Contents

About the Industry................................................................................................................................2

Sub parts of the Industry......................................................................................................................3
Growth Drivers.....................................................................................................................................3
Growth Inhibitors.................................................................................................................................5
Sector Risk Factors...............................................................................................................................5
Macroeconomic Factors which affect the Industry..............................................................................6
Performance Metrics of the Industry....................................................................................................6
Retail Customer KPIs.......................................................................................................................7
Retail Financial KPIs.......................................................................................................................7
Various Business Models in the Industry.............................................................................................8
1. Store Based Retailing.................................................................................................................8
2. Online retail business models:......................................................................................................9
Recent Developments in the Industry..................................................................................................9
Major Govt. Policies for the industry.................................................................................................11
Major Cost heads for the Industry......................................................................................................11
Major players in the Industry.............................................................................................................12
Major Growth Strategies adopted by the companies in the Industry.................................................12
Financial Analysis of the Industry: Ratios.........................................................................................14

Industry Analysis – Retail

About the Industry

The Indian retail industry is one of the fastest growing in the world. Retail industry in India is
expected to grow to US$ 1.3 trillion by 2020, registering a Compound Annual Growth Rate (CAGR)
of 16.7 per cent over 2015-20. Modern trade would expand twice as fast at 20 percent per annum
and traditional trade at 10 percent. Retail Industry accounts for over 10 per cent of the country’s
Gross Domestic Product (GDP) and around 8 per cent of the employment. India is the world’s fifth-
largest global destination in the retail space.

India’s Business to Business (B2B) e-commerce market is expected to reach US$ 700 billion by
2020. Online retail is expected to be at par with the physical stores in the next five years.

India is expected to become the world’s fastest growing e-commerce market, driven by robust
investment in the sector and rapid increase in the number of internet users. Various agencies have
high expectations about growth of Indian e-commerce markets. Indian e-commerce sales are
expected to reach US$ 120 billion by 2020 from US$ 30 billion in FY2016.Further, India's e-
commerce market is expected to reach US$ 220 billion in terms of gross merchandise value (GMV)
and 530 million shoppers by 2025, led by faster speeds on reliable telecom networks, faster
adoption of online services and better variety as well as convenience.

India’s direct selling industry is expected to reach a size of Rs 23,654 crore (US$ 3.51 billion) by
FY2019-20, as per a joint report by India Direct Selling Association (IDSA) and PHD.

Rising Prominence of Online Retail

 Online retail business is the next generation format which has high potential for growth in
the near future. After conquering physical stores, retailers are now foraying into the
domain of e-retailing

 E-commerce is expected to be the next major area supporting retail growth in India. The
industry is projected to touch US$ 100 billion by 2020 growing from US$ 30 billion in 2016

 With growth in the e-commerce industry, online retail is estimated to reach US$ 70 billion
by 2020 from US$ 3 billion in 2014
Sub parts of the Industry

Growth Drivers

 Demand-Side Factors
 Personal Consumption as a percentage of GDP only second to Vietnam in Asia. Fourth in
the world China (~35%), Singapore (~45%), Hong Kong (~50%), South Korea (~46%) in 2007
 Adoption of Nuclear Family Culture
 Average Household Size in 1991: 5.57
 Average Household Size in 2001: 5.36
 Average Household Size in 2011: 5.02
 Steep Growth in Earning Population (15-60 yrs)
 335 million people (54 % of total population) in 1975
 593 million people (58.3% of total population) in 2000
 Growing Working Women Population. Working women can spend 1.3 times more than
housewives
 Working women in 1991: 22%
 Working women in 2001: 26%
 Growth in Urban Population. Urbanization has increased at a rate of 2.7 percent from
1991-2001
 Urban population 2000: 28.1 crore
 Expected to grow at 2.4%
 India is the second fastest growing Financial Cards market in the Asia - Pacific region.
Growing at 30-35% p.a. from 27mn cards in 2007. Credit Card Sales: 1.2% in 2008Credit
Card Sales: 1.4% in 2010. The figure is expected to grow exponentially due to the
demonetization effect.
 Internet Driving Awareness and Online Purchases. Increased awareness has resulted in a
perceptible change in behaviour and they are on the lookout for convenience, speed,
efficiency and a wide range of products, simultaneously – a one-stop shopping experience
 India’s middle and high-income population has notched up an impressive growth and the
country’s middle class will grow from about 5% of the population to more than 40% and
create the world’s fifth largest consumer market. As a country with a high percentage of
youth (33% below the age of 15), consumer spending has risen sharply.

