Retail Industry

Uday khanna Lecturer, Graphic Era University 470/F, Opposite Cane Society, Ganeshpur, Roorkee (U.K)-247667 [email protected] 01332-232091, 09319701501

Title: Retail industry: Next growth engine for Indian Economy Authors Dr. Pankaj Madan,Professor,Gurukul Kangri University, Haridwar,[email protected] Mr. Uday khanna,Lecturer, Graphic Era University, Dehradun, [email protected] Mr. Manish Kumar,Dean(Management Dept.) Graphic Era University, Dehradun

Abstract The paper illustrates the changes, trends & future prospects occurring in the retail industry. Retailing is becoming a buzzword in the current market scenario. It is undergoing a sea change with the emergence of new topologies like hypermarkets, supermarkets, superstores, malls, e-retailing & others. The gradual shift in the demographics of the Indian customers gives an opportunity to the retailers to showcase their energy and charisma. The ever increasing per capita income & the growing purchasing power give a wider room to the consumers in terms of availability, convenience, experience & choice. There is beeline of the retail chains who want to catch hold of the customer’s share of voice and mind &the technology is playing an important role in bridging the gap between the customer expectation and the delivery mechanism of the retail chain. The article focuses on the scanning of the external environment for the retail industry & gives a picture of various threats & opportunities in the competitive retail market. The emergence of retail marketing is creating an ecosystem where the big as well as small players can complement each other & create opportunities for a major chunk of skilled labor that can greatly contribute to our booming economy. The debatable issue of survival of unorganized (kirana stores) sector has been resolved by the report of Icrier, the premier research body which suggests that due to supply crunch in the market, both the organized & unorganized players can work hand in hand to feed the ever demanding & impulsive customer to cope up with the demand-supply mismatch. The focus is on the entry of the big organized retail chains being owned by big Indian corporate houses like Reliance, Bharti & Aditya Birla group on one hand & the big giants like Wal-Mart, Tesco& Carrefour on the other hand, who has shown keen interest in the strong unorganized sector being dominated by local kiranawala & baniyawala.

Keywords: topologies, ecosystem, Icrier, impulsive customer, kiranawala

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Retailing in its initial period was witnessed at the weekly haat or gathering in a market place where vendors put on display their produce (goods). Then the market saw the emergence of the local baniya & his neighborhood ‘kirana shop’. They were the local mom & pop stores located in residential areas. Retailing is not a term, it is a concept which is taking shape to give the Indian consumers a different lifestyle where they can enjoy & pamper them & can relax their muscles by a wide array of the branded showrooms & the mystic interiors which make the customer proudly associated with a positive shopping experience to live in. Retail industry undergoes a revolutionary change during the post liberalization era. The fast changing demographics of Indian consumers has given birth to the growth of Western format typologies such as specialty stores, department stores, supermarkets, hypermarkets, shopping malls, discount stores & factory outlets. In the post liberalization era, consumer buying behavior & lifestyles has undergone a transition phase. The concept of ‘value for money’ & ‘time squeezed impulsive customer’ has open new arena for the biggies to exhibit their competencies for a comfortable share in the competitive & highly fragmented market. Retail is a game of multiplication where economies of scale & distribution excellence are driven by the numbers of stores in a country. “Nowhere in the world has the journey of retail been as smooth as it is in India. The customers in the other parts of the world had been introduced to the concept of retailing gradually i.e it was the transition from department stores to shopping centers, then to hypermarkets & supermarkets & the journey took time around 30-40 years to go through gradually. But in India however everything comes together in a single stroke to cater to the rising aspirations of the demanding time squeezed impulsive Indian consumers”- “explains B.S Nagesh, M.D Shoppers stop 1

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Emergence of Retailing: (a significant change in the demographics) •

There is a growing concept of DINK (Double Income No Kid), which is giving a good disposable income & better purchasing power to the consumer.

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More & more women are taking up the corporate job, which is adding to the family’s income, & leading to better lifestyle.

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Rising income has led to increase demand for better quality products while lack of time has led to a demand for convenience & service.

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The demand for frozen, instant, ready to cook, ready to eat food has been on the rise especially in the metropolitan & large cities in India.

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There is also a growing trend in favor of one stop shops like supermarkets & dept. Stores.

Key findings2:  Organized retail will form 10% of total retail by the end of this decade.  From 2006 to 2010, the organized sector will grow at the CAGR of around 49.53% per annum  Cultural & regional differences in India will deter the retailers from adopting a single retail format.  Hypermarkets are emerging as the most favorable format for the time being in India.

