ME Project Final

8/4/2019 ME Project Final

1/19

A project report on

Price leadership inPrice leadership inPrice leadership inPrice leadership in

Indian RetailIndian RetailIndian RetailIndian Retail

Institute of Management

Technology, Ghaziabad

Submitted By:

Swati Singh (10IB-059)Rajat Jain(10DM-116)Rajat Sethi(10IB-050)

Chitti Bansal(10IB-025)Tanvi Khandelwal(10DM-201)

Varun Nandode(10HR-042)


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Executive Summary

Indian retail is dominated by a large number of small retailers consisting

of the local kirana shops, owner-manned general stores, chemists,footwear shops, apparel shopspaan and beedi shops, hand-cart hawkers,pavement vendors, etc. which together make up the so-calledunorganized retail or traditional retail. The last 3-4 years havewitnessed the entry of a number of organized retailers opening stores invarious modern formats in metros and other important cities. Still, theoverall share of organized retailing in total retail business has remainedlow.Unorganized retailers in the vicinity of organized retailers experienceddecline in sales and profit in the initial years of the entry of organizedretailers. However the adverse impact weakens over time.


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INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

An important aspect of the current economic scenario in India is the

emergence of organized retail. There has been considerable growth inorganized retailing business in recent years and it is poised for muchfaster growth in the future. Major industrial houses have entered this areaand have announced very ambitious future expansion plans.Transnational corporations are also seeking to come to India and set upretail chains in collaboration with big Indian companies. However,opinions are divided on the impact of the growth of organized retail in thecountry. Concerns have been raised that the growth of organized retailingmay have an adverse impact on retailers in the unorganized sector. It hasalso been argued that growth of organized retailing will yield efficienciesin the supply chain, enabling better access to markets to producers(including farmers and small producers) and enabling higher prices, onthe one hand and, lower prices to consumers, on the other. In the contextof divergent views on the impact of organized retail, it is essential that anin-depth analytical study on the topic.

Since the organized retail sector play on profit by volumes, so theygenerally kept low profit margin. This low profit margin may besometimes detrimental to unorganized retail sector. These unorganized

retail sector have to take price set by organized retail segment to stay in amarket. So organized retail sector acts as a price determiner andunorganized retail sector acts as a price takers as in a perfectlycompetitive firms.


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PRICE LEADERSHIP MODEL IN RETAIL

There are various models concerning price-output determination underprice leadership on the basis of certain assumptions regarding thebehaviour of the price leader and his followers. Here organized sectorwith low profit margin act as price leader whereas unorganized retailoutlets will take the price set by the leader to determine their output. Allthe unorganized sector will fill the demand according to their productioncapacity. The residual demand is then fulfilled by the market leader. Inthe following case, there are few assumptions for determining price-output level under price leadership:

a) There are only two firms A and B and firm A has a lower cost ofproduction than the firm B.

b) The product is homogenous or identical so that the customers areindifferent as between the firms.

c) Both A and B have equal share in the market, i.e., they are facing thesame demand curve which will be the half of the total demand curve.

In the above diagram, MCa is the marginal cost curve of firm A and MCbis the marginal cost curve of firm B. Since we have assumed that the firmA has a lower cost of production than the firm B, therefore, the MCa isdrawn below MCb.

Now let us take the firm A first, firm A will be maximizing its profit byselling OM level of output at price MP, because at output OM the firm Awill be in equilibrium as its marginal cost is equal to marginal revenue atpoint E. Whereas the firm B will be in equilibrium at point F, selling ONlevel of output at price NK, which is higher than the price MP.

N M X

YL

O

Price &

Cost

Quantity

D

D

PK

FE

MR

MCb

MCa


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Two firms have to charge the same price in order to survive in theindustry. Therefore, the firm B has to accept and follow the price set byfirm A. This shows that firm A is the price leader and firm B is thefollower.

