Indian Retail Formats A Changing Scenario Marketing Essay

Retailing is one of the pillars of Indian economy which accounts for 35% of Gross Domestic Products-GDP. 97% of the Indian retail sector is found to be highly fragmented and it is being run by the unorganized retailers like the traditional family run stores, the “Kiranas”. Next to agriculture the retail sector is identified the largest source of employment in rural India. It is of two types viz., Organised retailing that include the corporate-backed hypermarkets, retail chains, privately owned large retail businesses and unorganised retailing, which refers to the traditional formats of low-cost retailing, the “kirana” shops- owner manned general stores, /beedi shops, convenience stores, hand cart and pavement vendors, etc. The organized retail however is at a very nascent stage though attempts are being made to increase its proportion to 9-10% .Hence there is a huge opportunity for prospective new players 1.

Source: Ernst &Young, The Great Indian Retail Story, 2006.

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As per the statistics the retail sector in India has a potential worth of 394 billion US Dollars and is growing at the rate of 30% annually. An Indian Council For Research On International Economic Relations – ICRIER study has found that retailing ($180 billion) contributes to 10 per cent of GDP and employs 7 per cent (21 million) of the workforce . According to AT Kearney, India is given the top ranking as the next foreign investment destination, as Chinese market has become highly saturated. India is the fourth largest economy as regards GDP (in terms of Purchase Power Parity – PPP terms) and is expected to rank third by thie current year end just behind US and China. Over the past few years, the retail sales in India are hovering around 33-35% of GDP as compared to around 20% in the US. The following table indicate a comparison of India’s retail trade with US and China.

Comparison table of India’s retail trade with US and China.

Source: Economist, Let gradualism guide FDI in retail, 2006.

The retail sector has witnessed a rapid growth in the last decade. The key drivers are the globalisation of market are

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rapidly changing consumer profile,

their demographics, and

increase in the number of international brands available in the India had greater the economic implications..

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increasing urbanization, credit availability

improvement in the infrastructure

increasing investments in technology

real estate building

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a world class shopping environment for the consumers

efficient delivery of goods and

value-added services to the consumer making a higher contribution to the GDP. From the macro point of view the International retailers see India as the last retailing frontier left as the China’s retail sector is becoming saturated. The conservative policies of Indian Government having restrictions on the FDI are creating ripples among the international players like Wal-Mart, Tesco and many other retail giants struggling to enter Indian markets.

The changing Indian consumer

There is a paradigm shift in the consumer buying behavior of the Indian consumer. There is a greater focus on appeal value – looking and feeling good as trend-conscious, from a level of price considerations to designs and quality . However, it is to be noted that still Indian consumer is a paradox, and the discount shopper loyalty takes a backseat as compared to price discounts. The mall mania has bought in a whole new breed of modern retail formats across the country catering to every need of the value-seeking Indian consumer. An average Indian would see a mall as a perfect weekend getaway with family offering them entertainment, leisure, food, shopping – all under one roof

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Indian Retail Formats – Changing Scenario – Indian Industry

The format of the retail is much dependent on the perceived demographics of the target group. A retailer can choose a format based on the kind of store design, the locality, the products and services mix, and the pricing mix that should be ideal to the considered target demographics. The different types of retail formats being experimented by the Indian Retail Industries are mom-and-pop or kirana stores, department stores, ,discount stores, convenience stores , specialty stores, , hypermarkets, supermarkets, malls, category killers, e-tailers and vending machines.

Growth

Due to the relative low compensation offered by the traditional agriculture and manufacturing sector a large volume of people are turning to this Retail services sector for employment . The unorganized retail sector is pegged at 6 percent growth while the organized retail market is growing at 35 percent annually that gives an index of the growth potential of the Indian Retail industries.

The Indian Retail Market

Indian Retail market is characterized by high complexities in terms of a wide geographic spread and diversified consumer preferences by region that demands for localization within the geographic zones and India has highest number of outlets per person

Major Indian Retailers

Since large Indian players like Reliance, Ambani’s, K Raheja’s, Bharti AirTel, ITC are investing in this sector leading to emergence of big retailers who can work on large economies of scale that made discounting an accepted practice.Proper infrastructure is a pre-requisite in retailing.

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Indian apparel retailers are increasing their brand presence the developed overseas markets. While most have identified a gap in countries in West Asia and Africa, some majors are also looking at the US and Europe

Entry of Multi National Corporations -MNCs

The world’s largest retailer Wal-Mart Stores Inc and Sunil Mittal’s Bharti Enterprises have entered into a joint venture to sell groceries, consumer appliances and fruits and vegetables to retailers and small businesses.

