Retail Market And Recession

Homework Title: Impact of economic slowdown in US Course Code :ECO211

Submitted To: Mr. Rohan sharma

Date of submission : 30-November-2009

Student’s Roll No RB6803A01

Section No. : B6803

Declaration: I declare that this assignment is my individual work. I have not copied from any other student’s work or from any other source except where due acknowledgment is made explicitly in the text, nor has any part been written for me by another person. Student’s Signature : _____________ Evaluator’s comments: _____________________________________________________________________ Marks obtained : ___________ out of ______________________

Executive Summary

This term paper describe slowdown in US economy and its impact on retail industry. I have described the way with which recession have its impact on retail sector. A recession has many attributes that can occur simultaneously and includes declines in coincident measures of activity such as employment, investment, and corporate profits. A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes, such as Vshaped, U-shaped, L-shaped and W-shaped recessions. In the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 1954 and 1990-91; U-shaped (prolonged slump) in 1974-75, and Wshaped, or double-dip recessions in 1949 and 1980-82. Japan’s 1993-94 recession was Ushaped and its 8-out-of-9 quarters of contraction in 1997-99 can be described as L-shaped. Korea, Hong Kong and South-east Asia experienced U-shaped recessions in 1997-98, although Thailand’s eight consecutive quarters of decline should be termed L-shaped.

Acknowledgement First and foremost I thank my teacher who has assigned me this term paper to bring out my creative capabilities. I express my gratitude to my parents for being a continuous source of encouragement and for all their financial aid given to me. I would like to acknowledge the assistance provided to me by the library staff of Lovely Professional University, Phagwara. My heartfelt gratitude to my brother helping me to complete my work in time.

Varun Chadha

RB6803A01

RETAIL The word 'retail' is derived from the French word 'retaillier' meaning 'to cut a piece off' or 'to break bulk'. In simple terms it involves activities whereby product or services are sold to final consumers in small quantities. Although retailing in its various formats has been around our country for many decades, it has been confined for along time to family owned corner shops. Englishmen are great soccer enthusiasts, and they strongly think that one should never give Indians a corner. It stems from the belief that, if you give an Indian a corner he would end up setting a shop. That is how great Indians retail management skill is considered.

The Facts Retailing in more developed countries are big business and better organized that what it is in India. Report published by McKinsey & Co. in partnership with Confederation of Indian Industry (CII) states that the global retail business is worth a staggering US $ 7 trillion. The ratio of organized retailing to unorganized in US is around 80 to 20, in Europe it is 70 to 30, while in Asia it comes to around 20 to 80. In India the scenario is quiet unique, organized retailing accounts for a mere 5% of the total retail sector. Although there are around 5 million retail stores in India, 90% of these have a floor space area of 500 sq.ft. Or less. The emergence of organized retailing in India is a recent phenomenon and is concentrated in the top 20 urban towns and cities

The Reason This emergence of organized retailing has been due to the demographic and psychographic changes taking place in the life of urban consumers. Growing number of nuclear families, working women,

greater work pressure, changing values and Lifestyles, increased commuting time, influence of western way of life etc. have meant that the needs and wants of consumers have shifted from just being Cost and Relationship drive to Brand and Experience driven, while the Value element still dominating the buying decisions.

The Global Retail Industry Retail stores constitute 20% of US GDP & are the 3 rd largest employer segment in USA. China on the other hand has attracted several global retailers in recent times. Retail sector employs 7% of the population in China. Major retailers like Wal-Mart & Carrefour have already entered the Chinese market. In the year 2003, Wal-Mart & Carrefour had sales of US $ 70.4 Crore & US $ 160 Crore respectively. The global retail industry has traveled a long way from a small beginning to an industry where the world wide retail sales is valued at $ 7 x 10 5 Crore. The top 200 retailers alone accounts for 30 % of the worldwide demand. Retail turnover in the EU is approximately Euros 2, 00,000 Crore and the sector average growth is showing an upward pattern. The Asian economies (excluding Japan) are expected to grow at 6% consistently till 2005-06. On the global Retail stage, little has remained same over the last decade. One of the few similarities with today is that Wal-Mart was ranked the top retailer in the world then & it still holds that distinction. Other than Wal-Mart's dominance, there's a little about today's environment that looks like the mid-1990s. The global economy has changed, consumer demand has shifted & retailers' operating systems today are infused with far more technology than was the case six years ago.

