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RETAIL SECTOR IN INDIA: ISSUES & CHALLENGES

Mr. GOURAV ANAND, STUDENT

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INDEX 1. INTRODUCTION 1.1 Debate over the Entry of Organized Sector in Retail Industry 2. INDIA RETAIL SECTOR: AN OVERVIEW 2.1 2.2 2.3 2.4 2.5 3.1 3.2 4.1 4.2 4.3 5.1 5.2 5.4 5.5 5.6 5.7 5.8 5.9 5.6 6. RECENT TRENDS 7. CHALLENGES BEFORE THE ORGANISED SECTOR 8. FUTURE ROADMAP 9. CONCLUSION 10. REFERENCES Meaning of Retail Current scenario of Indian Retail Market FDI norms Factors driving growth of retail sector Boom of Retail in NCR Categories of unorganized retailers Future trends in unorganized sector Share of organized Sector in Retail Sector Modern Retail Formats in India Major player in organized sector & their business strategies Impact or Consumers Impact on unorganized sector Impact on manufacturers Impact on Global Players. Impact on Rural Population Impact on Technology Impact on Government Revenue Impact on Investment

3. UNORGANISED RETAIL SECTOR IN INDIA

4. ORGANISED RETAIL SECTOR IN INDIA

5. IMPACT OF ORGANISED SECTOR ON OTHER SECTORS

5.3 Impact on employment

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ABSTRACT

This paper provides detailed information about the growth of retailing industry in India. It examines the growing awareness and brand consciousness among people across different socio-economic classes in India and how the urban and semi-urban retail markets are witnessing significant growth. It explores the role of the Government of India in the industries growth and the need for further reforms. In India the vast middle class and its almost untapped retail industry are the key attractive forces for global retail giants wanting to enter into newer markets, which in turn will help the India Retail Industry to grow faster. The paper includes growth of retail sector in India, strategies, strength and opportunities of retail stores, retail format in India, recent trends, and opportunities and challenges. This paper concludes with the likely impact of the entry of global players into the Indian retailing industry. It also highlights the challenges faced by the industry in near future. KEYWORDS Retailing, Unorganized Sector, Organized Sector, Traditional Retail, Modern Retail

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1. INTRODUCTION India is the second fastest growing economy in the world. It is third largest economy in the world in terms of GDP and fourth largest economy in terms of Purchasing Power Parity. India presents a huge opportunity to the world at age, to use as a hub. Standing on the threshold of a retail revolution and witnessing a fast changing retail landscape, India is all set to experience the phenomenon of global village. India is the promised land for global brands and Indian retailers A Vibrant economy. India tops in the list of emerging market for global retailer and Indias retail sector is expanding and modernizing rapidly in line with Indias economic growth. The future is promising; the market is growing, government policies are becoming more favorable and emerging technologies are facilitating operations. Retailing in India is gradually inching its way toward becoming the next boom industry. The whole concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retail has entered India as seen in sprawling shopping centers, multi-storied malls and huge complexes offer shopping, entertainment and food all under one roof. The Indian retailing sector is at an inflexion point where the growth of organized retailing and growth in the consumption by the Indian population is going to take a higher growth trajectory. The Indian population is witnessing a significant change in its demographics. 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 are going to be the key growth drivers of the retail sector in India Retailing in India is evolving rapidly, with consumer spending growing by unprecedented rates and with increasing no of global players investing in this sector. Organized retail in India is undergoing a metamorphosis and is expected to scale up to meet global standards over the next five years. Indias retail market has experienced enormous growth over the past decade. The most significant period of growth for the sector was between year 2000 & 2006, when the sector revenues increased by about 93.5% translating to an average annual growth of 13.3%.The sectors growth was partly a reflection of the impressive Indian economic growth and over all rise in income level of consumers. Apparels and consumer durables are the fastest growing vertical in the retail sector. Mobile phone as a product category has witnessed the highest growth in the consumer demand amongst all retail products offering, with increasing penetration of telecommunication in towns and villages. The telecommunication sector has been adding on an average 5 million new users every month. The other product categories are gaining traction predominantly in the urban areas and emerging cities, with increasing average income and spending power of young urban India. India remained as the most attractive market for third year in a row in an index prepared by At Kearney. Retail sector is the largest contributing sector to countrys GDP

