesup 200 to 250 million citizens. These citizens spend over $300 million each year, which is significant,in light of the fact that consumer spending in India increases on average 6% annually. Forty million or 3.6% of India’s population of 1.1 billion have the same purchasing power as Americans and 75% of the population is under the age of 40. These young, increasingly technologically-inclined members of the population represent the future of India’s labor force and its consumers. The Indian retail industry, including both the organized and unorganized sectors, is currently valued at $292 billion annually, according to KPMG. This industry is significant to the Indian economy in that it is the greatest contributor to the Indian services sector. Retail makes up 14% of the country’s annual economic outputand consists of 11 million outlets dispersed throughout the country. The value of the retail industry in India was reported in the Hindu Business Line10to have doubled in value in 2005. In comparison to just 0.9 million retail employees in the US, it is clear that the Indian retail industry serves not only to serve the population with consumer goods, but also as a key source of employment. An estimated 42 million Indians are employed by the retail sector, which constitutes 7% of the total workforce. As recently as 1998, the retail industry employed well under 178,000 total employees. Thus, the industry has experienced growth of over 220% in the past eight years. India’s retail environment is unique in that it is best understood when divided into organized and unorganized sectors. The “organized sector” specifically refers to retail establishments employing ten or more employees which includes hypermarkets, supermarkets, and shopping malls. The organized sector constitutes just four percent of retail activity in India. Only about 500,000 people employed in the Indian retail industry are involved in the organized sector. Not only is the amount of employees in this portion of the industry expected to grow, but so too is the amount of actual organized retail space. The amount of retail space devoted to organized retail is projected to grow by20 to 25% in the next four years. The unorganized retail setting is defined by the Hindu Business Line as a retail establishment including fewer than ten employees. The unorganized sector “includes the traditional formats of low-cost retailing such as the local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, and handcart and pavement 11

vendors”. The majority of Indians who work in the retail sector are members of the unorganized portion of the industry. In fact, about 39,500,000 people are employed in this portion of the retail industry. Another unique aspect of India’s retailing industry is its immunity to business cycle changes. Most industries must contract and expand in a reactionary nature to macroeconomic environmental issues. However, as demonstrated in the chart below, India’s retail industry remains consistent in its percentage of output each year (with the exception of the effects of a natural disaster, which explains the spike from 1960-1962). This immunity to the cyclical nature of economic activity in the country suggests the growing strength and importance of the retail industry in India.

1951-2002 GDP of Services in India.

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The Shopping Mall in India:

The entrance of international retailers has increased the presence of the shopping mall format. The diagram above, taken from the Images Report 2005, shows a breakdown of the amount of commercial shopping mall space throughout the country. Clearly, the northern-most part of the country contains the greatest number of shopping malls to date. By 2008, 150 new shopping malls will be constructed, which represents an investment of 4-12 months of building time and at least $128 billion Rupees to adequately fund each project. Most of the current retail spaces, as much as 96%, consist of just 500 square feet of retail space. Western department stores are also rising in popularity. Currently there are around 100 department stores in India. The amount of department stores in the country continues to grow at a rate of 24% each year and the sales volume of department stores grew 34% 12

during the period from 1999 to 2002. The increase in the department stores has been echoed by the similar increase in the presence of hyper and supermarket stores. A unique trend that is developing in India with regard to retail space centers onthe utilization of high-end hotel space in India’s most urban settings. Noted particularly in 2004 and 2005, high-end hotels such as the Oberoi Hotel Delhi, the Taj Mahal in Mumbai, the Imperial Hotel Delhi, and the Maurya Hotel Delhi have all converted 10,000 to 220,000 square feet of the lower levels of their accommodationto retail space.

Zone Wise Distribution

Potential Obstacles: While significant growth is forecasted in the Indian retail industry, there are also potential obstacles to the further success of the industry. The Hindu Business Line reports that one of the greatest disadvantages of the retail sector at present is its propensity to underemploy its workers. Many members of the unorganized sector are forced into retail by unsuccessful agricultural endeavors and often have neither the training, nor the means nor inclination to succeed in retail10. This phenomenon can serve to explain the habitual 13

problems that members of the industry experience in gaining access to capital equipment, human capital, or staff, and viable real estate selection. Another potential obstacle to the successful growth of the Indian retail industry is the relative rates of job growth in proportion to industry growth. At the beginning of 2005, 413.800 lakh were unemployed and covered by pensions. However, during the past decade, the organized sector only grew by 30,000 jobs. This disconnect between willing and employed workers creates an obstacle for retail industry growth. An additional obstacle to the growth of the Indian retail sector is the potential entrance of multinational, multi-billion-dollar Big Box retailers, such as Wal-Mart. As the following quote from Mohan Guruswamy’s article in the Hindu Business Line10 suggests, multinational retail corporations, specifically Wal-Mart, could stagnate the growth of India’s retail industry by displacing thousands of workers in the unorganized sector: “India has 35 towns each with a population over one million. If, hypothetically, Wal-Mart were to open a store in each of these cities and they reached the average Wal-Mart performance per store, it would mean a turnover of over Rs 8,033 crore with only 935 employees. Extrapolating this with the average trend in India, it would mean displacing about 4,32,000 persons. This would mean an employment of just 43,540 persons, displacing nearly eight million persons employed in the unorganized retail sector.” When weighing the costs and benefits of the entrance of multinational retailers, most see expansion of giants such as Wal-Mart as a positive way to contribute to the growth of the Indian economy. However, one must question the contribution of such giants to the economy if so many workers are to be displaced and the very nature of the retail environment is to be altered.