 Retailer or Supply-Side Drivers

 Increased Investments in Retail. through Private Equity, IPO route and infusion of funds
through warrants allows organised players in Retail to expand
 Tier- II & III cities to fuel future growth of Modern Retail. The Top-784 cities in India
constitute about 26% of population, they contribute 35% to Total Retail Sales. Tier- II and
III cities account for 18% of the overall population and they contribute 22% to the Total
Retail sales
  Shortened Supply Chain benefits consumer
 Availability of real estate. Over 95% of the Indian retail stores are less than 500 sq.feet in
size. In 1999, India had just 3 shopping malls measuring around 1 mn.sq.feet. By the end of
2006, the total mall space rose to 28 mn.sq.feet. With an average annual addition of 3.9
mn.sq.feet. Post 2006, on an average 8 mn.sq.feet. Retail space has been added annually,
pan India, taking the mall space to over 52 mn.sq.feet by the end of 2009.
 From bar code scanners to RFID, technology has been one of the most important drivers of
change in the retail industry. To leverage on the growth of internet usage, online retailing
is growing as an alternate channel. Mobile marketing is another available tool.
 India is one of the largest economies of the world. The GDP has gone up from $600 billion
in 2003 to $ 1.25 trillion in 2008. Current estimates are that the GDP of the country has
 grown @ 6.6 % (2009-10) and is projected to grow @9% in (2010-11). The growth of
retailing is intrinsically linked to the Growth Rate of a country. In the Indian context major
growth in retailing has developed during the last one decade when the GDP growth picked
up

Growth Inhibitors

 High competitiveness

Competition from the unorganised sector, making available an alternative channel of retail for
consumer. New entrants in the organised sector increases competitiveness of existing players.

 Policy induced barriers

Dual management of sectoral policies by the Ministry of Commerce (takes care of the retail
policy) and, the Ministry of Consumer Affairs (regulates retailing in terms of licenses and
legislations). Need for a single apex body to govern the industry.

 Difficulty in availability of finance

Absence of “industry status”, to the organized retail industry restricts financing ability and
other fiscal incentives.

 Real Estate related challenges; Infrastructural issues

High rental costs in prime areas, Service tax on rental value, limited space availability in prime
areas; The supply chain is plagued with infrastructural issues: to poor cold storage,
warehousing facilities etc

 Shortage of Skilled Manpower

There are very few courses specific to the retail and graduates’/post graduates from other
streams are recruited. Additionally, retail training opportunities such as niche courses for areas
like merchandising, supply chain and so on are limited.

Sector Risk Factors

Despite all the frenzy associated with the business, retailing has still not been accorded an
industry status. According industry status will enable retailers’ access to cheaper bank credit
facilities. Another contentious issue relates to FDI in retail. Considering the sensitivity of the issue,
there is bound to be a lot of resistance to change. Apart from these initiatives the following issues
need to be addressed on an urgent basis:
 COLD STORAGE FACILITIES - Food products constitute the single largest component of private
consumption accounting for close to 35% of total spending15.Cold storage facilities form an
integral part of the supply chain and are essential for storage and distribution of perishable
goods and temperature sensitive items. The present cold storage capacity in India is grossly
inadequate. There is an urgent need to scale up and develop integrated cold chain facilities
across the country. The country is short by 10 million tonnes of cold storage capacity

 CONTINUOUS AND ADEQUATE POWER SUPPLY - A study done by Enterprise Surveys has
revealed that inadequate power supply is the most important obstacle to the development
and growth of retail in India

 LOGISTICS AND SUPPLY CHAIN - Managing the supply chain is the core of the retailer’s
business since the products have to be moved from the point of manufacture to the point of
consumption. India's telecommunications network has improved dramatically, the nation's
outdated road, rail and port infrastructure continues to present logistical challenges. It is
believed an inadequate logistics infrastructure knocks 1 to 2 percent off India's average annual
GDP growth rate. Only 2 % of India's roads are highways, yet those highways handle more than
40 % of freight traffic. Rail service is constrained, and two-thirds of the nation's commercial
trucks are owned by carriers with fleets of five trucks or less. As a result, logistics costs are
estimated at about 13 percent of GDP compared with well below 10 percent in most
developed economies.

