Competitive Retail Strategyfor Fashion Merchandise

Opportunities for India through Retail Sector

In our opinion, the growth in the retail sector can have a multiplier effect on the economy.
Some of the benefits which can accrue are:
y Farm income in India can increase if organized retail enhances farmer's realizations on food items
from the currently estimated low level of 30-35%of retail price to the International norm of over 60%of
retail price, y The supply chain for unprocessed food items is fairly under-developed in India. It has
Many layers leading to high wastages & a high cost of distribution. Increased penetration of organized
retail into food and grocery segment can boost farm incomes, y The current farm realizations for
unprocessed items are estimated at around Rs. 1.2 Trillion. If this segment shifts entirely to organized
retailing the realizations of farmers Are at levels compared to international countries (60-65%) y Higher
farm income can boost the purchasing power of 60%>of the population adding to GDP growth through
higher economic activity. If farmers spend 80%>of their incremental Income the economy will witness
an incremental spending of around Rs. ltril I ion which is Equal to 3%>of India's GDP even if economic
multiplier effect is excluded, y Companies are spending heavily on marketing, hence improving the
growth of the marketing sector as well. Intense competition will only further increase advertisement
and marketing expenditure.
y Also, logistics and supply chain companies are set to benefit from the retail boom.Thus growth in
retail can have a multiplier effect on economy. Indian consumers will be the Largest beneficiaries.
India's middle class as well as lower income consumers will be the ultimate gainers with multiple
benefits. Reduction of prices in typical monthly basic needs Shopping bills may reduce by at least
10%within the next 24-30 months, leading to generation of an equivalent amount of surplus
disposable income, Improve- -ment in quality of fresh/ perishable products in the market,
Improved assortment and reliable availability of products.

Threats in Retail Sector

v Foreign Direct Investment in Retail
Currently, foreign direct investment in retail chain stores is restricted in India. Prior to 1997, there

AmnKumarAmnachalaiah - Retail Consultant, email - aarun9677@hotmail.com, Mobile 9740067765

Competitive Retail Strategyfor Fashion Merchandise

were no FDI restrictions in the domestic retail sector. Players who entered were McDonalds,
which opened in India in 1996 and Foodworld, which was hived off as a 51:49 joint venture
between Spencer & Company (RPG Group) and Dairy Farm International. Companies that entered
prior to 1997 have been allowed to continue with their existing foreign equity components.
Drawbacks of FDI in retail would be cut-throat competition, Promoting cartels and creating
monopoly, Increase in real estate prices, Marginalize small domestic entrepreneurs. Displacement
of unorganized players because of financial strength of foreign companies, Unfair trade practices
like predatory pricing in case of absence of proper regulatory guidelines

v Steps being taken to protect margins

Retail is a low margin, high volume business. With the retail boom being witnessed in the country,
al I companies are on an expansion mode and adding stores at a fast pace.
This expansion drive is leading to cost pressures and biting into the margins of retailers.
In order to protect its margins and also with the aim to counter competition in the industry
companies are taking several measures to stay competitive and also expand margins,a well as
offer best prices to the customer. Companies are setting up massive supply chain systems,
promoting private label apparels and concentrating on their backend support by setting up
warehouses at different locations to reduce sourcing costs as well as stocks reach the stores on
time.

AmnKumarAmnachalaiah - Retail Consultant, email - aarun9677@hotmail.com, Mobile 9740067765

Risks and Concerns in Retail

y Delays in mall construction may delay launch plans of retailers
Malls would account for half of the total organized sector retail space demand in the next Five years.
However, the rising cost of retail space in India is affecting the growth plans of Retailers. Real estate
costs are hampering their margins, which are already not very high. They are also entering into
long-term lease & revenue sharing arrangements with mall

y High employee mis

Another major concern is staff costs. Owing to increasing competition and new entrants in the retail
business, attrition levels for the industry have gone up drastically resulting in high Expenses to retain
and hire new people. Staff costs have gone up by 35%since 2006. Companies are now focusing on
retaining their employees and are forced to offer them higher Salaries and bonuses, which in turn
have an impact on the profitability.

y Delays in mall construction may delay launch plans of retailers

Malls would account for half of the total organized sector retail space demand in the next Five years.
However, the rising cost of retail space in India is affecting the growth plans of Retailers. Real estate
costs are hampering their margins, which are already not very high. They are also entering into
long-term lease & revenue sharing arrangements with mall

y Opposition to organized retail

Opposition from the unorganized sector and any consequent political opposition can Hamper
growth plans of retailers. Also, delays in opening up the retail sector to FDI

y Pressure on margins
Another important fact is the pressure on margins, which the retailers will face once Competition
enters. Retailing as such is low margin business. EBITDA margins for food & Groceries are wafer
thin@3-3.5% Margins in the apparel business are in the range of 8-16% Given the big expansion
plans of retailers, net profits may have to take a hit in order to Increase volumes. Retailers are
concentrating more and more on private labels where Margins are higher. However, going forward,
this is a key risk in this business.

An intuitive assumption on Indian Retail

The Indian retail industry leaders are very positive on the sector and believe current players such as
Pantaloon, are well positioned to take full advantage of the growth in the sector. With the growth in
consumerism, urbanization and a young population the Retail sector is clearly on an upswing. To protect
margins, retailers have now started to Concentrate on their supply chain and logistics so as to ensure low
cost of procurement, as such retail is a high volume, low margin business and one which requires sizeable
Investments in working capital. With organized retail penetration levels of 3-3.5%of the total industry, and
as low as l%in segments such as food and grocery the scope for growth is tremendous, layers such as
Reliance Retail, Aditya Birla group are all expected to do well, going forward. Looking at the size of the
market and the potential, there is a market large enough for several large players to co-exist.