Scenario of retailing in India Retailing is the most active and attractive sector of last decade. While the retailing industry itself has been present since ages in our country, it is only the recent past that it has witnessed so much dynamism. The emergence of retailing in India has more to do with the increased purchasing power of buyers, especially post-liberalization, increase in product variety, and increase in economies of scale, with the aid of modern supply and distributions solution. Indian retailing today is at an interesting crossroads. The retail sales are at the highest point in history and new technologies are improving retail productivity. Though there are many opportunities to start a new retail business.

PRESENT INDIAN SCENARIO * Unorganized market: Rs. 583,000 crores * Organized market: Rs.5, 000 crores * 5X growth in organized retailing between 2000-2005 * Over 4,000 new modern Outlets in the last 3 years * Over 5,000,000 sq. ft. of mall space under development * The top 3 modern retailers control over 750,000 sq. ft. of retail space * Over 400,000 shoppers walk through their doors every week * Growth in organized retailing on par with expectations and projections of the last 5 Years: on course to touch Rs. 35,000 crores (US$ 7 Billion) or more by 2009-11

Let us look at the evolution process:

Detailing reasons why Indian organized retail is at the brink of revolution, the IMAGES-KSA report says that the last few years have seen rapid transformation in many areas and the setting of scalable and profitable retail models across categories. Indian consumers are rapidly evolving and accepting modern formats overwhelmingly. Retail Space is no more a constraint for growth. India is on the radar of Global Retailers and suppliers / brands worldwide are willing to partner with retailers here. Further, large Indian corporate groups like Tata, Reliance, Raheja, ITC, Bombay Dyeing, Murugappa & Piramal Groups etc and also foreign investors and private equity players are firming up plans to identify investment opportunities in the Indian retail sector. The quantum of investments is likely to skyrocket as the inherent attractiveness of the segment lures more and more investors to earn large

profits. Investments into the sector are estimated at

INR 2000 - 2500 Crore in the next 2-3 years,

and over INR 20,000 Crore by end of 2011. Few of India's top retailers are: 1. Big Bazaar-Pantaloons: Big Bazaar, a division of Pantaloon Retail (India) Ltd is already India's biggest retailer. In the year 2003-04, it had revenue of Rs 658.31 crores & by 2010; it is targeting revenue of Rs 8,800 Crore. 2. Food World: Food World in India is an alliance between the RPG group in India with Dairy Farm International of the Jardine Matheson Group. 3. Trinethra: It is a supermarket chain that has predominant presence in the southern state of Andhra Pradesh. Their turnover was Rs 78.8 Crore for the year 2002-03. 4. Apna Bazaar: It is a Rs 140-crore consumer co-operative society with a customer base of over 12 lakh, plans to cater to an upwardly mobile urban population. 5. Margin Free: It is a Kerala based discount store, which is uniformly spread across 240 Margin Free franchisees in Kerala, Tamil Nadu and Karnataka. Wholesale trading is another area, which has potential for rapid growth. German giant Metro AG and South African Shoprite Holdings have already made headway in this segment by setting up stores selling merchandise on a wholesale basis in Bangalore and Mumbai respectively.

GROWTH STAGES IN INDIA Due to the urban-rural divide, organized retail will first take place in metros and larger cities and then in semi urban and rural regions. Thus, the country will witness multiple stages of growth even with a low organized retail penetration. In the next 5 years, the organized retail activity growth is likely to peak in the metros; however, it will still remain at an early growth stage in the semi-urban and rural areas. The following diagram shows the organized retail industry cycle with the bold line depicting larger cities and dashed lines representing smaller cities and semi-urban areas:

