Panorama
AUGUST 2010 ISSUE TWO
Indian Retail Sector - An Overview
This article explores the various
formats, revenue and cost drivers,
critical success factors of the Indian
retail sector
From traditional ‘Mom and Pop’ stores to
a more competitive playing field, India’s
retail sector has witnessed a major
transformation coupled with exceptional
growth in the recent past. Rising incomes
and economic development of the
country has made India an exciting new
territory for the powerhouses of global
retail. However, given that the Indian
government’s policy on FDI in retail still
hangs in balance, the saga of the Indian
retail sector has only just begun.
Percentage of organi
sed retail
80
60
40
20
0 Supermarkets: They are grocery
USA China Brazil
1995
2010
Today, the retail sector in India is worth
$410 billion and accounts for about 10%
o f I n d i a ’s G D P a n d 8 % o f i t s
employment. Organized retail in India is
still in its nascent stages, accounting for
only 5% of the market share, much lower
than those seen in other countries as
shown in the box alongside. It is one of
the toughest sectors to operate in owing
to low margins and intense competition.
What makes this category such an
exciting future prospect is that it is
projected to expand to 2.5 times its
present size (AT Kearney Global Retail
Index) over the next three years, to
achieve a market share amounting to over
50 billion dollars. This projection is
supported by the fact that the share of
organized retail in the Chinese retail
sector has grown over 7 times in the last
fifteen years.
Classification
The two major sectors in organized
retail are i) Food Retail ii) Clothing
and Apparel. The description of
various formats in these sectors
follows.
Common formats in food include:
stores larger in size than the
neighbourhood kirana shop and
with greater variety on offer,
super markets can cater to
customers who want a good
shopping experience on a regular
b a s i s w i t h o u t c o m p ro m i s i n g o n
affordability. Food bazaar is an example
of this format.
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•Overview of retail sector
•Strategies of Indian firms
•News updates
Hypermarkets: They are super-sized
stores that combine supermarkets and
department stores and carry a vast range
of products. Hyper markets fulfill
consumers’ weekly shopping
requirements in just one trip. A popular
Food Retail Formats
• Hypermarkets
• Supermarkets
•Cash and Carry
example is the Future Group's Big Bazaar
chain.
Cash-and-Carry: Wholesale warehouses
that cater mostly to the needs of nearby
retail outlets, these stores are often
frequented by individual consumers as
well. Bharti-Walmart has begun its Cash-
and-Carry operations in Punjab.
The various formats in the clothing and
apparel sector are as follows:
National Chain Stores (NCS): These are
department stores that carry products of
a multitude of brands besides their in-
house labels. Brands staff and operate
shop-in-shops in the retail spaces within
an NCS. Shopper’s Stop is a prominent
NCS.
 Multi-Brand Outlets (MBO): An MBO
acts as a franchisee for several brands
which belong to the same retail segment,
such as sportswear or jewelry. An
example of this format is Planet Sports.
Single-Brand Stores: These stores are run
by brands themselves or their franchisees.
They usually carry a richer selection of
the brand’s products as compared to an
Clothing and Apparel
sector
formats
•National Chain Stores
•Multi-Brand Outlets
•Single Brand Stores
•Malls
NCS or an MBO. Nike has several
single-brand outlets in India.
Malls: Umbrella shopping centers that
lease space to NCS, MBOs and single-
brand outlets, malls enrich the shopping
experience by providing other facilities
such as food courts, fine dining and
entertainment arcades.
Another method of classification based
on product related verticals is as follows.
1. Consumer Durables
2. Electronics and Appliances
3. Jewelry
4. Books and Music
Private Labels
In terms of brands available, private
labels is a segment worth noting. Private
labels are home grown brands of
companies that operate in the multi-
brand format. Private labels compete
against national brands, providing
consumers with cheaper alternatives.
Private labels contribute to around 20%
of revenues and is on the rise. Examples
of private labels are the Future Group’s
Koryo and Sensei brands in electronics.
Indian Retail Firm Strategies
The Indian retail industry is fast evolving
with multiple formats and with the lines
between the different formats also getting
blurred. With the imminent entry of
foreign players the space will get
extremely competitive and margins will
decline.
The strategies of the prominent players
follow.
Margins in apparel private labels is as
high as 50% as opposed to 20-25% in
branded products. In groceries private
labels have margins of 25-30% as
opposed to 10-12% for branded products.
Supply Chain Management
The primary requirement of a typical
retail supply chain is a Distribution
Centre (DC). DCs are usually located
close to the means of production
(factories or farms) and supply the final
product to stores in their respective
regions. In the case of food retail, cold
storage at distribution and storage centers
with adequate power supply is essential.
