The Indian Retail Sector (Prepared as of Mar 2009)

the Indian Retail SectorStructure, Prospects, FDI & Policy Framework, Social Impact, key subject learnings, SWOT, key Observations & Recommendations, how can mom-n-pop counter the big fish

the Indian Retail Sector

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Brief Overview

Retail is the next Big Boom in the Indian Growth Story. India is witnessing an unprecedented consumption boom. The economy is growing between 7 and 9 percent and the resulting improvements in income dynamics along with factors like favorable demographics and spending patterns are driving the consumption demand.

Indian Retail Industry is ranked among the ten largest retail markets in the world. The attitudinal shift of the Indian consumer in terms of "Choice Preference", "Value for Money" and the emergence of organized retail formats have transformed the face of Retailing in India. The Indian retail industry is currently estimated to be a US$ 200 billion industry and organized Retailing comprises of 3 per cent (or) US$6.4 Billion of the retail industry. With a growth over 20 percent per annum over the last 5 years, organized retailing is projected to reach US$ 23 Billion by 20101.

Traditionally, Indian Retail Industry has been fragmented and has been dominated by mom and pop stores. However, there has been a gradual shift in the preferences and lifestyle of Indian Consumer over the last few years owing to increase in income level of people. This has attracted a large no. of organized players into the segment. Few of the predominant players in the Industry are Reliance (Reliance Fresh), Future Group (Big Bazaar), Subhiksha, AV Birla Group (Trinethra), etc.

1 http://www.indiainbusiness.nic.in/industry-infrastructure/service-sectors/retailing.htm


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Index

Brief Overview...............................................................................................................................................2

Research Objectives and Scope ....................................................................................................................4

Retail Formats...............................................................................................................................................5

Indian Retail Industry and Future ...............................................................................................................12

Porter’s Five Forces applied to the Retail Industry.....................................................................................21

(the model has been applied to Non-Apparel category) ............................................................................21

Indian Retail : A SWOT Analysis ..................................................................................................................25

How can mom and pop stores fight the Big Fish (own survey) ..................................................................28

Impact of Organized Retail on Unorganized Retail.....................................................................................33

Consumer Survey ........................................................................................................................................42

Consumer Survey at Unorganized Fruit and Vegetables Outlets ...............................................................46

Impact of Organized Retailing on Intermediaries, Farmers and Manufacturers........................................49

Conclusion and recommended Blue Ocean Strategy for Unorganized Retail ............................................50

Policy Recommendations............................................................................................................................56

Annexure A : “Logistics” The Core Retail Function .....................................................................................58


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Research Objectives and Scope

The advent of new format retailing in the traditional India on the one hand reflects prosperity and growth that is happening in the economy, but also generates interest in various other areas that include a close study of changing lifestyle and consumer preferences, bolstering of supply chain that forms key area of specialization in case of these chains, how is organized retail going to impact the inefficiencies that exist in the Indian Farm Sector, social impact of organized retailing on smaller mom and pop stores, etc.With this background, I propose the following objective and scope of the study on the Indian Retail Sector :

Objective ScopeStructure of the Indian Retail Industry To develop an understanding of product wise split

of the industry, various players, different formats of outlets and key industry terminologies

Prospects To develop an understanding of future prospects of the sector and key directions that the sector shall undertake in times to come

FDI and Policy Framework To develop an understanding of the Govt. policy framework w.r.t. the Indian Retail Sector including the recent FDI policy announcements

Social Impact and is retail in Food and Groceries really reducing the inefficiencies in the Indian Agriculture distribution system

To develop an understanding of the social issues related to the Indian Retail Industry particularly those related with the advent of organized players in the sector

Key subject learnings Retail relies heavily on SCM, Mapping ConsumerBehavior and Information Technology. Attempt shall be made to identify practical subject specific learnings that shall entail out of the various findings

SWOT, Porter’s Five Forces Model, key Observations and Recommendations

A SWOT of the Indian Retail Industry shall be prepared. Recommendations shall be made to alleviate the impact of weaknesses and threats

How can mom and pop stores counter the Big fish As a final study, recommendations shall be made about how mom-and-pop stores can counter the onslaught of the big players entering the sector


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Retail Formats

The various formats in the Organized Indian Retail Sector have been discussed below :

Supermarkets / Hypermarkets2

The concept of Supermarkets / Hypermarkets is not new to Indian consumers. The British colonial government introduced the idea of Supermarkets to facilitate its officers with access of all household goods under one roof. This led to the development of Supermarket or Hypermarket.