Intro

duction: Marks the beginning of organized retail, primarily in metros with limited players and formats. Growth: Shows a market with rapid growth which is ready for retail; players announce huge expansions, experiment with formats, set up supply chain and back-end for scaling up, hire and train talent and use hygiene and ambience as their unique selling proposition (USP). Maturity: Growth reaches its peak; market is still growing but opportunities for new entrants decrease. Organized formats become well accepted and discounting becomes a norm. Decline: A high level of penetration is reached; industry has undergone consolidation and is dominated by a few players. The window of opportunity becomes small. Unlike the West, India is likely to have a shortened evolution cycle with rapid growth in the coming years (similar to the growth story of China). Inspired by formats existing in the developed countries, players are fast setting up all kinds of formats. The kind of growth that the developed countries (USA and UK) had witnessed in 4 decades is being witnessed by India only in a decade. The first mall in the US was set up only after more than 20 years of retailing in the form of shopping centers. Lifestyle centers, specialty stores and multiplexes came up in the US almost after 4 decades. Within 5 years of major activity in the organized sector, specialty retailing is already gaining ground in India. The success of Indian retailers will not be determined simply by emulating the West. A player will succeed in the long run only if he keeps in mind the tastes and preferences of consumers and fulfils

their needs. For example, opening of large stores in the outskirts may not work in India due to low auto density and inadequate public transport and infrastructure. India is primarily a consumption driven economy. With booming sectors like IT/ITES, real estate, financial services, etc, the country is witnessing both high affordability and willingness to spend at present. Organized retail has considerably grown only in the last 3-4 years. It is believed that the organized retail industry is currently in a growth stage due to the following reasons: Players are experimenting with formats, markets and products and are succeeding in almost all new venture. There is room for more players and formats; large domestic and international players are announcing new plans. There is a shortage of trained manpower, which is being solved by hiring and training local talent and employing people from related sectors, thereby creating a balance with expatriate employees. Most players are tapping the value segment through super markets and hypermarkets, as they have higher success rates.

FUTURE TREND: SCOPE OF 24hr RETAILING The concept of 24hr. retailing in India has been present only in very limited formats like the pharmaceuticals (Apollo) and fuel retail outlets (H.P, Reliance etc.) and the other retail formats used

to operate only till the early hours of the night. But because of the changing lifestyles and the buying habits of the consumers the retailers have been extending their operating hours till late nights. Most of the Indian retail formats though capable of operating their formats round the clock do not choose to do so because of the non feasibility of the idea at present taking in conjunction the customers’ readiness. For instance if any of the hyper market or supermarket is functioning during the night the retailer has to bear the extra costs of electricity, labor and maintenance if the number of footfalls are less very low during the late nights which otherwise would be profitable to him. Anyways, the shopping time of the consumer is considerably increasing. Moreover, in India most of the retailing is all about food and groceries. It might not be a rational prediction that all the consumers will step into the retail outlet at midnights to buy food and groceries. This problem can be overcome by implementing the idea in places, which have a floating population even during the nights like railway stations and bus stations. However with the upcoming culture of malls and the changing lifestyles of the people one can design a small part of the store or a mall for a new 24/7 retail format which consists of the essential products like medicines, fruits, vegetables etc.

Recession A Recession is a contraction phase of the business cycle. National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession. They define recession as: “ Significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales ”. For this reason, the official designation of recession may not come until after we are in a recession for six months or longer.

What Causes Recession? An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers loose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

Recession and politics:Generally an administration gets credit or blame for the state of economy during its time. This has caused disagreements about when a recession actually started. In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the causes of specific phases of the cycle. It is generally assumed that government activity has some influence over the presence or degree of a recession. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession. They are often unsuccessful, at least at preventing a recession, and it is difficult to establish whether they actually made it less severe or longer lasting.

RECESSION IN US:The United States housing market correction (possible consequences of United States housing bubble) and subprime mortgage crisis has significantly contributed to a recession. The 2008/2009 recession is seeing private consumption fall for the first time in nearly 20 years. This indicates the depth and severity of the current recession. With consumer confidence so low, recovery will take a long time. Consumers in the U.S. have been hard hit by the current recession, with the value of their houses dropping and their pension savings decimated on the stock market. Not only have consumers watched their wealth being eroded – they are now fearing for their jobs as unemployment rises. U.S. employers shed 63,000 jobs in February 2008, the most in five years. Former Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There is more than a 50 percent chance the United States could go into recession.". On October 1, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in September. On April 29, 2008, nine US states were declared by Moody's to be in a recession. In November 2008 Employers eliminated 533,000 jobs, the largest single month loss in 34 years.. For 2008, an estimated 2.6 million U.S. jobs were eliminated. The unemployment rate of US grew to 8.5 percent in March 2009, and there have been 5.1 million job losses till March 2009 since the recession began in December 2007. That is about five million more people unemployed compared to just a year ago. This has become largest annual jump in the number of unemployed persons since the 1940’s. Although the US Economy grew in the first quarter by 1%, by June 2008 some analysts stated that due to a protracted credit crisis and "rampant inflation in commodities such as oil, food and steel", the country was nonetheless in a recession. The third quarter of 2008 brought on a GDP retraction of 0.5% the biggest decline since 2001. The 6.4% decline in spending during Q3 on non-durable goods, like clothing and food, was the largest since 1950.