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A comparative picture of GDP contribution by retail sector of year 2010 is shown below: Table 1 Sr. No. 1 2 3 4 Country USA India China Brazil Contribution of retail sector to GDP 12% 12% 8% 10% 6%

With all these features and advantages, the opportunity for structural changes from unorganized retail industry format to organized format has made the Indian markets as a Permissible ground for global and domestic private players to fetch their goods and fuel the economy to grow. 2.2 CURRENT SCENARIO OF INDIAN RETAIL MARKET The size of Indian retail industry is more than US $350 billion but it is highly unorganized. The organized sector has started developing in the past few years. Many International brands have entered the market. With the growth in organized retailing, unorganized retailers are fast changing their business models. According to study conducted by ICRIER, total retail business in India will grow at 13% annually, from US $322 billion in 2006-07 to US $590 billion in 2011-12 and further US $1 trillion by 2016-17. Chart 1 Size of Indian Retail (in US$ bn)
1200 1000 800 600 400 200 0 2006-07 2011-12 2016-17 322 600 1011

Source: Technopak Analysis, CSO and other sources. 2.3 FDI NORMS Regulatory controls on FDI have been relaxed considerably in recent years. Currently the government allows 51% FDI in single brand retailing and 100% in cash-n-carry business. However, the governments plan to further open up the retail sector has hit the roadblock after facing strong political opposition and nationwide protests by small traders against the proposal to allow FDI in multibrand retailing. 2.4 FACTORS DRIVING THE GROWTH OR RETAIL SECTOR:Page 1 of 13

Indian economy is growing at the rate of 8%, indicating a prosperous future. The consistent economic growth resulted in a decent rise in income level of the middle class. The thickening of the pocket of the consumer resulted in a revolution of the retail industry. Many International brands have entered the market. With the growth in organized retailing, unorganized retailers have brought drastic changes in their business models, many factor are responsible for the growth of retail sector. These are: 1) Increasing Disposable Income: Rising disposable incomes in middle class and lower middle class with increase in employment opportunities for young adults in IT & IT enabled sectors are the major cause of retail growth in India. 2) Increasing No. of dual income nuclear families: In India, hefty pay packets, nuclear family along with increasing working women population and dual income in family are the factors contributing to prosperous retail sector. 3) Changing lifestyle and consumer behavior: Due to increasing working population, comfortable life, travel and leisure are given importance. These key factors are growth drivers of retail sector in India which now boast of retailing almost all the preferences of life apparel and accessories, Appliances, Electronics, cosmetics & Toilets cries etc. 4) Experimentation with formats: - Due to competition in the market, retailing is still evolving and the sector is witnessing a series of experiments with new formats being tested out. 5) Store Design: Shopping malls and super markets are growing at a very faster rate. Improvements in infrastructure and enhanced availability of retail space, store design are the factors increasing the share of organized retail ad thereby contributing to growth of Indian retail sector. Chart 2

Source: Technopak Analysis, CSO and other sources 2.6 ISSUES BEFORE RETAIL RECTOR IN INDIA: ENTRY OF ORGANIZED RETAIL PLAYERS : In Indian retail sector organized retail is a recent phenomenon. It is a zero-sum game between 2 players:a) organized sector & b) unorganized sector Indias retail is dominated by a large number of small retailers consisting of the local kirana shops, owner manned general stores, chemists, footwear shops, apparel shops, paan & beedi shops, hand-cart hawkers, pavement vendors etc. which together make up the so-called Page 2 of 13