Large self service outlets, catering to varied shopper needs are termed as Supermarkets. These are located in or near residential high streets. These stores today contribute to 30% of all food & grocery organized retail sales. Super Markets can further be classified in to mini supermarkets typically 1,000 sq ft to 2,000 sq ft and large supermarkets ranging from of 3,500 sq ft to 5,000 sq ft. having a strong focus on food & grocery and personal sales.

Supermarkets / Hypermarkets in India house varied shops selling different types of essential commodities along with luxury items. These Hypermarkets are mainly concentrated in urban areas only. Hypermarkets operating in India typically have a heterogeneous mix of large and small individual retailers. Most of these Hypermarkets sell branded products of both, domestic and international manufacturers. Hypermarkets of India offer products with different price bands for each and every sections of urban society.

These Hypermarkets in India sells products like - Electronic goods Groceries Vegetables and fruits House hold items Stationary Shops, Pharmaceuticals and health care products Consumer durables Vegetables Dress materials Furniture

2 http://business.mapsofindia.com/india-retail-industry/formats/


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Furnishings etc.

Hypermarkets in India - the operators Reliance retail Bharti-Wal-Mart retail

High Street Shops3

High Street Shops of India are predominantly unorganized. Indian high street shops are varied and scattered. High Street Shops of India generally occur in small tufts and sell products that are very relevant to economic needs of that particular area. For example, the High Street Shops in villages offer groceries and daily use commodities that are generally unbranded and cheaper in price and quality. High Street Shops in towns and cities are more organized and sell commodities of daily use along with luxury items.

Specialty Stores4

A specialty store is a store, usually retail, that offers specific and specialized types of items. These stores focus on selling a particular brand, or a particular type of item. For example, a store that exclusively sells cell phones or video games would be considered specialized.

The definition for specialty store is actually somewhat loose. Sometimes it includes chain retail stores that sell a specific brand of clothing. This would make retail outlets like Gap, Old Navy, Eddie Bauer, and Victoria’s Secret specialty stores, because all the clothing sold there is manufactured specifically for that store. If you buy something from the Gap, it will have a Gap label.

In this definition, the specialty store can carry a diverse range of products. Though Gap specializes in clothing, such clothing could be for children, teens or adults. You might also occasionally find Gap shoes or socks. This is certainly the case with a specialty store like Old Navy, where you can purchase not only clothes for the whole family, but also accessories, dog bowls, Frisbees, and a variety of other non-clothing related items.

3 http://business.mapsofindia.com/india-retail-industry/formats/

4 http://www.wisegeek.com/what-is-a-specialty-store.htm


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In other cases, the specialty store is not brand sensitive, but offers certain kinds of items that could all be loosely classed together. A grocery store that specializes in selling organic products would be considered a specialty store and could include chain stores like Whole Foods. The many ethnic foods markets that import most of their products are also examples of the specialty store. Products can vary significantly, but they may all fall under the class of being imported from a specific place like Asia, England or Italy.

Another example of the specialty store is a store that sells one kind of item only, like cell phone stores or video game stores. Product selection is usually wide at a store like Electronics Boutique, which specializes in retailing games for the Playstation, Nintendo, and X-Box game systems. A cell phone specialty store might sell many different cell phone brands, in addition to offering access to contracts with a specific cell phone company.