Since the demand curve faced by both firms is the same, therefore, thefirm B will produce OM level of output instead of ON. Since themarginal cost of firm B is greater than the marginal cost of firm A,therefore, the profit earned by firm B will be lesser than the profit earnedby firm A.

Difficulties of Price Leadership: The following are the challenges facedby a price leader:

I. It is difficult for a price leader to correctly assess the reactions of hisfollowers.

II. The rival firms may secretly charge lower prices when they find thatthe leader charged unduly high prices. Such price cutting devices arerebates, favourable credit terms, money back guarantees, after deliveryfree services, easy installment sales, etc.

III. The rivals may indulge in non-price competition. Such non-pricecompetition devices are heavy advertisement and sales promotion.

IV. The high price set by the price leader may also attract new entrantsinto the industry and these newentrants may not accept his leadership.


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Overview of Retail Sector

Growth India Retail - Total vs Organized

2003-04 2004-05 2005-06 2006-07

CAGR

2004-07

(%)

India Retail (Rs. bn)

Food & grocery 7028 7064 7418 8680 7.3Beverages 212 309 373 518 34.7Clothing &

footwear777 993 1036 1356 20.4

Furniture,furnishing,appliances &services

512 656 746 986 24.4

Non-institutionalhealthcare

950 972 1022 1159 6.9

Sports goods,entertainment,

equipment & books

212 272 308 395 23.0

Personal care 371 433 465 617 18.5Jewellery, watches,etc.

530 610 655 863 17.7

Total retail 10591 11308 12023 14574 11.2


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While total retail sales have grown from Rs. 10,591billion (US$ 230billion) in 2003-04 to Rs. 14,574 billion (US$ 322 billion) in 2006-07,which is at an annual compound growth rate of about 11 per cent, theorganized retail sales grew much more at about 20 per cent per annumfrom Rs. 350 billion (US$ 7.6 billion) in 2003-04 to Rs. 598 billion(US$ 13.2 billion) in 2006-07. As a result, the share of organized retail in

total retail grew, although slowly, from 3.3 percent in 2003-04 to 4.1 percent in 2006-07.


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Organized Sector

2003-

04

2004-

05

2005-

06

2006-

07

CAGR

2004-07

(%)Organized Retail ( Rs. bn)

Food & grocery 39 44 50 61 16.5Beverages 11 12 13 16 14.7Clothing & footwear 168 189 212 251 14.3Furniture, furnishing,appliances & services

67 75 85 101 14.8

Non-institutionalhealthcare

14 16 19 24 20

Sports goods,entertainment,equipment & books

25 33 44 63 37

Personal care 11 15 22 33 46.9Jewellery, watches,etc.

18 24 33 49 40.5

Total Organized

Retail350 408 479 598 19.5

Share of Organized

Retail in TotalRetail (%)

3.3 3.6 4.0 4.1

Source: CSO, NSSO, and Technopak Advisers Pvt. Ltd.


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As a result, the share of organized retail in total retail grew, althoughslowly, from 3.3 percent in 2003-04 to 4.1 per cent in 2006-07.Food andgrocery constitutes the bulk of Indian retailing and its share was about

two thirds in 2003-04 gradually falling to about 60 per cent in 2006-07.The next in importance is clothing and footwear, the share of which hasbeen about 7 % in 2003-04 and rose to 9 % in 2006-07. The third biggestcategory is non institutional healthcare whose share has slowly reducedfrom 9 per cent in 2003-04 to 8 % in 2006-07. The next is furniture,furnishing, appliances and services, whose share rose from about 5 percent in 2003-04 to 7 % in 2006-07. The category of jewellery, watches,etc. constituted about 6 per cent of total Indian retailing in 2006-07, risingfrom 5% in 2003-04.