The lack of infrastructure in India for
transportation and distribution adversely
affects the efficiency of the entire retail
sector, which will require rapid growth in
power generation, highway construction
and airport capacities if it is to achieve its
potential.
Many companies have started backward
integration to have better control over
their products and raw materials for the
products. Contract farming is one such
method in vogue these days, wherein
farmers enter into contracts with the
retailers to cultivate, harvest and
transport crops to distribution and
processing centers of food retail
companies, for which they are paid a pre-
determined price.
Optimization is important for apparel
retailers in particular because surplus
inventory must often be sold at heavily
discounted prices and large inventories
increase working capital. Inventories
maintained by leading Indian brands are
nearly three times those maintained by
international retailers with comparable
products. Thus, there is enough room for
improvement in this area.
Revenue Drivers
The burgeoning Indian economy is
increasing the disposable incomes of
Indian consumers. This is the primary
revenue driver for the retail sector in
Bharti-Walmart
The Bharti Group has begun its foray
into retail by opening several ‘Easyday’
neighbourhood convenience stores in
Punjab. This brand is operated by its
wholly owned subsidiary Bharti Retail. It
has also entered into an equal equity joint
venture(JV) with Walmart called Bharti –
Walmart, which presently operates cash-
and-carry stores. This JV has set up a
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India. Urbanization and better credit
availability are the other factors driving
revenue.
Cost Drivers
The expansion of the retail sector in
markets like China and Brazil drove up
retail real estate prices considerably. In
India, real estate prices are expected to
increase even more rapidly because of
the shortage of retail spaces, particularly
in the urban areas. Retailers are likely to
target smaller towns and cities for growth,
where retail spaces are more easily
available. Transportation cost, given its
direct correlation with fuel prices, is
another factor that indirectly affects
many retailers.
Critical Success Factors
The success of a retail store depends on
not just maximizing revenues but also
reducing cost. Hence, one of the
important parameters that is used to
judge the performance of a store is the
revenue generated per sq.ft floor space in
a given period of time. In countries
where land is easily available and labour
is expensive, revenue generated per
employee becomes a better evaluation
parameter.
FDI in Retail
As the retail space evolves, a highly
debated policy problem relates to the
extent of foreign investment that should
be allowed. Currently, the government
allows 51% FDI in wholesale cash-and-
carry retail as well as single-brand retail.
FDI is not allowed in multi-brand retail,
although the government is considering
relaxing norms across all formats. The
primary opposition to FDI stems from the
threat that companies such as Walmart
pose to the unorganized sector. On the
other hand, the entry of foreign players
will provide consumers a far greater
variety of products besides improving
industry efficiency and setting higher
benchmarks in services and operations.
Distribution centre in Punjab, which will
service the merchandise needs of the JV’s
cash-and-carry stores, the Easyday
convenience stores as well as those of
nearby retailers. Bharti-Walmart plans to
expand at the rate of ten stores per year
over the next five years, and at 100 stores
per year thereafter.
Walmart’s expertise will give Bharti
access to optimized back-end services and
supply chain management in food retail.
If it can replicate these for its own
subsidiaries and expand as aggressively as
it has planned, Bharti Retail will become
a force to reckon with in the food retail
market in the next five to ten years.
Future Group
With 1000+ outlets and over 10 million
square feet of retail space, Kishore
Biyani’s Future group operates both value
and lifestyle segments of the Indian
consumer market. Future Group’s
primary subsidiary, Pantaloons Retail is
India’s largest retailer by both size and
market capitalizations. Some of the
major formats it operates are:
•Fashion outlet: Pantaloons
•Hypermarket: Big bazaar
•Supermarket: Food bazaar
•Central: Seamless mall
The Future group has recently acquired a
stake in Aadhar which operates rural
retailing formats. It purchases crops from
farmers (especially wheat and paddy) and
provides them with feasible solutions to
operational problems. It also provides
techno-commercial suggestions to
improve their output. Thus, Future
Group is looking to expand into the
hitherto unexplored vertical of rural
retail.
The RPG group
The first entrant into the organised retail
market in India, the RPG group operates
the Spencer’s retail chain under three
formats: hypermarket, supermarket and
convenience stores. However, they plan to
restructure their stores into only two
formats: Spencer’s Hyper (hypermarkets)
and Spencer’s (retail store). They also
plan to expand their operations in fashion
and apparel retail.
