Retailing in India- Opportunities and Challenges

Aksshat Seth (08) Amit Kumar (10) Ankush Redhu (16) Devanshu (36) Dion Dsa (37) Harish V. (46) Haritha G. (47)
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Table of Contents
Executive Summary Introduction to the topic Traditional Scenario In India Indian Retail Is Moving Into Second Gear Failure Analysis Recent Trends Foreign Direct Investments Role Challenges Facing The Indian Organized Retail Sector Our Suggestions & Other Research Findings 3 4 4 5 8 9 11 13 16

Conclusion

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EXECUTIVE SUMMARY

CHALLENGES: To become a truly flourishing industry, retailing needs to cross the following hurdles:

Automatic approval is not allowed for foreign investment in retail. Regulations restricting real estate purchases, and cumbersome local laws. Taxation, which favors small retail businesses. Lack of trained work force. Low skill level for retailing management. Intrinsic complexity of retailing rapid price changes, constant threat of product obsolescence and low margins.

OPPORTUNITIES & OBSERVATIONS: A large young working population with median age of 24 years, Nuclear families in urban areas, Along with increasing working women population and Emerging opportunities in the services sector The growth pattern in organized retailing and in the consumption made by the Indian population will follow a rising graph helping the newer businessmen to enter the India Retail Industry. Indian retail is expected to grow 25 per cent annually. In India the vast middle class and its almost untapped retail industry Global retail giants wanting to enter into newer markets, which in turn will help the India Retail Industry to grow faster.. Modern retail in India could be worth US$ 175-200 billion by 2016. The Food Retail Industry in India dominates the shopping basket. The Mobile phone Retail Industry in India is already a US$ 16.7 billion business, growing at over 20 per cent per year. The government policies becoming more favorable and the emerging technologies facilitating operations.

Presently, Indian retail is aiming at meeting customer expectations. The future is in better backend management phase and then consolidation phase. Future of Indian retail is bright provided certain measures are taken well in time.

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INTRODUCTION

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, retailers are facing numerous challenges.

To overcome some of the challenges faced by modern retail, the country is developing a support infrastructure in form of specialized retail schools. One such skill development initiative has been taken by TKWs Group. Its TKWs Retail School has already training over a thousand students and retail professionals for different retail skills.

TRADITIONAL RETAIL SCENE IN INDIA India is the country having the most unorganized retail market. Traditionally the retail business is run by Mom & Pop having Shop in the front & house at the back. More than 99% retailers function in less than 500Sq.Ft of area. All the merchandise was purchased as per the test & vim and fancies of the proprietor also

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the pricing was done on ad hock basis or by seeing at the face of customer. Generally the accounts of trading & home are not maintained separately. Profits were accumulated in slow moving & non-moving stocks which were to become redundant or consumed in-house. Thus profits were vanished without their knowledge. The Manufactures were to distribute goods through C & F agents to Distributors & Wholesalers. Retailers happen to source the merchandise from Wholesalers & reach to end-users. The merchandise price used to get inflated to a great extent till it reaches from Manufacturer to End-user. Selling prices were largely not controlled by Manufacturers. Branding was not an issue for majority of customers. Bargaining was the unwritten law of market. Educational qualification level of these retailers was always low. Hence market was controlled by handful of distributors &/or Wholesalers. INDIAN RETAIL IS MOVING INTO SECOND GEAR

1) FIRST GEAR: (Create awareness) * New retailers driving awareness * High degree of fragmentation * Real estate groups starting retail chains * Consumer expecting 'value for money' as core value

2) SECOND GEAR: (Meet customer expectations) * Consumer-driven * Emergence of pure retailers * Retailers getting multi-locational and multi-format * Global retailers evincing interest in India

3) THIRD GEAR: (Back end management) * Category management * Vendor partnership * Stock turns * Channel synchronization * Consumer acquisition

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* Customer relation's management