 UNFRIENDLY LABOR AND TAX LAWS - The retail and wholesale sector is the second largest
employer in India after agriculture accounting for over 9% of all jobs and its share in GDP
equals 14%. 20A study shows that in India 27% of the stores find labor regulations as a
problem for their business. Currently, manpower cannot be employed on hourly basis as is
done in advanced countries. For the retail sector to thrive, grow and expand state laws need to
be amended and made less rigid.

Performance Metrics of the Industry

Retail Customer KPIs

1. Customer Gross Profit = Customer Sales - Customer Cost of Goods Sold for a period
2. Customer Lifetime Purchase Value = Monetary value of each customer's life time purchases
from the retailer
3. Customer Profitability = Customer Sales - (Customer Returns - Customer Cost of Goods Sold +
Customer Promotion Expenses + Activity Based Cost of Servicing Customer) for a period
4. Customer Purchase Frequency Count = Count of customer purchases transactions over a
period of time
5. Customer Purchase Value = Monetary value of each customer purchase during a period with
an average value for all purchases for the period
6. Customer Reference question = A rating from 0 to 10 that indicates if the customer would
recommend the store.
7. Customer Sales by Segment = This formula is dependent upon defining customer segments
(based on age, education, lifestyle, income and other factors) and associating individual
customers to specific segments.
8. Customer Service Staffing = Face to face customer service staff count / total staff count
9. Visit to Buy Ratio = Sales Transaction Count per period / Visit Count Per Period

Retail Financial KPIs

1. Accounts Payable Turnover = Avg Accts Payable / (Cost of Sales / 365)

2. Accounts Receivable Turnover Days = Avg Accts Rec / (Credit Sales/365)
3. Acid Test Ratio = (Current Assets - Inventory)/Current Liabilities
4. Admin Cost % = (Administration Costs / Sales) *100
5. Average Inventory = (Beginning of Period Inventory + End of Period Inventory)/2
6. Break-even ($) = Fixed Costs / Gross Margin Percentage
7. Cash Conversion Cycle = (Days Inventory Outstanding + Days Sales Outstanding + Days
Payable Outstanding)
8. Contribution Margin = (Total Sales - Variable Costs)
9. Cost of Goods = (Retail Price – Markup)
10. Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
11. Current Ratio = Current Assets / Current Liabilities
12. Ending Inventory at Retail = Beginning Inventory - (Sales + Transfers out + Return to Vendor
+ Markdowns + Employee Discounts + Shrinkage) + (Purchases + returns from Customers +
Transfers in + Markups)
13. Gross Margin = Total Sales - Cost of Goods
14. Gross Margin Return On Investment = Gross Margin $ / Average Inventory Cost
15. Initial Markup = (Expenses + Reductions + Profit)/ (Net Sales +Reductions)
16. Interest Cost% = (Interest Costs / Sales) *100
17. Inventory Turnover = Net Sales / Average Inventory
18. Maintained Markup $ = (Original Retail - Reductions) - Cost of Goods Sold
19. Margin % = (Retail Price - Cost) / Retail Price
20. Markup % = Markup Amount / Retail Price
21. Net Receipts = (Purchases + Transfers in + Returns from Customers + Overages) - (Transfers
Out + Return to Vendors)
22. Net Sales = Gross Sales - Returns and allowances
23. Retail Price = Cost of Goods + Markup
24. Return on Capital Invested = (Profit for the Year / Capital Employed) *100
25. Sales per square foot = Total Net Sales / SquareFoot of selling Space
26. Stock Turnover Days = Average Inventory / (Cost of Sales /365) number of days
27. Total Asset Sales Ratio = Sales / Total Assets
28. Turnover = Total $ Sales for season / Average $ Inventory for season

Various Business Models in the Industry

1. Store Based Retailing

1) Form of Ownership
 Chain retailer
 Independent retailer
 Franchise
 Leased departments
 Consumers co-operatives

2) Merchandise offered
 Convenience stores
 Super markets
 Hypermarkets
 Specialty stores
 Departmental stores
 Off Price retailers
 Factory outlets
 Catalogue showrooms