Their Music World chain, which retails
international and Indian music and home
videos, is the largest chain of music stores
in India.
Books & Beyond is a new vertical which
offers a large variety of toys, books and
stationery. Textbooks of various school
boards will also be available at these
stores. The RPG group plans to
aggressively expand this franchise,
especially because there are presently
very few players in the organised books
and stationery retail vertical.
K Raheja Corp
The Rahejas launched the first Shopper’s
Stop in 1991. Since then, Shopper’s Stop
has become India’s largest department
store chain. Their Crossword chain of
bookstores is also a leading franchise in its
segment.
The new verticals K Raheja Corp plans
to expand into are the accessories and
cosmetics segment and the babycare
segment. The group’s retail company,
Shopper’s Stop Limited has launched the
Arcelia franchise, which primarily caters
to the premium segment of women
shoppers by offering a range of luxury
cosmetics and accessories. Mothercare
PLC of UK has also signed a special
franchise agreement with Shopper’s Stop
Limited to set up stores that stock
products for infant and toddler care,
including shop-in-shops in Shopper’s
Stop department stores.
Reliance Retail
Reliance Retail entered the retail
landscape investing about ` 25,000 crore.
They started with Reliance Fresh, a
convenience store. They aggressively
partnered with farmers by following a
farm-to-folk strategy to obtain fresh fruits
and vegetables at affordable prices. They
chose Hyderabad to test waters, as the
city offers real estate at a price that does
not quite pinch. They poached talent
from pioneers in organized retailers to
head the organization.
Re l i a n c e S u p e r s t o re s a re l a rg e
super markets with an area of
4,000-10,000 sq ft and will stock grocery,
stationary, pharmaceutical products and
apparel only.
Reliance Fresh will also retail FMCG,
h o m e , c o n s u m e r d u r a b l e s , I T,
pharmaceuticals, and auto accessories, in
different formats like hypermarkets,
super markets and discount stores;
however, food will be a major account.
Reliance Fresh, Reliance Mart, Reliance
Digital, Reliance Trendz (apparel),
Reliance Footprint (footwear, handbags,
accessories), Reliance Wellness (health),
Reliance Jewels, Reliance Timeout (books
and gifts) and Reliance Super (mini mart)
are various formats that Reliance has
introduced.
Reliance Mart (1,50,000-3,00,00 sq. ft.) is
the company's hypermarket format.
Reliance has bought properties ranging
from ` 1,000 per sq. ft to as high as `
22,000 per sq. ft or more for their
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expansion. Reliance now plans the
franchisee route for further expansion.
Faced with expensive real estate costs and
delays in retail space acquisition, the
company is co-opting existing small
retailers in all formats other than
Re l i a n c e Fr e s h a n d Re l i a n c e
Hypermarket. This is yet another success
formula for giant retailers.
ITC
In the various ventures by retailers, ITC
stands out because of its focus on rural
retail and novel procurement channel.
ITC’s e-Choupal initiative began by
deploying technology to reengineer
procurement of soya and other crops
from rural India. The e-choupal system
was introduced by ITC in June 2000 and
reached 3.5 million farmers by 2006. It
has gone on to serve as a highly profitable
distribution and product design channel.
Critical factors in the apparent success of
the venture are ITC’s extensive
knowledge of agriculture, the effort ITC
has made to retain many aspects of the
existing production system, including
retaining the integral importance of local
partners, the company’s commitment to
transparency, and the respect and fairness
with which both farmers and local
partners are treated.
Going forward, probably this could be
the way to penetrate into the rural retail
market and other retailers might just take
a leaf out of ITC’s book.
Subhiksha
While we are euphoric about the future
of the Indian retail, there are lessons to
be learnt from the past debacles
especially in the case of Subhiksha.
Touted as the Indian version of the
Walmart, it started off as a low cost
Grocery retail quickly expanding into
other verticals like medicines, even
entering consumer durables etc. After an
initial period of sustainable growth the
firm started expanding rapidly by
opening more and more stores in order to
multiply its turnover, often working on
zero margins! The firm didn’t have a
backward integrated supply chain and
relied on bulk buying and huge discount
which is not a source of sustainable
competitive advantage. It soon ran into
working capital problems and governance
issues with credit defaults and more
seriously reports of financial fraud by
stating wrong numbers year after year.
The investigation is currently on.
 News Updates
Reliance's shale gas foray
Reliance Industries has acquired its third
shale gas asset in the US this year. The latest
investment was the US$392 million joint
venture agreement with Texas-based
Corrizo Oil and Gas. The company's
heightened interest in this new source of
energy will give it an exposure to the new
technology that it could then apply in India.