Carrefour, the world’s second largest retailer, is planning to lend its technical services , knowhow and its banner to an Indian company for direct-to-consumer retail.

The world’s fifth largest retailer by sales, Costco Wholesale Corp (Costco) known for its warehouse club model is waiting for the right opportunity.

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Tesco Plc., plans to set up shop in India intend to help Indian conglomerate Tata group to grow its hypermarket business.

Foreign Direct Investment -FDI in retail:

Global retailers have already been sourcing from India; the opening up of the retail sector to the FDI has been fraught with political challenges. It is felt that the presence of global retailers will enhance exports from India as they would also source Indian goods for their international outlets in a big way leading to a remarkable increase in Indian exports.

Segment analysis and the changing scenario of Indian Retail Formats

The structure of Indian retail is developing rapidly with shopping malls becoming increasingly common in the large cities with an estimated approximate 150 new shopping malls during year 2008. The traditional formats like grocers, tobacconist shops, and hawkers, continue to co-exist along with the modern retailing formats. Modern retailing has helped the companies to increase the consumption of their products for example: Basmati Rice. and it can be seen that the local market would go through a metamorphoses of a sea change and the local stores would soon become outdated or restricted to last minute unplanned buying.

The segmentation by classification of goods may be classified as

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Food & Grocery

Apparel

Gems and jewellery

Pharma

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Music

Book

Consumer Durables

Food and grocery retail: As per McKinsey report, it is found that the share of an Indian household spends 48% of income on food and beverages which the highest in the world.. The estimated food retail business in India through unorganized retail sector is Rs. 40,000 crore. The aggregate revenues of large food players is currently 5% of the total Indian retail market, and around 15 to 20% of the total urban food consumption. Most food is sold in the local `wet’ market, vendors, roadside push cart sellers or tiny kirana stores.

Apparel retail:

The ready-mades and western outfits are growing to create a business turnover of Rs.500 crores. In the recent years it has seen that this sector align itself to the global trends with retailing companies like Shoppers’ stop and Crossroads entering the fray to entice the middle class and it is estimated that this segment would grow to Rs. 300 crore in the next three years.

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Gems and Jewellery retail:

The gems and jewellery market is the key emerging area, accounting for a high proportion of retail spends. India is the largest consumer of gold in the world with an estimated annual consumption of 1000 tonnes, considering actual imports and recycled gold. The market for jewellery is estimated as Rs. 65,000 crores approximately.

Pharma retail:

The pharma retailing is transforming itself not a pure play pharma retailer but more in the health and beauty care business and the estimated business outlay in this retail sector is about Rs. 30,000 crore, with 15% of the 51 lakh retail stores in India being chemists.

Music Retail:

The size of the Indian music industry, is estimated at Rs.1100 crore of which about 36 percent is consumed by the pirated market and organized music retailing constitutes about 14 percent, equivalent to Rs.150 crore .

Book retail:

The organised retail book industry accounts for 7% (at Rs.210 crore). Out of the total estimated Rs. 3,000 crore. This segment is seen to be emerging with text and curriculum books accounting to about 50% of the total sales. The gifting habit in India is catching on fast with books enjoying a significant share, thus expecting this sector to grow by 15% annually.

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Consumer durables retail:

The consumer durables comprising of TV sets, audio systems, VCD players washing machines, microwave ovens, air conditioners (A/Cs) can be stratified into consumer electronics that accounts for an estimated 4.5 Billion USD out of which with organized retailing contributes to 5%

From the above figure it is inferred that organized retail penetration (ORP) in foot wear is the highest with 22% followed by clothing. In grocery segment only 1 % contribute to the organised sector even though food and grocery constitute a major share of 76 % retail spend by the consumer and it is estimated that this segment would grow five times taking the share of the organized market to 30 percent in the ensuing years .

Industry analysis of the Indian retail sector:

Modern retailing has entered India in form of sprawling malls and huge complexes offering shopping, entertainment, leisure to the consumer as the retailers experiment with a variety of formats, from discount stores to supermarkets to hypermarkets to specialty chains. However, kiranas still continue to score over modern formats primarily due to the convenience factor.

Source: IT Retailing: Are You In The Loop? July 16, 2006.