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PEST Analysis for Organized Retail

Political Factors

Economic PolicyThe government is making progress with regard to economic and social reform andprivatisation, albeit slowly. Falling import duties and the new VAT system introducedin April 2005 are expected to benefit consumers by reducing end prices. Organisedretailing is at a very low level due to government restrictions on FDI in the retailsector

Employment Laws

Existing labour laws are one of the key obstacles to growth in industry.Unemployment is high, and labour laws very restrictive

Environmental Regulations

The environmental regulations are quite liberal in India compared to the industrializednations of the west.

Trade Restrictions and Tariffs

The Indian government allows 51 per cent Foreign Direct Investment (FDI) in singlebrand retailing owing to which foreign multinationals like Reebok and Louis Vuittoncan now operate directly in the Indian markets instead of going through franchiseroute of earlier.

Political Stability

The political situation in the country is more or less stable. Overall India currently hasa coalition led government and both major political parties the INC and BJP havesimilar views on almost all aspects of the economy. Both are in favour ofliberalization and the opening up of the economy to the world.

Economic Factors

Economic Growth

The economy has posted an average growth rate of more than 7% in the decade since

1997. India achieved 9.6% GDP growth in 2006, 9.0% in 2007, and 6.6% in 2008,significantly expanding manufactures through late 2008.

Interest rates

The non-banking finance companies in the Indian context provide much needed fundsfor the overall growth of retail sector. The focus on the growing retail financingmarket, their strengths in the management of a retail portfolio have helped in theirperformance. The financing of the activities by the non-corporate sectors, particularlyin areas like trade (wholesale and retail), is mainly from private money markets wherethe rates of interest are much higher. These are cash flow based lending rather thanasset based and is undertaken more by the unincorporated type of financing agencies.


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Real Estate Market

The Real estate market in India focuses on three primary areas in commercial, retailand residential. India ranks fifth in the list of 30 emerging retail markets and there areforecasts of an impressive 20% growth rate for the organised retail segment by 2010.The primary focus for supply of retail space is in the metropolitan regions of Delhi

and Mumbai. These cities, owing to their sheer size of the population, are some of themost attractive consumer markets in the entire Asian region.India has lowest per capita retail space accessible around the globe. The study depictsthat India need to generate at least 110 million sq ft of additional retail space a yearfor many years, only to meet the demand on account of a continued GDP growth rateof 8%. This space crisis is leading to a condition, in which prime locations demandextremely high rates.India has a totally inadequate infrastructure, with acute water and electricity shortagesand very poor roads

Social FactorsPopulation growth rate

Age distribution

Most consumers have grown up with television, the internet, and have been exposedto the standards of living and consumer culture abroad. This generation is also makingmoney at a younger age and lots of it, thanks to call centres and other avenues ofemployment opening up that cater to students in college and schools.The organized retail sector is expected to grow stronger than GDP growth in the nextfive years driven by changing lifestyles, burgeoning income and favourable

demographic outline.Another credible factor in the prospects of the retail sector in India is the increase inthe young working population.In India, hefty pay-packets, nuclear families in urbanareas, along with increasing working-women population and emerging opportunitiesin the services sector is leading to increasing buying power for the consumer. Thesekey factors have been the growth drivers of the organized retail sector in India whichnow boast of retailing almost all the preferences of life The Growing Indian MiddleClass, the upper middle and high-income urban households in India has grown to 3.8crores in 2007 (from 1.46 crores in 2000).The sheer size of its upbeat middle class market makes India a happening marketplace for retail players.

Besides the number advantage, the purchasing power of Indian middle class is alsogrowing substantially with a year-on-year growth rate of 5-per cent in its householdincome.