While estimates vary on the current size of the consumer goods market, anywhere from $220 billion by the confederation of Indian industry (CII) to $350 billion by A. T. Kearney, it is forecasted that the market will nearly double by 2010 to anywhere between $440 billion to just over $600 billion, making it the fourth largest in the world. FICCI estimates that India’s retail industry will grow to $427bn by 2010 & the market share of organized retail will swell to 22 %3. 2 3

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The current size of the organized retail market in India is only somewhere between $6 and $8 billion (around 3% of the retail industry), however it is growing at between 20% and 30% a year much at the expense of the unorganized market made up of family-owned mom and pop business which make up about 97% of the consumer market make for a very fragmented and chaotic retail industry. There are about 5 million retail establishments in India which means there are about 22 per 1000 people with an average floor space of less than 50 square meters. Retail is India’s largest industry & the largest source of employment after agriculture. It is contributing around 10% of the GDP, which is largest in terms of contribution. There are about 300 new malls, 1500 super markets and 325 departmental stores currently under construction. Demographically the 80% of India’s population is under the age of 45. 54% under the age of 25 & to add flavor to it only 3% of the consumer market is made up of organized retailing. It has widened the eyeballs of big giants like Wal-Mart of U.S., Carrefour of France, Tesco of the U.K, Metro of Germany & others.

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. India ranked No.1 in A.T.Kearney’s global Retail Development Index in both 2005 & 2006. Global Retail Development Index (2006) Global Retail Development Index (2005) Rank Country GRDI Score Rank Country GRDI Score 1 India 100 1 India 100 2 Russia 85 2 Russia 99 3 Vietnam 84 3 Ukraine 87 4 Ukraine 83 4 China 83 5 China 82 5 Slovenia 82 Note: based on weighed averages in four categories: country risk, market attractiveness, market saturation & time pressure. Irrespective of the debate on FDI in retail, Indian companies are building on their strength, the market has already been targeted by the domestic players like Pantaloon (Big Bazaar), Tata (Westside), Raheja, Subhiska, Reliance (Reliance fresh), Bharti & others. Reliance is rolling a national wide chain of supermarkets as part of its $5.5bn retail strategy. Pantaloon, Indian’s largest retailer has announced plans to invest $1bn to expand its retail operations by 2010.Surprisingly the top 5 retailers in India make up only 2% of the retail market leaving a wide ground for others players to score better runs. As a result what used to be a local, unsophisticated, mom-and-pop business is being transformed into a national technology-intensive, growth sector. This transformation triggers off the foreign retailers to enter into the Indian market to fuel their expansion plans. Retailers like Aldi, Body shop, Carrefour, IKEA, Toys R Us, and Wal-mart & Zara are adorning the streets of several countries. Global retailers combine their finely tuned value proposition with superior retailing skills, global sourcing & access to capital to create value for both their customers & shareholders.

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The economic think tank Icrier has suggested the feasibility of both the organized & unorganized players to sustain & develop in the growing & the competitive environment. The organized sector has the competitive advantage of supply chain management, logistics & big financial muscles on their part than unorganized sector is strong in the convenience, delivery & credit facility available to their regular customers. The model of the retail is quite different in developed countries as compared to India. In U.S, majority of the hypermarkets are situated away from the hustle & bustle of the city where they can go on weekends in their own transport & can manage to fill the stock for the next upcoming week in the form of packaged food & grocery. The story is quite different in India where an average Indian will never rely on the credibility of the packaged foods as he believes in the philosophy of ‘eat fresh, stay fresh’.

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There are different categories of the customers who are being a part of the increasing footfalls.4 a) Flirters: These are the one who do not come with the intention to buy, neither they have the purchasing power to buy; they have just come to enjoy & pass the leisurely time. b) Cautious lovers: These are the customers who always look for the deal in branded products in supermarkets, hypermarkets & other retail formats. They are the one who are brand conscious & look for the better product quality, lower price & choice of more brands. c) Loyal pairs: They are the regular one who are used to the ambience & culture of the mall or superstore & feel uncomfortable if miss a chance to visit the store regularly. These are the middle class customers who are the bread & butter for retail shops at both organized & unorganized outlets. d) Economy Lovers: These are the customers who are really looking for a great saving & feel contended after taking home extra money in their pockets. These are the one who belong to middle-middle & lower-middle class & would like to shop at ‘discount stores’ & ‘sasta bhandar’. e) Extramarital lovers: These are the shoppers who shop at both organized & unorganized retail outlets & the share of spending varies as per the different product categories. These are the one who buy the vegetables, fruits & other non staple food items from the organized retail while other packaged items from unorganized outlets.