3. UNORGANISED RETAIL SECTOR IN INDIA Undeniably, around 96% of Indian retail sector is unorganized and hence majority of sales take place through unorganized stores popularly known as kirana or mom-and-pop stores. The unorganized retail sector is expected to grow at about 10% per annum with sales rising from 309 billion in 2006-07 to reach US $ 496 billion in 2011-12. Despite the steady expansion of organized retailers. Though organized sector is growing a faster rate, unorganized sector is still preferred by the customers as they are more convenient and easy to approach. The kirana shop owner knows that the buyer buys place first. They offer that utility. Total number of traditional retailers is estimated to be 13 million by Technopak Advisers Pvt. Ltd. The classification of the unorganized retail universe by category is shown below: 3.1 CATEGORIES OF TRADITIONAL RETAILERS Fruit & vegetable sellers Sells fruits and vegetables. Food stores Result of bakery products. Also sells dairy and processed food and beverages. Non-Vegetable Store Sells chicken and mutton. Kirana I Sells bakery products, dairy and processed food, home and personal care and beverages. Kirana II Sells categories available at a kirana I store plus cereals, pulses, spices and edible oils. Apparel Sells mens wear, womens wear, innerwear, kinds & infant wear. Footwear Sells mens wear, womens wear, kids wear Customer durables & IT- Sells electronics, durables & IT products. Furnishing Sells home lines & upholstery. Hardware Sells sanitary ware, door fitting, tiles. General mechanize Includes lighting, stationery, toys, gifts & crockery. 3.2 FUTURE TRENDS UNORGANISED SECTOR 1. The unorganized sector will grow @10% per annum but given the relatively weak financial of the unorganized sector and the space constraints on their compansion prospects, this sector alone will not be able to meet the growing demand. 2. The unorganized sector will expand further due to its proximity, goodwill, credit sales, bargaining, loose items, convenient timings and romedelivery. 4. ORGANISED RETAIL SECTOR IN INDIA The Indian retail sector is highly fragmented, consisting predominantly of small, independent, and owner managed shop. The domestic organized retail industry is at a nascent stage. India got started with organized chain retailing just a few years ago. There are just very few categories, the most prominent being apparel, where organized retail chains have had a significant presence for more than 3-4 years. Indian retailers have done very well. Particularly after taking into account the various obstacles and hindrances like real estate costs, lack of trained manpower etc.

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Growth of organized sector of retailing will yield efficiencies in the supply chain, enabling better access to markets, to producers and to customers. The strength of organized retail lies in resource availability. It can translate into efficient supply chain management, leading to faster inventory turnaround, resulting in improved button lines. It is anticipated that the further belongs to organized sector in India. Indias organized sector is all set to explode. While the existing players such as future group, Bharti, Reliance Retail, Essar, Shoppers stop and Aditya Birla group are endeavouring to consolidate their markets, others such as Mohindra & Mohindra, Parsavnath & DLF, Hero Honda & Indiabulls have announced plans to enter the retail sector. Organised sector is going to grow at a much faster rate of 45-50 percent per annum and quadruple its share in total retail to 16% by 2011-12. Government is also apprehensive about the uncertain future of this sector considering the vote bank attached to retail, political environment is quite willing to take the risk of 100% FDI in retail. The Major challenge facing the organised sector is competition from unorganised sector Traditional retailing has been established in India for some centuries. It is a low cost structure, mostly owner-operated, negligible real estate & labour costs & little or no taxes to pay. Chart 5

Source: Economics times retail knowledge series 4.1 SHARE OF ORGANISED SECTOR IN RETAIL SECTOR The increasing growth of retail sector is going to affect organised sector positively. Presently the organised sector does not enjoy a significant chunk of market share. When compared with developed countries, it is very low, a meager 4%. Table 2 Page 4 of 13

Country USA Japan Chinba United kingdom France Germany India Brazil Russia Korea, south Indonesia Poland Thailand Pakistan Argentina Philippines Malaysia Czech republic Vietnam Hungary

Share of Organized Retail in Selected Countries, 2006 Total Retail Sales Share of Organized Retail (US$ bn) (%) 2,983 85 1,182 66 785 20 475 80 436 80 421 80 322 4 284 36 276 33 201 15 150 30 120 20 68 40 67 1 53 40 51 35 34 55 34 30 26 22 24 30

Source: Planet Retail and Technopak Advisors Pvt. Ltd.