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Technological Factors

R&D activity

Automation

Technology incentives

Rate of technological change


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India Retail - Share of Categories (per cent)

2003-04

( %)

2004-05

( %)

2005-06

( %)

2006-07

( %)

Food & grocery 66.4 62.5 61.7 59.6Beverages 2.0 2.7 3.1 3.6Clothing & footwear 7.3 8.8 8.6 9.3Furniture, furnishing,appliances & services

4.8 5.8 6.2 6.8

Non-institutional healthcare 9.0 8.6 8.5 8.0Sports goods, entertainment,equipment & books

2.0 2.4 2.6 2.7

Personal care 3.5 3.8 3.9 4.2

Jewellery, watches, etc. 5.0 5.4 5.4 5.9Total 100 100 100 100

While the overall share of organized retailing remains low, its share incertain categories is relatively high and in certain other categories quitelow. Thus, for clothing and footwear, the share is already in the range of19-22 per cent, for the category of sports goods, entertainment,equipment and books the share is 12-16 per cent, and for furniture,furnishing, appliances and services, the share is 10-13 per cent. Incontrast, the share of organized sector in the largest category of food and

grocery retailing, although growing, remains just below one per cent.


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Share of Organized Sector in Total Retail by

Category

2003-04

( %)

2004-05

( %)

2005-06

(%)

2006-07

( %)

Food & grocery 0.5 0.6 0.7 0.7Beverages 5.0 3.8 3.6 3.1Clothing & footwear 21.6 19.0 20.4 18.5Furniture, furnishing,appliances & services

13.0 11.4 11.3 10.2

Non-institutional healthcare 1.5 1.7 1.9 2.1Sports goods, entertainment,

equipment & books11.6 12.1 14.4 16.0

Personal care 2.8 3.5 4.7 5.4Total 100 100 100 100Source: Computed from Technopak Advisers Pvt. Ltd. data.


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Expansion of Organized Retail by

Format

Table provides an analysis of the expansion of organized retail in terms ofthe different modern retail formats .The total number of organized retailoutlets rose from 3,125 covering an area of 3.3 million sq. ft. in 2001 to27,076 with an area of 31 million sq. ft. in 2006. Small-sized single-category speciality stores dominated the organized retail in the beginningwith almost two-thirds of total space in 2001. Departmental stores camenext with nearly a quarter of total space and supermarkets accounting forthe balance of about 12 per cent of organized retail space. There were nohypermarkets in India in 2001. Speciality stores are still the most

common modern retail format with over a half of total modern retailspace in 2006. Supermarkets and department stores occupied nearly anequal space of 15-16 per cent each in 2006. In 2006, India had about 75large-sized hypermarkets carrying a tenth of the total modern retail spacein the country. This format is expected to gain more prominence in thefuture.

Organized Retail Expansion by Format

Format Averag

e

Size

(sq. ft.)

2001 2006

No. of

Store

s

Area

('000

sq.ft.

)

%age

Total

Spac

e

No. of

Store

s

Area

('000

sq.

ft.)

%age

Total

Spac

e

Supermarkets/conveniencestores

1000 400 400 11.9 4751 4751 15.5

Hypermarkets 40000 0 0 0 75 3000 9.8

Discountstores

1000 48 48 1.4 1472 1472 4.8

Specialitystores

800 2651 2121 63.3 206121649

053.7

Departmentstores

30000 26 780 23.3 166 4980 16.2

Total3125 3349 100 27076

3069

3100


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Indian Unorganized Retail sector & its

Challenges

India is the only one country having the highest shop density in the world,with 11 outlets per 1000 people (12 million retail shops for about 209million households). Rather we can see the democratic scenario in IndianRetail (because of low level of centralization, low capital input and due toa good number of self organized retail).

Unorganized retailing refers to the traditional formats of low-costretailing, for example, hand cart and pavement vendors, & mobilevendors, the local kirana shops, owner manned general stores,

paan/beedi shops, convenience stores, hardware shop at the corner ofyour street selling everything from bathroom fittings to paints and smallconstruction tools; or the slightly more organized medical store and a hostof other small retail businesses in apparel, electronics, food etc.

Characteristics of unorganized retail:

Small-store (kirana) retailing has been one of the easiest ways to generateself-employment, as it requires limited investment in land, capital andlabour. It is generally family run business, lack of standardization and the

retailers who are running this store they are lacking of education,experience and exposure. This is one of the reason why productivity ofthis sector is approximately 4% that of the U.S. retail industry.