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PEST Analysis Political: There was a strong hue & cry with entry of the big organized retail chains being owned by the big corporate top guns like Reliance Retail & Aditya Birla group. Strong lobbying was done to protect the interests of local sabjiwala, kirana stores with the intention to increase their vote banks & to protect the interests of some high profile personalities as Reliance announced its intentions of directly sourcing from farmers, thereby disintermediating the middleman who is accused of escalating costs5. The lobbying was so strong that the Reliance fresh has to shut down their operations in almost every nook & corner of Uttar Pradesh. After feeling the heat of the issue, the govt. commissioned the economic think tank, Icrier to study the impact of the organized retail on the unorganized one. The finding of the Icrier came as a big relief to all the people who is directly or indirectly concerned with the overall gamut of the retail industry. The findings reveals due to supply crunch in the retail market, both the organized & the unorganized players can comfortably exist & get their share of pie on the basis of competitiveness & by improving customer service to the end customer. The permissible entry of the FDI only in one branded outlet tries to limit the emergence of the positive & healthy competition & growth in this sector. In the country of more than a billion people, the Govt. is more concerned to restrict the entry of the new players than to provide some incentives to the domestic kirana stores in the form of microcredit schemes & alike. The govt. can insulate the unorganized players from the adverse impact organized sector by providing institutional credit through banks. The low access to banking facilities has been a cause of worry for the unorganized sector, which can be taken care of by the active participation of the govt. & regulatory authorities. The unorganized sector can also take the advantage of different retail formats by a little awareness & positive attitude towards the newly emerging trends in the market. For example the local kiranawala can go for the ‘cash & carry operations’, where they can get a better deal & credit as compared to the direct billing from the companies. Now the UPA govt., which has emerged with the clear majority in the Lok Sabha, has express their intentions of big-ticket reforms to be taken in the near future. Even the new ally, the Samajwadi party is 5

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also not very rigid on the economic reforms, which are likely to take in the next few months6. FDI in the retail industry is limited to the single brand outlet where the maximum cap is 51%. Multi brands retailers like Wal mart & Carrefour are waiting for the green signal from the govt. to carry out their operations at the earliest. They have strong financial muscles & even turnover of some retailers is greater than the GDP of some countries. Once they entered they will infuse fresh capital to the tune of billion dollars, which will help the govt. to sustain the economic growth rate of 9% in the near future. Economic: R.Subramanian, owner Subhiksha (modern retail format) predicts that the top three players in the industry will end up sharing the bulk of the profits. On asking for the prospective exit,” Right now I don’t see any reason to get out. On the contrary, it might be a good time to acquire something because there may be some consolidation7.” One main reason for the exponential growth in the retailing sector is due to the shift in the consumption pattern of the U.S consumer. During the last decade, the ever-increasing growth of consumer spending in the U.S was a driving force for the global economy & for the global retailing industry in particular which was fuelled by the external debt & the cheap availability of loans at very comfortable rates. But the bursting of the housing bubble & the depreciation of the dollar altogether creates a new picture where the U.S growth will come from exports rather than consumer spending. The personal saving rate in U.S is nearly zero & is likely to rise in the near future, thus putting more pressure on the spending pattern. The bottom line is that the geographic mix of consumer spending growth will shift away from the U.S towards Asia which gives an ample opportunity to the big bosses of retail industry to showcase their energy & charisma. Organized retail in the U.S market is becoming more competitive due to the down turn in the consumption pattern, which is also forcing the big retailers to seek opportunities abroad, particularly in Asia. Moreover the business leaders of big conglomerate of Indian industry are getting the pulse of the retail market& are ready to recycle their excess cash flow from engineering, telecoms & manufacturing for a larger cash flow in retail in anticipation. Investment in Indian

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retail is a worth taking gamble which will payoff in the near future. It is viewed as a long-term proposition & the success for the first mover advantage will replicate in the retail industry too. Apart from these issues, the main threat which the retail industry as a whole is suffering from the commoditization of the products & services. The rapid expansion of the different formats in Indian retail industry has eventually put the customer in the perplexed state & he is not able to differentiate between the lucrative deals offered by the different retail outlets. Therefore the focus area for the retailers is to hunt for the customer, trap him & keep him for the long lasting affair. The look, the feel, the window display the freshness & the novelty factors are some parameters on which on player can outshine others in the same catchment area. The study reveals that while stores do better in the first year, the second year witnesses a drop, the main reason is the novelty factor- says, Hemant kalbag, consumer & retail practice, AT Kearney. “The initial excitement dies out as more players come into fray & then growth steadies eventually. In a business like retailing where processes can be easily replicated, one has to constantly move a notch higher above competition”.-explains kalbag8. Even the retailers now want to play the safe game & are not interested investing money in the format which is not able to get enough footfalls & a stream of revenues. The rising cost of the real estate coupled with low conversion ratio has put a hole in the pockets of the retailers. For example the Hyper City retail, part of K Raheja, also owner of Shoppers stop has dropped the launching of the convenience formats, express city. Reason the profits margins in convenience type of format is quite low & it has to be set in the prime locations to target consumers of mom & pop stores who believe in convenience, & quick deliveries. The current convenience stores format like Subhiksha, Reliance fresh & Spencer’s are struggling with challenges of operating a convenience stores due to high operating costs & wafer thin margins. Social: The consumer all over the world understands the importance of the term CSR i.e corporate social responsibility. They now feels the gravity of the situation & are ready to question the companies for their contribution towards the society in terms of better environment friendly products & processes, the conditions of the workers in the countries which manufactures & supply products & the impact of the products on them. They want companies to look after the