4) FOURTH GEAR: (Consolidation) * Aggressive rollout * Organized retail acquitting significant share * Beginning of cross-border movement * Mergers and acquisitions The third and fourth gear provides us with a potential vision to work for. This is the future. We would now study the current scenario and past trends with the help of studying some of the Indias retail giants. Pantaloon Retail (India) Limited, is Indias leading retailer that operates multiple retail formats in both the value and lifestyle segment of the Indian consumer market. Headquartered in Mumbai (Bombay), the company operates over 16 million square feet of retail space, has over 1000 stores across 73 cities in India and employs over 30,000 people. The companys leading formats include Pantaloons, a chain of fashion outlets, Big Bazaar, a uniquely Indian hypermarket chain, Food Bazaar, a supermarket chain, blends the look, touch and feel of Indian bazaars with aspects of modern retail like choice, convenience and quality and Central, a chain of seamless destination malls. Some of its other formats include Brand Factory, Blue Sky, aLL, Top 10 and Star and Sitara. The company also operates an online portal, futurebazaar.com. Future Value Retail Limited is a wholly owned subsidiary of Pantaloon Retail (India) Limited. This entity has been created keeping in mind the growth and the current size of the companys value retail business, led by its format divisions, Big Bazaar and Food Bazaar. The company operates 148 Big Bazaar stores, 169 Food Bazaar stores, among other formats, in over 70 cities across the country, covering an operational retail space of over 6 million square feet. As a focussed entity driving the growth of the group's value retail business, Future Value Retail Limited will continue to deliver more value to its customers, supply partners, stakeholders and communities across the country and shape the growth of modern retail in India.

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Pantaloon Retail is the flagship company of Future Group, a business group catering to the entire Indian consumption space.

Future Group Future Group, led by its founder and Group CEO, Mr. Kishore Biyani, is one of Indias leading business houses with multiple businesses spanning across the consumption space. While retail forms the core business activity of Future Group, group subsidiaries are present in consumer finance, capital, insurance, leisure and entertainment, brand development, retail real estate development, retail media and logistics. The company follows a multi-format retail strategy that captures almost the entire consumption basket of Indian customers. In the lifestyle segment, the group operates Pantaloons, a fashion retail chain and Central, a chain of seamless malls. In the value segment, its marquee brand, Big Bazaar is a hypermarket format that combines the look, touch and feel of Indian bazaars with the choice and convenience of modern retail. The groups specialty retail formats include supermarket chain - Food Bazaar, sportswear retailer - Planet Sports, electronics retailer - eZone, home improvement chain -Home Town and rural retail chain Aadhaar, among others. It also operates popular shopping portal - www.futurebazaar.com. Future Group believes in developing strong insights on Indian consumers and building businesses based on Indian ideas, as espoused in the groups core value of Indianness. The groups corporate credo is, Rewrite rules, Retain values. Logistics and supply chain management: Logistics forms a critical business activity across Future Groups businesses. Future Supply Chain Solutions Limited (FSCS), a specialized subsidiary, offers strategic, focused and consolidated approach to meet the groups large supply chain requirements as well as those of select supply and business partners.

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The Future Supply Chain Solutions team currently oversees the operations of an existing fleet of over 600 dedicated trucks, contracted from established regional and national transport carriers, most of which are now equipped with GPS sets. In addition it provides integrated end-to-end SCM, warehousing and distribution, multi-modal transportation and container freight station. The total consolidated warehouse space that the company intends to have operational by 2010-11 is nearly 7.50 million square feet. Mall management: Mall management has been identified as a critical factor for the success of shopping malls/centre and the retail industry across the world. Mall management broadly includes mall positioning, zoning, tenant mix, promotions/marketing and facility/finance management. Currently, the Indian retail market lacks designated mall management firms. Agre Developers Limited is a Future Group company that will provide a comprehensive mall/property management and services in India including positioning, finance management and mall advisory services. Agre Developers currently operates six shopping malls: Orchid City Centre and Milan Mall in Mumbai; Cosmos and Lido Malls in Bangalore; Ahmadabad City Centre in Ahmadabad and Cosmos Mall in Siliguri.