Unorganized retail sector is still predominating over organized sector inIndia, unorganized retail sector constituting 98% (twelve million) of totaltrade, while organized trade accounts only for 2%.

The reasons might be:

1) In smaller towns and urban areas, there are many families who aretraditionally using these kirana shops/ 'mom and pop' storesoffering a wide range of merchandise mix. Generally these kiranashops are the family business of these small retailers which theyare running for more than one generation.

2) These kirana shops are having their own efficient managementsystem and with this they are efficiently fulfilling the needs of thecustomer. This is one of the good reasons why the customer

doesnt want to change their old loyal kirana shop.


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3) A large number of working class in India is working as daily wagebasis, at the end of the day when they get their wage, they come tothis small retail shop to purchase wheat flour, rice etc for theirsupper. For them this the only place to have those food items

because purchase quantity is so small that no big retail store wouldentertain this.

4) Similarly there is another consumer class who are the seasonalworker. During their unemployment period they use to purchasefrom this kirana store in credit and when they get their salary theyclear their dues. Now this type of credit facility is not available incorporate retail store, so this kirana stores are the only place forthem to fulfill their needs.

5) Another reason might be the proximity of the store. It is theconvenience store for the customer. In every corner the street anunorganized retail shop can be found that is hardly a walkingdistance from the customers house. Many times customers preferto shop from the nearby kirana shop rather than to drive a longdistance organized retail stores.

6) These unorganized stores are having n number of options to cuttheir costs. They incur little to no real-estate costs because they

generally operate from their residences. Their labour cost is alsolow because the family members work in the store. Also they usecheap child labour at very low rates.As they are operating fromtheir home so they can pay for their utilities at residentialrates.Even they cannot pay their tax properly

The well established organized retail sector in India are Pantaloon Retail,Shoppers Stop, Spencers, HyperCITY, Lifestyle, Subhiksha & newlyemerging Reliance etc.Over 20,000 new retail outlets are expected toopen within this segment. Major corporate retail like Wal-Mart and have

started to try and take over the Indian retail sector.

But in India the unorganized retail is a source of foods and othernecessities of millions of Indians, major link between rural and urbansocieties. Not only that it is also act like a convenience store for thecustomer offering right product at right time at right place. In a countrywith large numbers of people, and high levels of poverty, this model ofretail democracy is the most appropriate. So these unorganized retailsector need to be promoted so that they can organize & supply food to

Indian consumer.


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How to promote Unorganized Retail

Sector

Some recommendations are as listed below:

a. Establishment of Retailer co-operatives among retailers which ishighly required for the sustenance of the unorganized retail sector.

b. Merger and buy-out of weak retailers by a stronger one that wouldgive a new horizon to the small retailer.

c. Setting up of franchisee organization may also help instrengthening the position of the retailers. The franchiser can exert

a tremendous control over the way retailing is done.

d. There must be good network connection between retailorganizations, the suppliers and other channel members to usecompatible technology so that they can build strong distributionset-up to satisfy the customers.

e. Setting up of more and more non-store retailing centers would alsoensure a strong retailing organization. Non-store retailing makesimplementation of modern principles easier and less costly.

f. Moreover there must be a change in the mindset of the unorganizedretailer. They have to understand the pulse of the trend. They haveto understand, come forward & lead this change management thenonly this sector not only can exist but flourish.


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Conclusion

There would be no negative impact of organized retailing on the

unorganized sector, which accounts for 96 per cent of retail business.Developing economies, specifically India, are appearing on the worldretail industry radar due to the size and potential of their markets. Asorganized retail presents enormous business opportunities, big namessuch as Reliance, Birlas and Tatas along with the foreign supermarketchains (in partnership with Indian companies), have been making an entryinto this sector. Unorganized retailers in the vicinity of organized retailersexperienced decline in sales and profit in the initial years of the entry oforganized retailers. However the adverse impact weakens over time.

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