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The organized retail sector comprises of a large number of retailers, and retailing does not mean just stocking and selling but indeed it is all about efficient supply chain management that includes developing vendor relationship, caring customer service, timely promotional campaign for an effective and efficient merchandising.The modern retail formats targets development of well structured, effective and efficient supply chain right from farms to kitchens, which will result promote leverage on reduction of channel layers and hence in huge savings for the farmers and contribute to the national economy. It also increases the numbers in tax bracket and hence ensures efficient fiscal revenues. Along with the modern retail formats, the non-store retailing channels are also witnessing action with HLL initiatives to use non-store retailing channels – Sangam Direct, adds a new dimension of direct to home service in retailing format. The Network marketing is another emerging area in retailing, growing quite fast and has a few large players as on now. Convenience Store is another format targeted to use the platform of Gas stations which are function round the clock. The other form of convenience stores in different areas of operation is ATMs, food courts and pharmacies which gain importance in this fast track world.

In the years to come it is expected that hypermarket format will gain importance as the most preferred format for international retailers who would like to make an entry to our nation. As the survey says near about half a million population are served through 50 hyper markets, operated by few large retailers, four to five in numbers across 67 cities. This market sector is expected to have a potential to absorb more hypermarkets in the ensuing decade.

Merger and acquisition in Retail sector

In the first half of 2006, India witnessed a record number of Merger and Acquisition deals worth USD 25.6 billion. A sizable quantum of deals have been signed in the Indian retail sector since past few months in order to acquire a larger market share in the growing domestic market and to compete the prospective global players. The table below shows some recent deals that have taken place in the Indian retail sector:

Year

Acquired/ JV Company/ Target

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Acquirer

Nature of Business

Stake

Consideration

(US$ million)

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2005

Liberty Shoes

Future group

Retail (Footwear)

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51%

3

2005

Indus – League Clothing

Future group

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Retail clothing

68%

5

2005

Odyssey India

Deccan Chronicle Holdings

Leisure retail chain (books, music, toys)

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100%

14

2005

Landmark

Tata Trent

Books, music, accessories

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74%

24

2006

Bistro Hospitality

TGI Friday’s (a subsidiary of Carlson Restaurant World-wide)

Restaurant (Food retail)

25%

N/A

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2006

Indus League clothing

(Future group company)

Etam group, France

Lingerie and women’s wear retailing

50%

(JV)

8

Source: Price waterhouse Coppers, Asia-Pacific M&A bulletin, Mid year 2006.

Employment opportunities:

The Indian retail sector gives a tremendous economic opportunity on a large scale both for domestic and global market. This sector play a key role in generating large job opportunities and bring a range goods to the consumers at reasonable and affordable prices. Ernst &Young’s report of `The Great Indian Retail Story’ indicates that this sector is expected to create 2 million jobs by this year .

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Reasons for Foreign retail firms to choose India

Even traditional `brick and mortar’ companies like Tata’s have entered the retail business. The reasons for the foreign firm to choose India as their potential retail market is

demographic changes like rising disposable incomes

rapidly expanding middle class,

changing transformation in the Indian consumption pattern and preferences

the changing psyche of brand conscious Indian

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India has the youngest productive population in the world, between the age group of 20-34 years.

regional retailers in the globalization race.

IT and latest development:

IT played a pivotal role in radically changing the buying behavior across the globe by the use of technology and IT has been used by retailers ranging from Amazon.com to eBay, To conclude, the organized retailers are in a hard pressed need for a single enterprise with a wide IT platform to manage operations, which will become increasingly complex once the market expands.

Significant impact on retailers and branded goods – creating new opportunities and threats:

According to Assocham, the overall an overall increase of 36 per cent in Organised retail sector market which would grow by with the registered estimated for a three-fold growth to Rs 15,000 crore year ended 2008. The total retail market size is also expected to increase to Rs 14, 79,000 crore from the existing level of Rs 5, 88,000 crore.

The Issues and Challenges in Indian Retail Market

India presents a large market opportunity because of the increasing purchasing power of consumers. Equally the associated significant challenges are that over 90% of trade is conducted through independent local stores that include: Geographically dispersed population, small ticket sizes, complex distribution network, little use of IT systems, limitations of mass media and the unique existence of counterfeit goods. However the major challenges could be listed as

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Severe shortage of talented professionals

Indian retail segment players are under tremendous pressure to make their supply chains

efficient levels of quality and service delivery

increase of costs of Supply chain by 15%.

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Lack of adequate infrastructure- roads, electricity, cold chains and ports

retail chains have to resort to multiple vendor system for their requirements,

raising costs and prices.

the system is currently polluted with differential tax rates for various states that increased costs for in establishing an effective distribution network

Stringent labor laws guiding the work hours

minimum wages to be paid that limits flexibility of operations and

employment of part-time employees.