FUTURE BAZAAR ONLINE PRESENCE:

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On visiting Future Bazaar website one can see the different verticals it is dealing with under one roof. This exemplifies the breadth and depth of the growth of retailing in India. The following are the details about it. 1.) Electronic deals: - Samsung ,LG, Sensei, Sony , Koryo , Philips ,Play station CD, Microsoft ,Hitachi, Onida. These are some of the main brands offered by Future Bazaar. Shopping has been made microscopic to ease out purchase. That means that they also provide the choice of selecting the range or budget that the consumer is willing to pay. Even the category can be chosen i.e. home appliances, gaming accessories, TVs, Kitchen appliances, Laptops. 2.) Home Deals:- categories include - Kitchenware , Toys and Games, Home Linen ,Bags & Luggage ,Home Utilities, More Home Deals ,Auto Accessories. Brands include- Dreamline, Mattel, Milestone, Prestige, Nirali, Frank, Wild Republic Funskool ,Cello and Aza. All the above mentioned points reveal the robust growth and diversification of retail in India. Moreover, the online presence is becoming common phenomenon of retailing nowadays in India. Future Bazaar is just an example. RECENT TRENDS Indian retail market is estimated to be at ~$350 billion and organized retail accounts for 6% of the total market. So all the Biyanis, Ambanis and the Birlas are sharing the 6% pie so far. With such a huge opportunity why would anybody not enter the retail market? Both domestic and foreign retail players are interested in investing in Indian retail story. The results have been mixed so far but there are trends if looked more closely.

Foreign Direct Investment is permitted only in cash-and-carry business of the retail space. No foreign investment is allowed in multi-brand retail stores. 51% investment is allowed in single brand retail stores. International Multi-brand retailers are allowed but only via the franchise route where the face should be of an Indian business house.

Not so good news

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Subhiksha, which runs the retail stores across India, is battling for survival. It has negotiated its rentals in many cities but now it is planning to close more than half of its stores. UK retailer Argos is pulling out of India. Reliance Retail has pulled out of cash and carry business because of the bleak outlook and they dont want to burn any more cash. Its Reliance Fresh is not doing that well. Same is the case with Spencers and Aditya Birla groups More.

Good news Future Groups Big Bazaar has bucked the trend though it is resorting to new ways to boost sales. It is trying to rent expensive clothes for special occasions. It is also in talks with Carrefour for a cash-andcarry set-up. Mahindra and Mahindra group unlike their Xylo launch has quietly entered the retail space with Mom & Me store. Bharti has collaborated with Wal-Mart for a cash and carry business and has named its stores as BestPrice Modern Wholesale. Since organized retail is pretty new in India, nobody knows what really works. But there are few trends if we look closely.

1. Big Bazaar is a hit. Which means their store format, which is a rip-off of Saravana Stores in Chennai, is something worth paying attention to. 2. Small stores like the Subiksha format or the Reliance Fresh format did not work. The profitability is not there for that small a space. 3. Good customer care. When I walk into a kirana store across the street, that guy makes an eye contact and asks what I want. That makes me feel good. I am not saying that the supermarkets should do to all the customers that walk their stores. If asked a good customer care is always a good way to increase reputation. 4. Parking space or the lack of it. If you have such a big store and I am fighting for the parking space I would rather not come to your store and will find an alternative. I would go to a small store who delivers to my home. I dont have to worry about parking and carrying the bags back to the car Indias retail sector has for quite a few years been one of the sunshine sectors of our industry. But problems ranging from poor supply chain, high infrastructure costs, lack of positioning and loyalty have proved as obstacles in their growth path.

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Now, many of them are turning their glances to the rural areas for expansions.

Shoppers Stop is planning to open over 12 stores in smaller cities by the year end at an investment of about 120 crore Future Group is planning to enter 10 12 towns every year Metro Cash and Carry and Easy Day are looking to expand their cash and curry business first to smaller towns

Wills Lifestyle and Spice Hotspot are targeting these smaller cities and towns as a very important part of their strategy

Wondering how come this change? I analyzed a number of factors / reasons responsible for this. One of the most important factors is the changing demographic dividend - Increasing disposable incomes, better standards of living and reduction of gender and race divides is proving to be increasingly beneficial.