A Nov 17, 2008 report from the Federal Reserve Bank of Philadelphia based on the survey of 51 forecasters, suggested that the recession started in April 2008 and will last 14 months. They project real GDP declining at an annual rate of 2.9% in the fourth quarter and 1.1% in the first quarter of 2009. These forecasts represent significant downward revisions from the forecasts of three months ago. A December 1, 2008, report from the National Bureau of Economic Research stated that the U.S. has been in a recession since December 2007 (when economic activity peaked), based on a number of measures including job losses, declines in personal income, and declines in real GDP. By July of 2009 a growing number of economists believed that the recession may have ended. The National Bureau of Economic Research will not make this official determination for some time. In the 2001 recession, for example, the recession ended in November 2001, but it was not until July 2003 that the NBER announced its official determination.

US faced major crisis because of – Sub prime mortgage crisis (home loan defaults) Rising oil prices at $100 a barrel • Global Inflation • High unemployment rates • A declining dollar value All this slowed down the growth of the economy and as the GDP growth rate fell to 2%, recession set in. • •

Low GDP growth indicating Recession in US

Impact on India A slowdown in the US economy is bad news for India because: •

Indian companies have major outsourcing deals from the US

• •

India's exports to the US have also grown substantially over the years. Indian companies with big tickets deals in the US are seeing their profit margins shrinking.

Share Market in India •

• • •

More people have sold the shares in the Indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points. Foreign investors have pulled out from stock markets leading to heavy losses in stocks and mutual funds Stock broking houses are laying-off people Because of such uncertainty many people have started saving money in banks rather than investing

Recession Impact on Retails Retail sales fell off a cliff in September, plunging by the largest amount in three years as worried consumers shunned the malls and auto showrooms in the midst of the country's financial meltdown. The Commerce Department reported Wednesday retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. It was the biggest decline since retail sales fell by 1.4 percent in August 2005. The bigger-than-expected decline significantly increased the risks of a recession because consumer spending is two-thirds of total economic activity.

The news spread recession jitters across Wall Street, as stocks fell sharply pushing the Dow Jones industrials back below 9,000 at times. The weakness was led by a 3.8 percent drop in auto sales. Sales dropped below 1 million units as consumers struggled to find financing. Retail sales have now fallen for three consecutive months, the first time that has occurred on government records that go back to 1992. Economists had expected sales to be down in September as a flood of bad news about the financial system and rising unemployment increased consumers' worries. Many analysts believe the overall economy, as measured by the gross domestic product, is slipping into a recession, triggered by a steep slump in housing and the severe credit crisis.

Even excluding auto sales, retail sales showed widespread weakness, falling by 0.6 percent or double the decline outside of autos that had been expected. "The consumer shut up shop even before the markets got crushed and that is not good news for the economy," said Joel Naroff, chief economist at Naroff Economic Advisors. "What is ominous is that the declines in spending were broad based." Sales at department stores fell by 1.5 percent following an even bigger 1.6 percent drop in July. Sales at furniture stores fell by 2.3 percent. Sales at appliance stores slid 1.5 percent.

In other economic news, the Labor Department reported that wholesale prices fell for a second straight month, declining by 0.4 percent, thanks to a big drop in energy costs. However, core wholesale prices, which exclude food and energy, rose by 0.4 percent, double what economists had been expecting. Federal Reserve policymakers are counting on the economic slowdown to dampen inflation pressures and give them more room to cut interest rates if needed to keep the financial crisis from pushing the country into a deep downturn. The central bank last week cut a key rate by a half-point at an emergency meeting, coordinating the move with other major economies. In a third report, the Commerce Department said businesses increased their inventories by 0.3 percent in August — the smallest advance in five months. The increase was below the 0.5 percent rise that economists had expected and sharply lower than the 1.1 percent jump in July.