Not much has been done in India on shale
gas prospecting so far, even though the rock
formation is common in several parts of the
country. ONGC, probably the only
company actively searching for shale gas, has
been studying the formations over the past
five years. Hence, there is a huge untapped
opportunity back home and Reliance has
chosen this indirect approach to build
competency in the area.
SEBI modifies takeover norms
On July 19 2010, a committee set up by the
Securities and Exchange Board of India, the
market regulator, proposed to make it
mandatory for acquirers to extend an offer
to buy all the shares in a company, once
their stake-holding exceeds 25%. The
current minimum level for mandatory open
offers is 15% and requires acquirers to make
a 25% public offer. This suggestion is in line
with the internationally established norms
for takeover.
The implications of such a change are far-
reaching. For one, it would significantly
increase the amount of funding that a
company would require for the purpose of a
takeover. Given the limited capability of
GST and its implications
The Goods and Service Tax (GST) can go a
long way in making indirect taxation within
the country more efficient.
GST is an indirect tax which would replace
existing duties such as service tax, VAT and
Excise Duty. It would be levied on almost all
goods produced within India or imported.
Producers would earn credit for taxes paid
by them earlier, thereby avoiding multiple
taxation. GST is, in fact, very similar to the
VAT, with the primary difference being that
services are also taxed in case of the GST.
It is planned that GST would initially be
implemented with a separate rate for the
Centre and State, and eventually converge
to a single rate. The tax would then be
shared by the Centre and the State in a
decided proportion.
India’s current debt market, such a directive,
if implemented, is like to give foreign
acquirers, with more access to funding, an
advantage over Indian players.
Apprehension has also been expressed about
the possibility of reduced Mergers and
Acquisition activity resulting from such a
directive.Such a measure may consequently
also lead to wide-spread changes in India’s
debt market, with more funding likely to
become available. Immediately following the
implementation, companies where entities
have stakes close to 15%, are likely to
witness a rise in stock prices.
On the other hand such a directive would
particularly benefit minority shareholders
and private equity firms. They would be able
to hold an increased stake of 10% in a
company, without having to make an open
offer.
Market to determine petrol prices
The GoI has decontrolled the petrol prices
leading to an increase of ` 3.5/liter. De-
regulation in the fuel prices allows the oil
companies to determine the petrol prices to
be in line with the market prices. Diesel
prices will also be deregulated in due course
of time.
The deregulation will reduce the retailers’
under-recoveries which are expected to be
around ` 22000 crores for the rest of the
financial year. The petrol companies can
now generate some positive cash flows to
build infrastructure for distribution of fuel.
The social losses in the earlier system of
GST would make the taxation process more
transparent and lead to increased
compliance and a broadened tax base.
Moreover, with fewer exemptions that
currently exist for the multiple taxes in
place, GST is also likely to boost tax
collections.
For companies, where cascading taxation is
a significant, GST would lead to reduce the
tax burden. It would encourage a more
competitive business environment and is
likely to boost GDP. According to a recent
statement by the Indian Finance Minster
Pranab Mukherjee, "Well-designed GST
will see an increase of 2 to 2.5 per cent in
the GDP."
Moreover, it would lead to harmony in the
systems of taxation across the country and
Please send in your suggestions
and comments to
consultclub@iimahd.ernet.in
price monitoring included misuse/
wasteful use of scarce petroleum
resources, diversion, adulteration, other
avoidable neg ative exter nalities,
improper substitution between products,
tax arbitrage, distortion of consumer
preferences and input choices of
industries, and international cross
hauling of petroleum.
The move will evince fresh interest from
MNCs for Indian downstream business.
Private sector oil companies can now
compete with the PSUs on a level
playing field and the increase in
competition may in turn improve the
efficiency of public sector companies.
On the flip side, the fuel price increase
will lead to a rise in inflation in the short
and medium term. Auto sector and
transport industries will bear the brunt of
price rise. Distribution based businesses
such as FMCG and cement will also be
impacted.
would end distortion in differential
treatment of the manufacturing and service
sectors.
However, there are several concerns
regarding the implementation of GST. The
exact rate of GST needs to be decided as
would the proportion in which the tax
would be shared between the Centre and
the State would need to be decided. The
VAT, Central Excise and Service Taxes,
would need to be phased out. Moreover,
variations exist in the definition of inputs,
capital goods etc across Indian states. This
leads to companies, especially those with a
national presence, providing for these
inconsistently. It is pertinent to deal with
issues such as these before GST is
implemented across the country.