This has also helped the rural populace to better realize their agricultural produce and get the right price for it. E.g.: Reliance Fresh is sourcing the vegetables directly from the farmers for its stores thereby removing the need of middlemen. Low land availability and rising prices has also made many retailers look to smaller towns for their operations. Increasing customization and decreasing the stock of luxury products is the strategy which retailers are using for rural areas. In Rakesh Biyani, CEO, Retail, Future Groups words Sales per sq ft may be lower than the cities, but then the costs are lower too

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FOREIGN DIRECT INVESTMENTS ROLE In the past decades, FDI was concerned only with highly industrialized countries. US was the worlds largest recipient of FDI during 2006 with an investment of 184 million from OECD (Organization for Economic Co-operation and Development) countries. France, Greece, Iceland, Poland, Slovak Republic, Switzerland and Turkey also have a positive record in FDI investments. Now, during the course of time, FDI has become a vital part in every country more particularly with the developing countries. This is because of the following reasons: Availability of cheap labor. Uninterrupted availability of raw material. Less production cost compared with other developed countries. Quick and easy market penetration.

FDI in the Retail sector: Retailing is one of the worlds largest private industry. Liberalizations in FDI have caused a massive restructuring in retail industry. The benefit of FDI in retail industry superimposes its cost factors. Opening the retail industry to FDI will bring forth benefits in terms of advance employment, organized retail stores, availability of quality products at a better and cheaper price. It enables a countrys product or service to enter into the global market. Some benefits: 1.) Cheaper production facilities: FDI will ensure better operations in production cycle and distribution. Due to economies of operation, production facilities will be available at a cheaper rate thereby resulting in availability of variety products to the ultimate consumers at a reasonable and lesser price. 2.) Availability of new technology: FDI enables transfer of skills and technology from overseas and develops the infrastructure of the domestic country. Greater managerial talent inflow from other countries is made possible. Domestic consumers will benefit getting great variety and quality products at all price points. 3.) Long term cash liquidity: FDI will provide necessary capital for setting up organized retail chain stores. It is a long term investment because unlike equity capital, the physical capital invested in the domestic company is not easily liquidated.

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4.) Lead driver for the countrys economic growth: FDI would create a competition among the global investors, which would ultimately ensure better and lower prices thus benefiting people in all sections of the society. There would be an increase in the market growth and expansion. It will increase retail employment and suppress untrained manpower and lack of experience. It will ensure better managerial techniques and success. Higher wages will be paid by the international companies. Urban consumers will be exposed to international lifestyles. 5.) FDI opens new doors for Franchising: Restrictions on FDI are considered as trade barriers as they deny direct market access to foreign firms. Retail giants who are at their wings, seeking entry into foreign market look for other available alternatives. These restrictions on the global retailers regarding the inflow of Foreign Direct Investment, leads them towards acquiring the market entry through franchises. Thus, countries which offer promising market potentialities for retail growth offers substantial growth in the franchising sector as well. 6.) Improved human capital: Indian industries are predominantly labor based but there is also a significant number of capital based companies. A capital intensive set up is indeed an expensive proposition but with the existing as well as potential labor intensive industries, India can look forward to more professional and sophisticated number of workers and employees at every level. Human capital, in terms of quantity was never a big problem in India, thanks to its huge population and quality and efficiency in work has been ushered in by the MNCs. 7.) Competition Effect: The benefits of larger FDIs will include the launching and marketing of new products and brands in the Indian market. New products are used by the multinational corporations and then demonstrated in the Indian market. The processes followed by MNCs in India serve to have a demonstration effect on Indian companies which in turn improves market competition and the standard of products. This had started in the 1980s due to Japanese firms and as a result, Indian firms started inculcating the practices of QC, JIT, and QA. 8.) Manufacturing Employment:

