MGMT8110 GLOBAL PERSPECTIVES

NAME OF THE PROFESSOR: CAROL TERENTIAK

ESSAY STATEMENT:

THE RETAIL SECTOR IN INDIA IS GROWING AND HAS THE POTENTIAL TO

ACCELERATE THE ECONOMY BY PROVIDING JOBS AND CHANGING THE

LIFESTYLE OF THE PEOPLE

CONESTOGA COLLEGE
INTRODUCTION

In this essay I will be writing about the retail industry in India. The structure of Indian

retail is different from that seen in the western countries. Indian retail industry is growing

at an exponential rate and attracting the attention of a lot of global retailers, however

there lie challenges in penetrating into the Indian market. The growing industry over the

years has generated a lot of jobs and contributed significantly towards the economic

growth of the country.

The paper will begin by an overview of the Indian retail sector accompanied by its

typical characteristics and this will provide an insight on how the Indian retail industry

works. I will then talk a bit about the history or how the retail sector in India has grown

over the years as it is always important to know the transition. Later on I will describe

how policies passed affect the retail sector in India followed by the risks and

opportunities it offers. This will also include cultural and other factors (will also include

some examples of foreign companies that succeeded). Then I will mention the socio

economic impacts of the retail sector. The essay will conclude with my opinion about the

retail sector.
OVERVIEW OF INDIAN RETAIL INDUSTRY

The net worth of the Indian Retail market is estimated around $ 450 billion USD and it

secures a place among the top 5 retail markets in the world. It significantly helps the

economic growth of the country by contributing around 14-15% of the GDP (ASA &

Associates, 2012). The growth of the retail industry is quite promising as it is growing by

10-12% per annum (TNN, 2012). The policies formulated by the government greatly

affect the penetration of foreign retailers in the market and the recent declaration

allowing 100% Foreign Direct Investment has surely opened the doors for global players

(TNN, 2012). Multi retail branding is not allowed as of now and most of the single retail

brands operate as franchise or joint ventures for example Starbucks collaborated with

Tata ( a major corporate house that handles diverse business like automobiles, hotels,

home goods etc).

The retail in India is broken down as follows: specialty apparel accounts for 33.3% of

the total retail space followed by departmental stores that stand at 29.4%, grocery

stores cover 5.9%, hypermarkets about 3.9%, home center and hard good/ electronics

both cover 2% of the total retail market and almost 23.5% is covered by other types

(ambiguous) (Frost and Sullivan, 2008). The structure of the Indian retail industry is

different as it is broken into organized an unorganized sector and this stands as a major

characteristic. Another characteristic is the lack of skilled labor for managing retail

sector. However there lie a lot of opportunities as the middle class is expanding and as

the youth in India are exposed to the western world their demand for western products

or western lifestyle increases.

 The metro cities in India are surely the hot spot for the retailers as the literacy rates

in these cities are high and these cities house some of the hubs for example Bangalore

is an IT hub and Mumbai is known as the financial capital of Maharashtra (a state).

Delhi being the federal capital has a demand for luxurious products and Kolkata is

gaining momentum is term of growth too. Thus Mumbai, Delhi, Bangalore, Kolkata and

Chennai are the key cities in terms of location. Another addition to this is the city of

Ahmedabad and the credit goes to the politician Narendra Modi who has been striving

for the welfare of the state (Gujarat).

EVOLUTION OF THE RETAIL INDUSTRY IN INDIA

India has witnessed a huge transition in terms of retailing. It started with families

owning a store in front of their house to earn a living followed by farmers market, weekly

markets, village fairs and then the ‘Kirana’ system. ‘Kirana’ system still exists in the

cities of India and consists of family run stores that sell groceries. Fresh vegetables are

sold by the vendors on the streets and this is preferred by a lot of people. All these

examples fall under the ‘unorganized sector’ in India and one cannot ignore that this

sector accounts for around 98% of the industry and it also includes local store brands

(Economy Watch, 2010).

The government of India then started taking an initiative towards rural retailing with

assistance from Khadi and Village Industries Commission. Items like cloth materials,

match sticks, wooden decorated show pieces were sold at these fairs. These institutions

basically catered to local people. Shopping centers started taking its baby steps in the

year 1869 in Bombay in form of shops sprawling across the streets called as ‘Crawford
market’ (Help Me, Accessed 2014). The real concept of retailing took its roots around

1980 when companies such as Bombay Dyeing, Raymonds opened their stores (textile

industries) (Indian Mirror, Accessed 2014) (Indian Mirror, Accessed 2014)

In the year 1995 the retail sector in India was in a developing stage, in the year 2003

and 2004 domestic as well as international retailers started penetrating in the market as

it seemed lucrative, between 2005 and 2007 it really started gaining momentum and by

2008 it reached at the peak of its growth and by 2010 it touched the mark of $ 427

billion (Frost and Sullivan, 2008).