Some specialty stores are not linked to a chain of stores, but operate from a single location. A small health food store, a high-class women’s boutique that offers couture clothing, or a little bait and tackle shop may all be considered examples of the specialty store. Even though prices might be higher at any of the above types of the specialty store, customers often prefer the expertise offered by small stores, usually opened by owners who are passionate about the products they sell. In large chain stores, assistance and product knowledge may not exhibit the same kind of quality as in smaller local stores. Exceptions do exist, and some chain stores are known for their high degree of customer service and product knowledge

Other examples of Specialty Stores in India are :

Pantaloons, Steel junction, Metal junction, Food bazar, Haldiram bhujiwala, Music world, Nokia world, Sony world, Khadims, Adidas,


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Bata, Raymonds, Ganguram, KC Das, Bausch and Lomb, Apollo pharmacy, Sifyiway, Kidskemp, Bookstore Crosswords

Convenience StoresThese are relatively small stores 400-2,000 sq. feet located near residential areas. They stock a limited range of high-turnover convenience products and are usually open for extended periods during the day, seven days a week. Prices are slightly higher due to the convenience premium.Subhiksha Stores in North India have adopted this format.

Shopping MallsThe shopping malls form the largest form of organized retailing today. The area under a shopping mall ranges from 60,000 sq ft to 7,00,000 sq ft and above. They lend an ideal shopping experience with an amalgamation of product, service and entertainment, all under a common roof.

Shopping malls are an emerging trend in the global arena. According to historical evidences shopping malls came into existence in the Middle Ages, though they were not called so.

Originally the first of the shopping malls was opened in Paris. Then the trend followed in the other metros over the world, and there was a spree of shopping malls coming up at various places. In this age of mass production and mass consumption, the concept of shopping malls is perhaps the most modern method of attracting consumers. The concept of shopping was altered completely with the emergence of these shopping malls.


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Shopping was no longer limited to mere buying activity – it had become synonymous with giving customers exquisite experience. The inclusion of amenities like restaurants, multiplexes, and car parks attracted crowds to shopping malls and they soon attained popularity as family hangout zones.

In India, the emergence of shopping malls has mostly altered the lifestyle of consumers. Growth in income, changing attitudes and demographic patterns favor the emergence of shopping malls.

Examples include Shoppers Stop, Piramyd, Pantaloon, Great India Place.

Discount StoreA discount store is a type of department store, which sell products at prices lower than those asked by traditional retail outlets or the MRP. Most discount department stores offer wide assortments of goods; others specialize in such merchandise as jewelry, electronic equipment, or electrical appliances. Discount stores are not dollar stores, which sell goods at a dollar or less. Discount stores differ because they sell branded goods and prices vary widely between different products. Discount department stores are more popular in India than other any other category of stores. Discount stores offer discounts based on their back-end bulk purchases and rely on economies of scale for margins.

Example of discount stores are Walmart. In India, Big Bazaar is also an example of discount stores.

Departmental Stores5

A department store is a retail establishment which specializes in selling a wide range of products without a single predominant merchandise line. Department stores usually sell groceries, items of daily use like toiletries, cosmetics, and also at times stock apparels, furniture, appliances, electronics, and 5 http://en.wikipedia.org/wiki/Department_store


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additionally select other lines of products such as paint, hardware, photographic equipment, jewelry, toys, and sporting goods. Certain department stores are further classified as discount department stores. Discount department stores commonly have central customer checkout areas, generally in the front area of the store. Department stores are usually part of a retail chain of many stores situated around a country or several countries.

Examples of Departmental Stores in India are LM365, Sabka Bazaar, Spencer’s.

Multi Brand OutletsMulti Brand outlets, also known as Category Killers, offer several brands across a single productcategory. These usually do well in busy market places and Metros.

Evolution of Retailing in IndiaRetailing, one of the largest sectors in the global economy, is going through a transition phase in India. For a long time, the corner grocery store was the only choice available to the consumer, especially in the urban areas. This is slowly giving way to international formats of retailing.