Foreign Direct Investment: The impact of foreign direct investment on the future of India’s retail sector is significant. According to the Hindu Business Line10, of the 30 “emergent” economies, India’s retail sector is ranked as second only to China as the attractive retail sectors in which to invest. Hindu Business Line reports foreign direct investment as being one of the sole forces to push the value of the Indian retail industry to a potential of over $300 billion per year by 201010. During the first half of this fiscal year, the amount of foreign investment in India increased to $7.96 billion. This growth is significant in comparison to the period of 20042005 where foreign direct investment stood at $2.38 billion. The primary medium of foreign direct investment in India is through portfolio investment. Portfolio investments of GDRs, ADRs, and FIIs contributed a total of $5.10 billion in investment into the Indian economy. Recent government reforms mentioned on the India Brand Equity 14

Foundation website11 point to an increased loosening of foreign direct investment regulationsin the retail sector. According to the IBEF organization, 51% foreign direct investment will now be allowed in a single brand of products in India. The opening of many previously closed industries to foreign direct investment will serve to boost India’s economy in the long run. Foreign direct investment could increase India’s standing as the fifth largest economy in the world and its standing as the third largest GDP in Asia12. There are many arguments for the liberalization of foreign direct investment in India’s retail trade. First and foremost, increased investment in the country’s retail industry is thought to increase the quality standards of all retail outlets throughout the country. Not only is quality believed to be improved by greater foreign direct investment, so too is product selection for consumers, as well as more competitive pricing structures. Higher standards of quality can lead to the increased acceptance of Indian products in the worldwide market for consumer goods. According to Business Standard, however, the Indian retail industry would most benefit from the liberalization of foreign direct investment without the current bureaucratic and governmental interventions that hinder the attractiveness of foreign direct investment in so many other sectors of the Indian economy.

Kirana Stores Are Safe From Big Retail: Amid a debate on whether organized retail kill livelihood of mom and pop store owners, an official study on Monday said there was no real threat to neighbourhood 'kirana' stores from modern retail chains. In fact, farmers as also consumers stand to gain from organized retail in terms of competitive pricing, says the government-sponsored study. There is "no evidence of a decline in overall employment in the unorganized sector as a result of the entry of organized retailers," said the report by think tank ICRIER. However, it admitted that initially, mom-and-pop stores located in the vicinity of big malls have seen drop in sales and profit, but the impact would disappear in the long run. It said farmers benefit significantly from direct sales to organized retailers. "Profit realization for farmers selling directly to organized retailers is about 60 per cent higher than that received from selling in the mandi. "At a time when inflation is impacting the household budget, consumers have "definitely gained" from organized retail on multiple counts. "While all income groups saved through the entry of the organized retail purchases, lower income consumers saved more," it said. The much-awaited study has recommended nationwide uniform licensing policy to facilitate "modern retailing" which will help take India's total retail sector to a whopping $590 billion in 2011-12.The document which has been submitted to the Department of Industrial Policy and Promotion, however, did not deal with the impact of foreign direct investment on small retailers

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Organized Retail Is Beneficial: The organised retail sector can take care of itself, but the unorganised retail sector requires public policy. ICRIER's policy recommendations are directed towards nurturing and modernising the unorganised sector to bring them to a level playing field.

Improve access to credit for kiranas to expand and compete. Encourage the formation of retail cooperatives to help increase kiranas' bargaining power and exploit the advantages of bulk buying. Modernisation of wetmarkets to scale-up operations and improve the efficiency of the supply chain. Formation of ‘private codes of conduct' which may be incorporated into enforceable legislation. Strengthen the Competition Commission's role to prevent collusion or predatory pricing on the part of the organised retailer when dealing with farmers, manufacturers or even consumers A simple uniform license regime to facilitate the growth of organised retail to deal with increasing demand and to avoid inevitable bottlenecks in retail if left only to unorganised retail.

The initial decline in turnover and profit smoothen out over time as organised and unorganised retail begin to co-exist. The various positive externalities are: Improvements in logistics and infrastructure Efficient supply chains Better quality produce Increased revenue for the government through taxes, and Lower wastage

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Clearly this is a positive sum game. Modernisation in retail in India has started late. India can therefore learn from various international experiences and not be afraid to embrace this development in the retail sector.

Future Predictions: The growth of the middle class will revolutionize consumption habits in India. The sheer numbers and spending power of this group of consumers will assist in raising the GDP and living standards of the country in the coming years. In addition, increasing technological knowledge and sophistication of consumers will cause sales of technologically and electronically complex consumer goods to spike in the coming decade. The growth of the Consumers and the Climbers segments and the decline of the Destitutes and Aspirants will ensure increasing disposable income and purchasing power for the majority of the population. In the future, fewer consumer dollars will be spent on non-durables such as food, and a growing amount of emphasis will be placed on services and durable goods purchases.

Conclusions: The nature of India’s expanding economy reflects not only the growing buying power of the Indian population, but also the large-scale effects the rising middle classes in India are having on the economy. As the GDP of the country increases, so too does the importance of the country’s domestic retail industry. With the trend towards growth in the organized retail sector, shopping malls and hotel retail space are becoming more common in India’s urban areas. With large multinational companies attracted by India’s burgeoning economy, many in India are wondering if job growth in this industry will also follow. In the future, India’s consumers can expect more choices, higher quality, and more purchasing power with which to make their purchase decisions.

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