With industrialization, rise in the number of educated Indians and progress in

technology the retail sector started shaping in a proper structure. With the rise in the

disposable income and the rise in the middle class came a demand for western

products, western concepts and western brands. International brands like Zara, Jack

and Jones, Mango, Pizza Hut, Subway, Mc Donald’s. Dominos, Vera Moda have tasted

success in India. Some of the recent entrants are Starbucks and Forever 21.

The organized retail sector in India can be categorized as follows:

1. Malls

Malls are the most organized form of retailing and they are mostly located in major

cities. They are spread across 60,000 sq. ft. to 70,000 sq. ft. and are devoted towards

giving a luxurious shopping experience to the customers coupled with entertainment,

food and gaming zones (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

 
2. Specialty stores

These stores cater to a specific segment of the society and are unique in their offerings

for example there is a store called as Crossword that deals in books, Planet M is well

known as a music store (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

3. Discount Stores

These stores comprise of the factory outlets where products are available at a lesser

cost and often you can purchase them in bulk. Some times to get rid of the stocks these

stores sell items at a lesser cost (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

4. Department Stores

These stores are usually spread across an area of 20000 to 50000 sq. ft. and consist of

stores that sell everything from groceries to child care products, clothing etc (Shanthi &

Dr. Dhanabhakyam, Accessed 2014)

5. Hyper marts/Supermarkets

The stores primarily sell food and grocery and can be found near wealthy residential

areas and are spread across 1,500 sq. ft. to 5,000 sq. ft. (Shanthi & Dr. Dhanabhakyam,

Accessed 2014).
POLICIES AND REGULATIONS

India recently allowed 100% foreign direct investment for the single brand retailers

however these retailers have to comply with the regulatory issues formulated by the

government. The Indian retail industry is expected to touch $ 804.06 billion by 2015.

Accepting FDI was a gradual process in India and it took a while before we welcomed

this change, in the year 1995 the World Trade Organization agreed upon wholesale and

retail services. In 1997 the FDI was only permitted towards wholesale and in the year

2006 government agreed to sanction 51% FDI for single retail brands and it was in the

year 2011 that the bill for 100% FDI was passed (for single brand) (ASA & Associates,

2012).

FDI with regards to multi brands is confined to 51% at the moment (ASA &

Associates, 2012). FDI in single retail means that the retail shop will only be allowed to

sell one brand under their umbrella for example Adidas can sell their products at an

Adidas store however if they plan to sell Reebok products that they also own it won’t be

possible. As per the agreement they will have to take permission from the government

and essentially establish a new store for selling Reebok products (ASA & Associates,

2012).

FDI for multi brand retailers stands at 51% and it was approved in the year 2010 by

the Ministry of Commerce and the Department of Industrial Policy and Promotion. The

interested candidates however had to make sure that there was a minimum investment
of $100 million and they had to invest 50% of the amount in back end operations which

comprises of safeguarding the farmers and community (ASA & Associates, 2012).

FROM A RETAILERS POINT OF VIEW

India is surely a market of opportunities as the economy is growing at the rate of 6%

(TNN, 2012), there is a rise in the middle class and disposable income, majority of

Indian population is young, there is a demand for western products, technology is

progressing, people have started using credit cards. However there is a shortage of

land as India has a huge population to cater to and due to that the cost of real estate is

pretty high. Typically the malls are established in prime locations and setting up a shop

and maintaining it is an expensive affair. Moreover stores like Walmart have a huge

store format and that could be a challenge. Corruption, lack of recycling the products,

circulation of fake products, complex supply chain management might deter some

companies to expand in India. Needs of Indian consumers are unique. In Canada I have

observed that people cook in big batches buy a lot of frozen fruits and vegetables as

well as frozen meals. However in India consumers prefer to buy fresh fruits and

vegetables and cook meals everyday thus these factors will have to be taken into

consideration (PwC, Accessed 2014).

COMPANIES THAT MADE THEIR WAY THROUGH IT

During international expansions it is extremely important to be aware of the local

market and it is for this reason that most of the international retailers have a partnership

or joint venture with an Indian company. ‘Starbucks’ opened their first two stores in
Bombay in the year 2012. They are in a partnership with Tata group, selecting a partner

is the most important aspect and Tata group has a long standing history of business

excellence, conducting business with honesty. Starbucks was welcomed by Indians with

open arms and they are expanding quite rapidly. They have over 30 stores in the

country now (Starbucks, 2013).