2. Non-store Retailing
 Direct selling
 Mail order
 Tele marketing
 Automated Vending

3. Service Retailing
 Banks
 Car Rentals
 Service contracts
 Providers of various services.
 2. Online retail business models:

Virtual merchant
 Online marketplace models that generate most of the revenues from online sales and
services.
 Example: Amazon, Flipkart, eBay

Bricks-and-clicks
 These are the companies that operate both through physical stores of primary retail
channel and online sales & services
 Examples: Wal-Mart, J.C. Penney, Sears

Catalogue merchant
 Established companies that have a national offline catalog operation as largest retail
channel, but also have online capabilities
 Examples: Lands’ End, L.L. Bean, Eddie Bauer, Victoria’s Secret, Lillian Vernon

Manufacturer direct
 Single or multi-channel manufacturers who sell directly online to consumers without
intervention of retailers
 Example: Dell

Recent Developments in the Industry

 With investment of around US$ 511.76 billion, the first half of 2016 witnessed the highest
annual private equity (PE) in the retail sector, since 2008.
 Online retail business is the next generation format, which has high potential for growth in
the near future. After conquering physical stores, retailers are now foraying into the domain of e-
retailing
 E-commerce is expected to be the next major area supporting retail growth in India. The
industry is projected to touch US$ 100 billion by 2020 growing from US$ 30 billion in 2016.
 With growth in the e-commerce industry, online retail is estimated to reach US$ 70 billion
by 2020 from US$ 3 billion in 2014
 The Indian retail industry is one of the fastest growing in the world. Retail industry in India
is expected to grow to US$ 1.3 trillion by 2020, registering a Compound Annual Growth Rate
(CAGR) of 16.7 per cent over 2015-20.
 India’s population is taking to online retail in a big way. The online retail market is expected
to grow from US$ 6 billion to US$ 70 billion during FY15-FY20.
 India is the fifth largest preferred retail destination globally. The country is among the
highest in the world in terms of per capita retail store availability. India’s retail sector is
experiencing exponential growth, with retail development taking place not just in major cities and
metros, but also in Tier-II and Tier-III cities.
 Global retailers such as Walmart, GAP, Tesco and JC Penney are increasing their sourcing
from India and are moving from third-party buying offices to establishing their own wholly-
owned/wholly-managed sourcing and buying offices.
 India is ranked second in the global retail development index out of 30 by AT Kearney
 The share of modern retail is likely to grow from its current 3 per cent to 15 - 20 percent
over the next decade. 85% of organized retailing is taking place in India's urban areas while 66 per
cent of it taking place in India's 6 main cities alone. The growth is much faster in south India than
in northern states.
 According to a recent report (CII, 2001), there are some 12.08 million retail outlets in India
(compared to 90, 5000 in USA) half of which are low cost kiosks and pushcarts.
 The organized sector accounts for just 2% (modern stores being only 0.5%) of the
estimated $ 180 billion worth of goods are retailed in India every year.
Major Govt. Policies for the industry

 The Government of India has introduced reforms to attract Foreign Direct Investment (FDI)
in retail industry. The government has approved 51 per cent FDI in multi-brand retail and
increased FDI limit to 100 per cent (from 51 per cent) in single brand retail

 Government is planning to allow 100 per cent FDI in e-commerce, under the arrangement
that the products sold must be manufactured in India to gain from the liberalized regime

 The Ministry of Urban Development has come out with a Smart National Common Mobility
Card (NCMC) model to enable seamless travel by metros and other transport systems
across the country, as well as retail purchases
 The Government of India has accepted the changes proposed by Rajya Sabha select
committee to the bill introducing Goods and Services Tax (GST). Implementation of GST is
expected to enable easier movement of goods across the country, thereby improving retail
operations for Pan-India retailers.
 The Government has approved a proposal to scrap the distinctions among different types
of overseas investments by shifting to a single composite limit, which means portfolio
investment up to 49 per cent will not require government approval nor will it have to
comply with sectoral conditions as long as it does not result in a transfer of ownership
and/or control of Indian entities to foreigners. As a result, foreign investments are
expected to be increase, especially in the attractive retail sector.