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Traditional Retail O/L

Departmental Stores

Malls

Malls, Multiplexes, Leisure Centers, Discount Store Formats

Larger Malls

Pre 80s

Mid 80s

90s

2000s

2004-05

Market Maturity


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Indian Retail Industry and Future

The entire globe is undergoing a wave of recession and India which is more integrated with the global economy than it was ever before, is also facing the heat of the meltdown. With liquidity under severe crunch, FDI has been affected in various sectors which has lead the Govt. and the RBI to revise the GDP growth figures to nearly 7% as against 8.7% in the previous financial year. The meltdown has impacted the ambitious plans of large retail ventures.

Discount retailer Subhiksha is on the verge of a near bankruptcy as has been reported recently. Last year, it sold 10% stake to Azim Premji for Rs. 230 Crore. There have been reports that firm has been delaying payments to its suppliers and salaries to its employees6.

6 Ten, too, has been learnt to close shops.

Country’s largest retailer Reliance Retail saw its high profile joint venture between Reliance Retail and the UK-based supply chain powerhouse Wincanton which was to manage RRL’s transportation, warehouses and inventory been called off. Reliance, too has been learnt to have put a halt on expansion, has shut down stores and is implementing various cost cutting measures.Other retailers like Vishal retail, Sabka Bazaar have also been facing the heat.

Real Estate is the most integral part of any retail roll-out. Real Estate expansion has one of the worst affected sectors of the global meltdown. With developers facing the crunch large scale development of malls and other commercial complexes has also shifted to lower gears. DLF, Parsvnath and other real estate developers have lagged behind by 54 per cent in their target to open retail space even as retailers’ vacancy climbed to 16 per cent in 2008, according to a study. Cash-strapped real estate developers failed to deliver 11 million sq ft of retail space in 2008, according to a study released by Cushman & Wakefield. Out of the proposed 74 malls in key eight cities at the beginning of 2008, only 34 were delivered through the year, the study showed. Developers in the National Capital Region (NCR) lagged the most with a supply of 4.7 million sq ft compared with the earlier target of 7.1 million sq ft. Developers may continue to restrict their supply, or go slow on retail space by a similar amount in 2009 across key major cities, the study showed. Added to it, demand side too has seen taking a dip in the past few months

But that does not mean that India Retail story is over. 72009 is expected to be a year of consolidation for Indian retail sector. As a result of adoption of best practices and restructuring of business models by the retailers, organized retail is expected to realign itself to the market conditions and create new areas of 6 http://www.livemint.com/2008/10/03003508/Subhiksha-says-it8217s-not.html, Oct 3 `08

7 http://www.indianrealtynews.com/retail-market/organised-retail-may-realign-in-2009.html, Jan 28 `09


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growth in 2009. Given the market malady being faced by developers and retailers alike, it is possible that partnership models of growth through mechanisms such as revenue sharing would become more prominent.

More deals are going to get renegotiated as priced drop in over-priced locations. The process of rationalization should reach its peak by March, 2009. In 2009, it is anticipated that the supply pipeline may witness further stalling Most players’ expansion plans for 2009 will slow down considerably. However, Projects that are planned well (incorporating approaches like proper zoning, optimal tenantmix strategies), implemented with high quality standards and incorporating appropriate mall management practices are anticipated to be successful. In 2009, premier brands will look at Tier II cities, but certainly not Tier III. Luxury brands will stick to metros.

Pan India mall developers will look at more practical rentals in 2009.High streets may see consolidation with a high possibility of a revenue-sharing model in terms of the overall cost-to-retailer on many high streets. For 2009, Jones Lang LaSalle Meghraj has seen a decisive upscale in transactions in the hypermarket category. However, the demand is clearly higher for stand-alone high street locations rather than mall-based locations.

The Research Findings8

The Indian retail market, which is the fifth largest retail destination globally, was ranked second after Vietnam as the most attractive emerging market for investment in the retail sector by AT Kearney's seventh annual Global Retail Development Index (GRDI), in 2008. The share of retail trade in the country's gross domestic product (GDP) was between 8–10 per cent in 2007. It is currently around 12 per cent, and is likely to reach 22 per cent by 2010.