Economists are watching to see whether business confidence begins to falter as the economy weakens. Business plans on inventory growth and investment spending are key factors influencing economic activity. Analysts said the slowdown in inventory growth could also be reflecting the serious problems in the market for commercial paper, where businesses obtain short-term loans to fund their day-to-day operations such as buying inventories. That market has frozen up in recent months as banks have grown concerned about the risks of bad loans. In one of many emergency measures implemented by the government during the current credit crisis, the Federal Reserve has announced that it will start a program later this month to support the commercial paper market in an effort to get those loans back to more normal levels.

Impact of Recession Retail sector deep in recession Retail sales deteriorated further in April, confirming the recession in the local economy continued into the 2nd quarter. Wholesale andretail trade contracted 2.5% (saar) in the 1Q09. Although interest rates have already been cut by 4.5%, the positive impact on spending will take time to become apparent. Further cuts in interest rates are possible, but the SARB may keep rates unchanged at the June meeting because of the stickiness of inflation and the time lags involved in monetary policy. Household finances are taking strain despite the lower interest rates. Reducing the huge debt burden accumulated in previous years is a priority for many households. Banks have also tightened their lending criteria significantly and only a small portion of credit applications are being approved. At the same time weak equity and property prices are putting household balance sheets under pressure and reducing the propensity of households to borrow. Given the surge in mortgage lending in recent years, many households currently have negative property equity on their balance sheets. The result is that households are cutting back on discretionary spending in a big way and saving more. The labour market is also taking strain with increasing unemployment and falling wage increases. In many sectors, such as manufacturing, current wage increases are way below the inflation rate. Current statistics suggest that retail inflation is still around 10%.

•

Seasonally adjusted real retail sales were 1.3% lower in April than in March and 6.9% lower than a year ago.

•

April real retail sales (seasonally adjusted) were also 4% lower than the 1st quarter average.

FUTURE OUTLOOK AND CHALLENGES At least 2 - 2.5 Million additional direct jobs are likely to be created in the next 5 years. Hyper-competition is expected to set in by 2009-11as the footprint of the top-5 players starts significant overlapping in top 20 - 30 towns. According to Assoc ham, the overall retail market would grow by 36 per cent with the organized sector expected to register three-fold growth to Rs 15,000 crore by 2009 The total size of the market is also expected to increase to Rs 14, 79,000 crore from the current level of Rs 5, 88,000 crore. The Big Bazaars of India know God is in retail. Analysts swear by their stated corporate ambitions, promising growth potential and soaring performance graphs. Yet, indicators suggest that we are far from being declared as the tourism destination for retail therapy. The industry is facing a severe shortage of talented professionals, especially at the middlemanagement level. 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%. 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. 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.

Conclusion The future for organized retail in India is a bright one in spite of recession. The demographics, the sense of optimism and the deep-rooted entrepreneurial culture are ready ingredients for success. The retail industry needs to get organized and drive its own destiny. The government needs to be lobbied with, to help create a conducive environment so that the latent entrepreneurial spirit can get unleashed and ultimately value can be delivered to consumers who will push their shopping carts and participate actively in this great retail boom. While there are obstacles, there are clear opportunities in modern retailing in India.

On the issue of recession Mr. Manmohan Singh suggested –“A coordinated fiscal stimulus by countries that are in a position to do so would help to mitigate. the severity and duration of the recession”. “It would also send a strong signal to investors. around the world. Resort to fiscal stimulus may be viewed as risky in some situations, but if we are indeed on the brink of the worst downturn since the Great Depression, the risk may be worth taking,” he added Only three percent of India’s retail market is organized. The future shows tremendous potential for growth in the retail sector. Almost all large companies worldwide are looking to establish a base or stake in the Indian market. In this scenario, the Indian retail sector itself must seize the initiative to realize the dreams of contributing to a prosperous and booming economy.

References

1.www.retailindustry.about.com 2. http://en.wikipedia.org/wiki/Retail_industry 3.http://en.wikipedia.org/wiki/Recession 4.http://www.pdfcoke.com/doc/16768235/scope-of-the-retail-sector-in-thecontext-of-global-recession-in-20072009 5.http://www.pdfcoke.com/doc/19704579/Impact-of-recession-on-RetailIndusties