For opening new outlets by the same company , multiple clearances are required that add to the costs and time and inhibits expansion.

The retail sector does not have ‘industry’ status

Difficulties faced by retailers to raise finance from banks to fund their expansion plans.

Government restrictions limits on the FDI are leading to an absence of limited exposure to best practices

to find a good location and size of a real estate

organized nature of transactions has been identified due to Lack of clear ownership titles and high stamp duty.

To become a promising and flourishing industry, retailing needs to face and over come the following hurdles/challenges

In foreign retail investment automatic approval is not allowed because of

The Cumbersome Local laws and Regulations restrict the real estate purchases while taxation, favours small retail businesses.

Absence of integrated supply chain and IT management.

Lack of trained labour force.

Poor skill level for retailing management.

Poor study options and Retailing Courses

The Intrinsic complexities like Fluctuating price changes, product obsolescence and low margins.

Specialized retail schools are being considered to overcome the challenges faced by modern retailing.

Retail Industries serve as the best channels that act as a bridge between the producers of goods and services and the end users. It serves both as a conduit of out reach of goods and services and a feed back channel from the customers to the manufacturers which help the product and process innovation. It serves as a source for the end users to receive the goods and services in discrete quanta at the door step or near by places. The discrete volume / quanta are perceived as the demands of the retail outlet. It is also a source of demographic information that helps the manufacturer to plan his production and marketing.

Conclusion

The Indian economy is aggressively growing economy and there is a paradigm shift in the consumer buying behavior of the Indian consumer as trend-conscious, from a level of price considerations to appeal fitness designs and quality conscious. However, it is to be noted that still Indian consumer is a paradox, and the discount shopper gains more loyalty than price discounts. Hence is sector will have a mix of the tradition and modern formats based on the demographics and the Indian Retail format could be well a mix as given below.

Glossary

Mom-And-Pop or Kirana Stores: is a retail outlet that are family-run businesses with very selective and few in numbers and the square feet area of the store much depends on the store holder.

Specialty Stores: A specialty store is that it gives attention to a particular category like selling dog food and provides high level of service to the customers. A pet store is one that specializes as a specialty store like “Reebok” where they find just Reebok.

However, branded stores also come under this format. For example if a customer visits a Reebok or Gap store then Department Stores is that store that a carries variety of categories of inventory and it has a broad assortment at average price. It offers a considerable customer service. Example: Food World in Bangalore.

Discount Stores: offers assortment of merchandise at cut-rate and affordable prices but the service may be inadequate.

Convenience Stores provide limited amount of merchandise, more than the average price and with a speedy checkout. Normally it is ideal for emergency purchases.

Hypermarkets considers variety and volumes of exclusive merchandise at a very low margins and comparatively it has less operating cost than other retail formats-Example :the Metroâ„¢ store in Bangalore.

Supermarkets is a self service model with a focus on grocery and limited products of non food items. They may adopt a Hi-Lo strategy for pricing. The supermarkets normally has a space of between 20,000-40,000 square feet. Example: SPARâ„¢ supermarket.

Malls will have a range of retail shops at a single outlet. They normally endow with products, food and entertainment under one roof. Example: Sigma mall and Garuda mall in Bangalore.

At E-tailers customer can shop and order through internet and the merchandise are delivered at the customer’s doorstep Example: Amazon and EBay.

Vending Machines is an automated equipment wherein customers can acquire the products by the drop of a coin or a token considered for a price. For example: Soft drinks vending at Bangalore Airport.

List of resources:

1. . Michael Levy, Barton A Weitz ,Retailing Management,Pub. Irwin/McGraw-Hill, Edition 7,ISBN Number: 0073381047 2. Ernst & Young, The Great Indian Retail Story, 2006. 3.. FICCI – ICICI Property Services Study. 4.. Let gradualism guide FDI in retail, Economist, 2006. 5. AT Kearney, GRDI 2006. 6. CII, Logistics and Freight News, March 2006. 7.. KPMG analysis, Consumer markets in India – the next big thing, September 2005. 9. India’s changing household, Deutche Bank, November 2004. 8.. CII, Manufacturing Bulletin, June 2006. 9.. Northbridge Journal, Industry Outlook – Retail, 2006. 10. Price Water Coppers, Asia-Pacific M&A bulletin, Mid year 2006. 11.www.alexa.com. 12. www.itcportal.com.

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