Commercial real estate services company, CB Richard Ellis' findings state that India's retail market is currently valued at US$ 511 billion, and is poised to grow to US$ 833 billion by 2013. The report further stated that organised retail that currently accounts for less than 5 per cent of the total retail market is expected to register a compound annual growth rate (CAGR) of 40 per cent and swell to US$ 107 billion by 2013.

A report by global consultancy firm, AT Kearney said "The consumer spending in India has increased by an impressive 75 per cent in the last four years and will quadruple in the next 20 years." Moreover, India recently topped the Nielsen Global Consumer Confidence study, conducted by Nielsen, a market research company. The biannual report revealed that Indians are "the most optimistic lot globally who think that their country will be out of the economic recession in the next twelve months."

8 Indian Brand Equity Forum


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According to the recent report by McKinsey & Company titled 'The Great Indian Bazaar, Organized Retail Comes of Age in India', India's overall retail sector is likely to grow to US$ 450 billion by 2015. Another McKinsey report 'The rise of Indian Consumer Market', estimates that the Indian consumer market is likely to grow four times by 2025.

In a joint study recently conducted by ASSOCHAM and KPMG, the following findings were revealed: The total retail market size in India in 2008 was estimated at US$ 353 billion. The annual growth of the retail market in India is expected to be around 8 per cent. The total retail market size in India is likely to touch US$ 416 billion by 2010. The present share of organised retail sector is estimated at 7 per cent. The estimated annual growth of organised retail sector is 40 per cent. The size of organised retail sector by 2010 is estimated to reach US$ 51 billion. The estimated share of organised retail in total retail by 2010 is 12 per cent. The investment into modern retailing formats over the coming 4-5 years is expected to be

around US$ 25-30 billion.

The great Indian consumer market is still going strong. The ETIG analysis carried out by the Economic Times revealed that most mass consumer goods and service in India were not much affected by the global economic slowdown. Despite the inflation experienced during the period, the second-quarter results of leading 70 consumer-related firms revealed that their aggregate revenues increased by 8.5 per cent during the September 2008 quarter over the same period in 2007. Even though this was a tad lower than the 9 per cent growth posted during the first quarter of 2008-09, it was a lot higher than the 7 per cent registered during the previous three quarters for these firms.

Growth Continues Apace9

Despite the global economic slowdown, Indian retailers are still optimistic about the India growth story. Speaking on the issue, Mr Tarun Joshi, CEO and MD of Brandhouse Retails said “Fashion retail has not been impacted in a big way. Not even 0.5 per cent of the working population has been hit in India.” “The Indian economy is more stable than other economies across the world and one must not confuse India with the rest of the world”, reiterated Mr Sandeep Kulhalli, V-P, Retail and Marketing, Tanishq.With the 30-40 per cent drop in retail rentals, Indian retailers are a happy lot. In fact, retailers are also foreseeing further drops in rentals in 2009 and they are optimistic about their expansion plans for this year

Retailers such as Spencer's Retail, Future Group, Shoppers Stop, Westside, Wills Lifestyle, Bata India, and Raymond, have plenty of expansion plans for 2009.

The Future Group will focus on launching private labels with high profit margins in segments like toothpaste, shampoo, and butter amongst others. According to Kishore Biyani, MD and CEO of

9 Indian Brand Equity Forum


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the Future Group, "Another thrust area will be entering into new segments like rural retail and telecom products distribution. Through 'Aadhar' we can ramp up rural retail, which is outside the 20 per cent of the population we have been targeting so far."

Aggressive marketing efforts by leading retailers are on. Tanishq is planning a marketing effort for plain gold along with the World Gold Council during the last quarter of 2008-09. Similarly, Brandhouse Retails is planning a joint venture with a European private apparel label for the next financial year, along with the introduction of a few more international brands.

In West Bengal, leading retailers like the Future Group and Spencer's Retail, are expanding and upgrading their present stores in 2009. Others like Wills Lifestyle, Turtle Ltd, and Bisk Farm, are planning to set up new stores, particularly in the suburbs.