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well being of the society & contribute towards it as per their efforts. Even the consumer is ready to shell extra money from his pocket for the safe & environmental friendly products. Technological: The KRA’s for the retail industry is to enhance the customer experience & drive revenues by managing costs & improving operational efficiency. To meet these challenges the retail industry is heavily backing on I.T to streamline its operations & to improve its bottom line in the low margin retail industry. Here is the opportunity for the retail industry to tie the knot with I.T. Shortage of real time information exchange between the stakeholders of the retail industry takes a toll on the quality of service, inventory, strategies & management decision making. Retailers have already increased their IT spending by almost 15% in 2006, allocating almost half of this increase to application software with a particular focus on tools that facilitate multi channel customer relationships, point of sales systems, strategic merchandising & supply chain management. As consumers embrace modern retail formats, technology will play an important role to enhance the experience of shoppers as well as retailers The critical activities that can be handled by IT are finance, accounting, business intelligence, vendor development & management, merchandising & inventory management, stores management, customer relations management, branding, sales promotion, supply chain management & others. In the last couple of years, the retailing industry is implementing solutions ranging from F&B operations to discount clothing, implementing supply chain management (SCM) solutions to core business such as global sourcing ,distribution, logistics, innovations, transparency & visibility in financials & inventory, compliance & management of point of sale(POS) data. Retailers are experimenting with blue- casting, self-service kiosks, SMS based interactions, digital signage & self-checkout counters. Thus the IT organization has to be agile enough to address the rising expectations, & move on the adoption curve. The future needs are converging as Indians retailers too are striving to create technology led supply chain efficiencies,

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optimizing revenue opportunities & customer intimacy. It is assumed that merchandise systems & point of sale (POS) will trigger off the operations. Depending on the size of the warehouse & the no. of SKUs (stock keeping units), a good supply chain system & replenishment model will start driving basic operational activities. The efficiencies are created with POS to warehouse to supplier integration with dynamic & replenishment of stock based on sale data. The life cycle of the retail industry seems to be squeezing as the big retail juggernauts are laying off of their employees & surprisingly enough this time the axe falls on the middle & top level executive. The management has justified the stand by calling it by another management jargon called ‘staff rationalization’. With the focus shifting from driving top line growth to protecting the quickly depleting margins, the retailers are giving pink slips to their top level non performers’ executives. They have started pruning manpower from the top to sustain their margins where they have been confronted by escalating real estate costs, strong competition, changing consumer behavior patterns, novelty factor & commodization of products & services. Overall the picture of the retail is not looking very rosy in India as the increasing real estate costs, changing consumer’s attitudes & increasing competition has forced the retailers to think & act rationally. “At today’s prices of real estate, retail isn’t a viable business. Today most retailers are working on a net margin of 3 percent. But thanks to spiraling real estate costs, occupation costs are double that figure.” -Kishore Biyani, Group CEO, Future Group.9 India’s largest retail conglomerate Reliance Retail has initiated the ‘austerity drive’. The company is going for some cost cutting measures including a check on unnecessary travel, mode of travel, courier dispatches, use of stationery office, use of cabs & the type of accommodation while on tour& the no. of times employees can have coffee or tea. Even the top managers are asked to use AC Indica cars instead of luxury sedans on outstations tours. The company which promises to invest Rs.26000 crores in its new retail venture & hired thousand of people with 9

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some astronomical salaries has now asked its format head to justify their respective employee strength & the role each employee has in the retail venture. Finally the billion-dollar question is that can it is possible for all of them to co-exist in the retail ecosystem by nurturing & supporting each other to overcome difficulties & uncertainties & come up with flying colors. The answer lies in the vision, commitment & trust to think positively & act positively.

References: The strategist, Business Standard, May06, 2008, ‘We will be more fashionable’. India Retail Sector Analysis (2006-2007) 3 India’s growing consumer product & retail market, Google search 4 Khanna Uday, Graphic Era University, Dehradun 5 Financial express, ‘Reliance Retail may quit U.P’ Page 1, Sept25, 2007 6 Times of India,’ whipping up reforms’, page 8, July27, 08 7 Business standard, Kiranas on steroids Page 10, Tuesday22, 2008 8 Brand Equity by Economic Times, ‘Same old storey’, 26 March’2008 9 Business Today, ’Retail Wars’ June 15, 2008 2

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