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Larger FDIs definitely generate more and more employment opportunities. The opportunities are highly experienced in the manufacturing area. This not only includes the quality human resource but also provides for quick and efficient work and effective outcomes. CHALLENGES FACING THE INDIAN ORGANIZED RETAIL SECTOR The challenges facing the Indian organized retail sector are various and these are stopping the Indian retail industry from reaching its full potential. The behavior patterns of the Indian consumer have undergone a major change. This has happened for the Indian consumer is earning more now, western influences, women working force is increasing, desire for luxury items and better quality. He now wants to eat, shop, and get entertained under the same roof. All these have lead the Indian organized retail sector to give more in order to satisfy the Indian customer. 1.) Retail Space: With real estate prices escalating due to increase in demand from the Indian organized retail sector, it is posing a challenge to its growth. With Indian retailers having to shell out more for retail space it is affecting their overall profitability in retail. 2.) Trained manpower shortage: is a challenge facing the organized retail sector in India. The Indian retailers have difficulty in finding trained person and also have to pay more in order to retain them. This again brings down the Indian retailers profit levels. 3.) FDI: The Indian government has allowed 51% foreign direct investment (FDI) in the India retail sector to one brand shops only. This has made the entry of global retail giants to organized retail sector in India difficult. This is a challenge being faced by the Indian organized retail sector. But the global retail giants like Tesco, Wal-Mart, and Metro AG are entering the organized retail sector in India indirectly through franchisee agreement and cash and carry wholesale trading. Many Indian companies are also entering the Indian organized retail sector like Reliance Industries Limited, Pantaloons, and Bharti Telecoms. But they are facing stiff competition from these global retail giants. As a result discounting is becoming an accepted practice. This too brings down the profit of the Indian retailers. 4.) Merchandise: The primary goal of the most retailers is to sell the right kind of merchandise and nothing is more central to the strategic thrust of the retailing firm. Merchandising consists of activities involved in acquiring particular goods and services and making them available at a place, time and quantity that enable the retailer to reach its goals.

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5) Pricing: Pricing is a crucial strategic variable due to its direct relationship with a firm's goal and its interaction with other retailing elements. The importance of pricing decisions is growing because today's customers are looking for good value when they buy merchandise and services. Price is the easiest and quickest variable to change.

6) Scale of operations: Scale of operations includes all the supply chain activities, which are carried out in the business. It is one of the challenges that the Indian retailers are facing. The cost of business operations is very high in India.

The challenges facing the Indian organized retail sector are there but it will have to be dealt with and only then this sector can prosper. FIRST PRIORITY: NEED FOR LARGER FDI The need for larger FDI is because India is at a stage where it needs US investments, technology, and management policies to sustain and enhance its economic growth. In 2006, Foreign Direct Investment (FDI) in India amounted to US$37 billion, out of which only $5 billion was from the US. This was not a very encouraging figure in view of the goal of increasing the GDP by 3436%. Therefore, there is a need for larger FDIs. India still requires an FDI component equal to 4% of the GDP. The US needs to invest more in various sectors of the Indian economy. There is a potential to attract more FDIs in areas like infrastructure, IT hardware, automobiles, leather, textiles, gems, jewellery, and the financial sector. As such, India is rated as the 2nd best economy to invest in, after China. Foreign companies need to persuade the parliament for increasing Foreign Direct Investment capital. WHAT ARE THE BENEFITS OF LARGER FDI TO THE RETAIL INDUSTRY The benefits of larger FDI can be tangibly felt in the domains pertaining to technological advancements, generation of export, production improvements, and hastening of manufacturing employment. Capital inflow into India has increased and so have the exports from the country. Thanks to the economic boom India is experiencing, some Indian companies are doing better than even the multinational corporations. The benefits of larger FDI are, however, very few in number but as India capitalizes on the above mentioned benefits, there will be more competition in the market at large and the rural sector of the country will be in the process of reformation, thus bringing about a socio-economic stability.