Major Cost heads for the Industry

1. The largest operating cost in a retail business is usually employees

2. Administrative costs (buying trips, payroll services and the like) 
3. Fixed Cost: rent, utilities and insurance.
These cost can be measured by the following factors:

 Track employee productivity

This can be done by dividing your annual or monthly sales by the number of employees
you have. From this, you will get an expected sales volume per employee that can be used
as a benchmark.
 Creating an online store
To avoid some of the largest overhead costs, many retail operations have invested in an
online store. This not only helps you reduce staffing and inventory costs, but can also
reduce fixed costs
 New digital tools have levelled the playing field for small retailers
a. Digital marketing
b. Workforce planning tools
c. Customer relationship management

Major players in the Industry

Major players in the Industry (Global)

1. French retail chain Carrefour

2. Sears, US
3. UK’s Tesco
4. Bharti Enterprises
5. Walmart
6. ALDI GmbH & Co. KG Essen
Major players in the Industry (India)

1. Shoppers Stop
2. Trent
3. Reliance Retail
4. Bharti Retail
5. Aditya Birla
6. Spencer’s Retail
7. Landmark
8. Future Retail

Major Growth Strategies adopted by the companies in the Industry

1. Integration
A company that seeks to grow through acquisition can adopt two main strategies.
a. Horizontal integration: This occurs when a company takes over, or merges with, a direct
competitor. For example, when the supermarket chain Morrisons acquired the rival
 Safeway chain in 2004, it simply created a larger supermarket chain. This was a classic
example of horizontal integration.

b. Vertical integration: This is when it acquires a business at a different stage in the chain of
production. It may acquire businesses that were previously its suppliers or its customers.
For example, a furniture manufacturer might purchase a chain of furniture stores so that it
can sell its products direct to consumers. It would previously have looked to sell its
products to this retail furniture business.
c. Backward vertical integration: The manufacturer could also choose to merge with
one of its suppliers, such as a timber merchant. This would give it more control over
one of its key inputs.

2. Improving the business by using the innovation and technology

3. Critical factor
a. Location
b. Distribution and Information Systems
c. Customer Service & Loyalty

Keys to Success
Four characteristics of retailers that have successfully exploited international
growth opportunities are
 1. Globally sustainable competitive advantage

2. Adaptability
3. Global Culture
4. Financial Resources
India is an attractive market for retailers because it has a population of over 1 billion, solid
economic growth, rising affluent urban middle-class, and it has rescinded some restrictions on
foreign investment. The challenge facing global retailers in India is that the majority of the
population, especially in rural areas, still prefers small, family-owned shops.

In addition, despite some loosening of the limitations, India restricts foreign investment, so the
majority of ownership still must reside with Indian nationals

Financial Analysis of the Industry: Ratios

 The retail industry has numerous financial ratios that assist management with the operations of selling
goods. These financial ratios are also useful to investors to determine the long-term security, short-
term efficiency and overall profitability of a retail company. Additionally, they can help analyse how
well a retail company is selling its inventory, pricing its goods and operating its business as a whole.

 Interest cover ratio Debt can be dangerous for any company, but it’s particularly concerning for
retailers. This is because most retailers have unseen leverage built into their businesses because of
their regular lease obligations. No matter what the level of consumer confidence, retailers must pay
rent each and every month.
 EBIT margin: Measures how many cents in earnings before interest and tax (EBIT) a company squeezes
from each dollar of sales’. Retailers usually operate on slim margins, because barriers to entry are few
and competition is typically high. It’s relatively rare, for example, for a retailer to have EBIT margins
much above 10%.
 Cost of doing business: Like all businesses, a retailer should aim to minimise its costs. A common
measure of a retailer’s performance against its peers is its ‘cost of doing business’, which are all its
non-interest expenses below the gross profit line of the income statement (such as rent,
administration and sales staff costs), divided by sales. 
 Free cash flow to net profit: While the cost of doing business is a retailer-specific ratio, free cash flow
to net profit is a generic ratio that can be calculated for most businesses.
 Revenue guidance is generally provided in the form of same store sales or comps. These terms are
used to describe sales as compared to prior year sales of stores open for that full time period. It is a
comparability measure.
 Analysts also like to track foot traffic and ticket for retailers. Foot traffic or “traffic” refers to how many
potential shoppers the retailer gets in its doors. Higher foot traffic generally leads to higher sales.