Dominos has a joint venture with Jubilant foods and Kraft with Cadbury. These

retailers however have to take some factors into consideration. The price of a

McDonald’s burger in India was INR 60 (1 CAD) however coupled with a fries and a

coke it meant a lot of money for a middle class family 10 years ago. College going

students are the main target of McDonalds’s in India and spending 100 INR a day was

not that easy. Taking into account all these factors as well as the income structure in

India McDonald’s launched ‘Happy Price Menu’ and one could now get selected items

at INR 25 (25 cents). This move was incredible.

Taking into consideration the social factors is critical too. India comprises of a huge

non meat eating population and Indians worship cow and beef is not even sold in some

parts of the country. Approximately 9 years ago McDonalds was severely criticized for

using/ selling beef products in the state of Maharashtra where people worship cows.

After that incident they implemented strict measures to make sure such an incident

does not surface up again and even started having separate fryers for chicken and

vegetarian products.
THE IMPACTS

Some political parties such as ‘Aam Aadmi Party’ (the translation would be a Party of

common people) are against the evolution of retailing, specifically foreign retailers

penetrating in India and argue that it will affect a common man’s pocket. They argue

that it will lead to loss of jobs (TNN, 2014) (TNN, 2014). However it is not true and there

are various positive socio economic impacts of FDI in the retail industry. First of all it will

lead to the creation of thousands of jobs and if retail is expanding they will need people

to manage it. As I mentioned earlier the unorganized sector in India consists of 98% and

the workers in such stores might not have health benefits or other perks, they might not

be even getting a salary worth making a living.

The retail sector has the capacity to employ 9.4% of the total labor force (Limaye,

2014) and the international retailers will make sure they are paid equivalent to the

international standards moreover they will have benefits, human rights (healthy working

conditions, gender equality, working hours, minimum wage). Another social aspect

doing rounds is the issue that these huge retailers are replacing the traditional shops.

On this note I strongly feel that the market is completely different for these two

categories, there was and there will always be income disparity in India thus people

from lower economic strata will prefer these groceries stores over Walmart. The

traditional shops are easily accessible thus they will always enjoy the benefit of

convenience. On an average people above the age of 40 who were used to shopping

from these stores will continue doing so for example my parents won’t drive half an hour

to visit a big box grocery store inspite of having a car because for them it is a huge

transition.
 Slow death of traditional stores started occurring due to emergence of Indian

retailers in the first place hence pressuring FDI is pointless. I also feel that if foreign

retailers enter the market they might bring around some positive reforms in the country.

They will engage into corporate social responsibility sooner or later, the reasons might

be different (gain subsidies, goodwill, attract investors) but it will lead to the

improvement of the vast rural sector in India if they are investing in rural sector. Waste

disposal in India is still in an embryo stage and execution of recycling is a dream, the

foreign retailers are used to specific standards in their home countries and there is a

hope that they might implement it in India.

Some people are of the opinion that the farmers will be exploited during this

process. Earlier in the report I mentioned that as per the rules the retailers will have to

invest in back end channel which means that they will have to contribute towards

development of infrastructure and they will have to employ local people. Also they will

have to source produce from farmers. Agriculture is the pre dominant occupation of

India, we infact export fruits, vegetables, grains and spices, if the retailers work in India

they will establish relationships with the farmers and this might lead to increase in

exports due to their contacts or if they wish to export products to their home country.

The farmers are literally exploited by the middle men in the government led system

thus presence of foreign retailers might make a difference by giving them the money

they deserve. To make sure that these retailers do not create a monopoly the

government can make it mandatory for them to adopt a framework (ASA & Associates,

2012). On an economic front the government will now get taxes from these retailers

which means more revenue for them, it is estimated that the government will get around
$ 25-35 billion, the consumers will also be able to save around 5-10% due to

competitive pricing of the products etc (TNN, 2014).

MY OPINION

I do feel that the government should not keep the FDI on hold for multi retail branding. If

it takes too long it might discourage the retailers. There are other arguments that due to

increase in the number of malls there is a greater demand for electricity and power in

the cities and due to this the rural areas are experiencing power cut. Though this is

slightly true another side to this story is that rural areas have always been facing this

problem even before modern retailing emerged. There is a lot of power being wasted

and if used in an appropriate way this issue can be tackled.

Indians have a fast paced life, the family patterns are changing to nuclear families in

the cities and the young generation is increasing and because of this there is a lifestyle

change. More and more women are working and this creates a need for products that

save time. I do see the frozen food segment and ready to eat meals gaining a slight

popularity. Consumers have access to cars and have money to spend on luxurious

brands. Retailing looks promising in transforming the lives of Indian consumers, farmers

and business. It will give India an opportunity to be on par with other countries with

regards to lifestyle and economy.

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