4.2 MODERN RETAIL FORMATS IN INDIA The face of India retail sector is changing, new & innovative business models are being adopted. The formats prevalent in retail sector are:1. Hyper Market Hypermarket offer a large basket of products, ranging from grocery. Fries & processed food, beauty & healthcare products etc. Example Spencers, Big Bazaar 2. Cash & Carry These are large B2B focused retail formats, buying & selling in bulk for various commodities and carry several thousand stock-keeping. Example Mito, a Germany based C&G. 3. Department Stores - Department stores have a large layout with a wide range of merchandise mix, usually in cohesive categories, such as showed towards garments. Example:- Ebony, Shoppers stop, Westside 4. Speciality Stores Speciality stores are single category, focusing on individuals and group clusters of the same class with high product loyalty. Examples Footwear stores, gift stores etc. Examples- Archies, Woodlannd etc. 5. Discount store A discount store is a retail store offering a wide range of products, mostly branded, at discounted prices or apparel or footwear brands. Example Subhiksha, Koutons, Nike, Levis Page 5 of 13

6. Convenient Store A convenience store is a relatively small retail store located near a residential area (closer to consumer), open long hours, 7 days a weak and carrying a limited range of staples and groceries. Example In & Out, Safal, 6ten. TABLE 3: ORGANISED RETAIL MODEL Retailer Subhiksha Segment Value Business Strategy Low-price high-volume strategy: by keeping no fancy frills front-end and by becoming an intermediary at the back end, Subhiksha leverages on discounted prices on bulk purchases and cash payments. Single- brand strategy: leverages on high margins in private labels, and targets consumers in socio-economic class B and C. Strategic JVs and subsidiaries around retail has enabled PRIL to develop retailing across age-groups, all product categories, the entire customer segments under multiple retail formats. Backward integration through IT-based business model: leverages by building direct relationship with the supply service, the fanners, to sell as well as purchase products and services. The "duck and the duckling" model: by having two- or three- value segment stores, backed by a cluster of small-sized Fresh, Daily, and Express stores, to leverage, on economies of scale at back-end value chain. Operates on a co-operative model with the objective of increasing farmers' welfare, Has a strong presence in Delhi's NCR region. Strategically located in residential areas and follows a low-price strategy for fruit and vegetables.

Trent Limited Future PRIL

Lifestyle & value

Group: Lifestyle & value

ITC Choupal Value Sagar & Choupal Fresh Spencers Retail Value

NDDB: Mother Value Dairy

5.5 IMPACT ON GLOBAL PLAYERS It will help global players by providing them with the avenues for investments. Favorable demographic and psychographic changes in Indias consumer class and the rising affluence of young India population is an important attraction that is attracting the global players to enter in Indian market 6. RECENT TRENDS

Retailing in India is witnessing a huge revamping exercise as can be seen in the graph India is rated the fifth most attractive emerging retail market: a potential goldmine. Page 6 of 13

Estimated to be US$ 200 billion, of which organized retailing (i.e. modern trade) makes up 3 percent or US$ 6.4 billion As per a report by KPMG the annual growth of department stores is estimated at 24% Ranked second in a Global Retail Development Index of 30 developing countries drawn up by AT Kearney. Multiple drivers leading to a consumption boom: o Favorable demographics o Growth in income o Increasing population of women o Raising aspirations: Value added goods sales Food and apparel retailing key drivers of growth Organized retailing in India has been largely an urban Phenomenon with affluent classes and growing number of double-income households. More successful in cities in the south and west of India. Reasons range from differences in consumer buying behavior to cost of real estate and taxation laws. Rural markets emerging as a huge opportunity for retailers reflected in the share of the rural market across most categories of consumption o ITC is experimenting with retailing through its e-Choupal and Choupal Sagar rural hypermarkets. o HLL is using its Project Shakti initiative leveraging women self-help groups to explore the rural market. o Mahamaza is leveraging technology and network marketing concepts to act as an aggregator and serve the rural markets. IT is a tool that has been used by retailers ranging from Amazon.com to eBay to radically change buying behavior across the globe. E-retailing slowly making its presence felt. 6.1 CHALLENGES BEFORE ORGANIZED RETAIL SECTOR

Organized sector has only recently emerged from its nascent stage and yet has to become a preferred career option for most of Indias educated class. The roadblocks in the success of organized sector are:1. Talent shortage & lack of trained manpower. 2. Supply chains are not yet so efficient and the kind of quality that customers demand is not being provided yet. 3. There are too many intermediaries. These long intermediaries chains are in turn driving up their costs. 4. A plethora of clearances are required for setting up retail outlet. It limits the expansion of retail outlets at a faster pace. 5. Inadequate infrastructure, such as roads, electricity, cord chains and posts, hampers going for a pan-India network of supplies. Due to this, retailers have to resort to multiple vendors for their requirements which is raising their costs and prices. 6. Organized sector does not have industry status. It is further making it difficult for the players to raise funds for their expansion plans. 7. Government restrictions on FDI limit are resulting in limited exposure to international best practices. 7. FUTURE ROADMAP