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SECOND PRIORITY: SUPPLY CHAIN MANAGEMENT IN THE INDIAN RETAIL INDUSTRY The role of supply chain in Indian organized retail is very significant for on it depends the growth of this sector. The Indian Supply Chain Council have been formed to explore the challenges that a retailer faces and to find possible solutions for India. The role of supply chain in the organized retail sector in India should be a shelf- centric partnership between the retailer and the manufacture for this will create supply chains that are loss free. This will also give rise to top and bottom line growth. In the organized retail sector in India the presence of fresh produce (vegetables and fruits) is very small. This is so for the nature of supply chain is very fragmented. This shows the important role of supply chain in the organized retail sector in India. In the organized retail market in India the role of supply chain is very important for the Indian customer demands at affordable prices a variety of product mix. It is the supply chain that ensures to the customer in all the various offerings that a company decides for its customers, be it cost, service, or the quickness in responding to ever changing tastes of the customer. The infrastructure in India in terms of road, rail, and air links are not sufficient. And so warehousing plays a major role as an aspect of supply chain operations. To overcome these problems, the Indian retailer is trying to reduce transportation costs and is investing in logistics through partnership or directly. The Indian organized retail sector is growing so the role of supply chain becomes all the more important. It should become all the more responsive and adaptive to customers demand. There is also need for the supply chain to be more cost efficient and collaborative to win the immense competition in this sector. The role of supply chain in Indian organized retail has expanded over the years with the boom in this industry. The growth of the Indian retail industry to a large extent depends on supply chain, so efforts must be made by the Indian retailers to maintain it properly. THIRD PRIORITY: THE REAL ESTATE SUPPORT Provide cheaper space for the retail Provide tax holidays for rural retail business.

THE FOURTH PRIORITY The range / varieties of formats for the retail sector by providing tax benefits.

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OUR SUGGESTIONS & OTHER RESEARCH FINDINGS

The recent growth of credit cards and other credit facilities available for the retail customers has changed the pace and ease with which they now consumer goods and services. Now even EMI schemes are available to the customers who can purchase goods of their choice at will and pay with ease. This has increased competition among the retailers as the retailer who fails to provide these frills is either forced to do so or has to leave the industry. It might even eat into the retailers profits. An efficient supply chain can be a good solution. Indian retail is characterized by both- organized and unorganized players; unlike the west where organized retail comprises of 85% of the whole retail sector. Indian society and as a result the retail sector is very diverse in nature. In such a situation, the retailer faces a huge challenge before entering the industry. The challenge is that which kind of business model will work. He also needs to think as to how different his business model is in comparison to his competitors keeping the diversity of the tastes and preferences of his customers.

Presently the retailers, pay octroi tax and other such taxes. But thinking a few years ahead of time, when Goods and Services Tax will be implemented it will be very beneficial for the retailers and it will also have a direct bearing on the prices of goods and services, supply chain costs and profit margin.

Licensing: At present the Indian retailers have to take innumerable licenses before starting their business. We believe that this process becomes very cumbersome due to red tapism, paperwork and corruption. The government of India should take concrete steps in this regard and reduce this factor of possible discouragement for the new entrant retailers.

Only big players can afford to take risks and experiment. The retail sector of India is so huge and is growing at such a fast pace that Retail sector of

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India deserves to be given the industry status. This would open the floodgates of development and funds that were denied to it for the past so many years. There should be a regulatory body which would be responsible for setting up guidelines, rules and regulations for the retail sector. This can only happen after the retail sector is given an industry status. It is high time!! Political Risks: This is also another issue that affects the retail sector very much. In the recent times we have seen how state governments have been responsible for the decline and doom of some retail giants. India is a very politically sensitive country and emotions run high where the development of the Aam Admi is concerned.

CONCLUSION Retail is clearly the sector that is poised to show the highest growth in the next five years. The sector is set for a revolution, as both the present players and new entrants are gearing up to explore the market. Global retail giants such as Wal-Mart, Tesco, Germany's Metro AG and many others are entering the retail markets. The rising demand of branded products and increase in purchasing power has lured these companies to enter the market. There are a few challenges that the industry faces which need to be dealt with in order to realize the complete scope of growth in Indian market. Despite many challenge international brands are thriving in the Indian market by finding solutions around these challenges. A company that plans to enter Indian market at this time can definitely look forward to great business if it analyzes and puts efforts on all parameters.

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The retail sector has played a phenomenal role throughout the world in increasing productivity of consumer goods and services. It is also the second largest industry in US in terms of numbers of employees and establishments. There is no denying the fact that most of the developed economies are very much relying on their retail sector as a locomotive of growth. The India Retail Industry is the largest among all the industries, accounting for over 10 per cent of the countrys GDP and around 8 per cent of the employment. The Retail Industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. But all of them have not yet tasted success because of the heavy initial investments that are required to break even with other companies and compete with them. The India Retail Industry is gradually inching its way towards becoming the next boom industry.

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