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Indian Government seems determined to go ahead and gradually liberalize the retail sector despite continuing opposition from the Left parties. The tortoise-like slowness with which the retail sector is being opened up is due to objections by the Communists, but the amazing fact is that some movement is taking place. This seems to be due to Prime Minister Manmohan Singh's conviction that bringing in the big retail chains will unleash a wave of employment in rural and urban areas. The fears of the Left, on the other hand, are that the entry of retail giants will mean job losses as small mom-and-pop retailers get pushed out of existence. The fact is there is merit in both arguments. On the plus side, it is clear that agriculture is not providing enough jobs for the economy and there is an unprecedented wave of migration to urban areas. The entry of retail chains, which buy straight from the farmer, is bound to bring about greater purchasing power as the producer will get much better prices. This has already been felt in parts of the country like Jharkhand where farmers have held demonstrations protesting the withdrawal of Reliance Retail by the state government. Similarly, this gives a bonanza to the consumer who gets food products sourced directly from the farmer without having to pay the middleman's commission. Clearly, a win-win situation for all. But the Agitators have a point too. They are worried that the 15 million small retailers in the country may be forced out of existence. India has the largest retail economy in the world, according to a study by the CII (Confederation of Indian Industry) and A.T. Kearney. It pegs the size of the retail industry currently at about $270 billion with the Closure of the countless tiny retail outlets that dot the countryside can mean severe hardship for the families working in them. At the same time, as the saying goes, no one can stop an idea whose time has come. And the time has certainly come for retail chains to enter this country. The process has been gradual, as mentioned earlier, but even so large retail has made a dramatic impact in the areas where it has been allowed to make an entry. In the long run, it is clear that the entry of large retail chains will benefit the agricultural sector, which is in dire need of resuscitation. They will also have a long-term effect on agricultural unemployment, which is the big worry for policymakers right now. Besides, Indian consumers are not likely to desert heir neighborhood grocers en masse immediately. Therefore the hue and cry over loss of jobs is somewhat premature. domestic retail chains have already been allowed to set up business and it is now merely a matter of allowing bigger foreign players into the country Multinational giants like Walmart and Carrefour also have deep pockets and their huge investible funds are meant for sourcing products from rural areas, which in turn will provide more jobs. The thinking in the commerce ministry right now seems to be that the existing policy of allowing only single brand retailing can be extended in a phased manner to multi-brand retailers. Incidentally, as much as 96 percent of the Indian retail economy remains in the unorganized sector. 8 CONCLUSION India at the crossroads with regard to the retail sector. Several emerging market economics have gone ahead and reaped the benefits of modern retail. Politics is an unfortunate reality that has been coming in the way of success of organized sector and ultimately the overall retail sector. The hue and cry created by unorganized sector against Reliance Fresh, Wal-Mart especially in U.P., Jharkhand etc. is not appreciable, it is the major hindrance in the growth of retail sector. There is need of balanced approach to retail & govt. has to play a very vital role in shaping the future course. Though tradition retail has been performing a vital function in the economy, but it has to shed off its shortcomings and inefficiencies and this is actually happening. Thus, the organized sector is not only impacting the other sectors positively but also it has benefited its own competition i.e. unorganized sector. So, organized sector becomes the growth mantra of Retail sector.

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9 REFERENCES A.T. Kearneys Report on Indian Retail, 2008 Agarwal Pulkit, Tyagi Esha, Foreign Direct Investment In retail Sector- An Analysis, 2010 Indian Retail sector, Dec 2010 http://www.cci.in/pdf/surveys_reports/indias_retail_sector Krafft M and Mantrala, Murali K (eds), (2010), Retailing in the 21st Century: Current and Future Trends, US Dhanabhakyam M, Shanthi A Indian Retail Industry Its Growth, Challenges and Opportunities, 2010 Sanjeev Kumar Retail Industry: Where does India Stand? at http://www.coolvenues.net/forum/viewforum.php? F=9

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