Auto company Mahindra & Mahindra (M&M) has made a quiet foray into the retail sector with the soft launch of its specialty format Mom & Me to sell infant care and maternity products. The company has launched two outlets in Ludhiana and Ahmedabad.

India has one of the largest number of retail outlets in the world. A report by Images Retail estimates the number of operational malls to grow more than two-fold, to cross 412, with 205 million square feet by 2010, and a further 715 malls to be added by 2015, with major retail developments even in tier-II and tier-III cities in India.

Even as the organised retail market is starting to take off, there is an associated surge in branded discount outlets in India. Top realtors and local retail chains are developing malls in regional boroughs, specifically to sell premium branded goods.

Rural Retail Led by the rising purchasing power, changing consumption patterns, increased access to information and communication technology and improving infrastructure, the rural retail market is estimated to cross US$ 45.32 billion mark by 2010 and US$ 60.43 billion by 2015, according to a study by Confederation of Indian Industry (CII) and YES Bank.

As per the National Council of Applied Economic Research (NCAER) reports, there are 720 million consumers across 6, 27,000 villages in rural India.

According to a report—India Retail Report 2009— by Images FR Research, "India's rural markets offer a sea of opportunity for the retail sector. The urban-retail split in consumer spending stands at 9:11, with rural India accounting for 55 per cent of private retail consumption." Rural India accounted for almost half of the Indian retail market, which was worth about US$ 273.64 billion in September 2008. With most of the retail markets getting saturated in tier-I and tier-II cities, the next phase of growth is likely to be seen in the rural markets.


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Major domestic retailers like AV Birla, ITC, Godrej, Reliance and many others have already set up farm linkages. Hariyali Kisan Bazaars (DCM) and Aadhars (Pantaloon-Godrej JV), Choupal Sagars (ITC), Kisan Sansars (Tata), Reliance Fresh, and Naya Yug Bazaar, are established rural retail hubs. Retail giants like Reliance, Spencer's and Subhiksha are also expanding in semi-urban and rural areas.

Luxury Retail By the next four to five years, India is expected to become a manufacturing hub for global luxury brands, according to a FICCI-Yes Bank report on luxury brands. The report states that India has the most rapidly growing high-net worth individuals (HNI) population in the world, and the income level of consumers is expected to grow three times by 2025. The active age group (25–45 years) is likely to rise to a third of the population.

The report further states that the manufacturing business of luxury items in India can cross US$ 500 million with global brands like Louis Vuitton and Frette looking at India as a manufacturing base. According to a survey done by AT Kearney, the Indian luxury retail market is estimated to touch US$ 30 billion by 2015. Estimated to be the 12th largest in the world, it has been growing at the rate of 25 per cent per annum.

E-tailing The increase in personal computers (PC) and internet penetration along with the growing preference of Indian consumers to shop online has given a tremendous boost to e-tailing, the online version of retail shopping. An estimated 10 per cent of the total e-commerce market is accounted for by e-tailing. Several online retailers are reporting good business in categories like travel, art, books and music. E-tailing in lingerie and fresh fruit businesses is also doing well.

Retail Franchising Along with e-tailing, another perceptible trend in the growth of organised retail market has been the concept of retail franchising. According to industry estimates, retail franchising has been growing at the rate of 60 per cent in the last three years and is set to grow two-fold in the next five years. And with immense potential seen in this segment, the US$ 4 billion-franchising industry is likely to see an almost two-fold rise in the number of franchisees (from 0.2 million) by 2010.

Innovative Retail Concepts With the entry of new players and the market becoming increasingly competitive, retail players are using innovative retail concepts to attract consumers.

With reduced commodity prices and the recent excise duty cuts, input costs have come down by around 25-30 per cent in several categories. Subsequently, many value retailers have brought down prices by over 15 per cent for various product categories to encourage greater consumption. They are also stepping up their bargains and discount offers. Retailers like Big Bazaar, D'Mart, Spencer's and Food


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Bazaar, among other retailers, have begun slashing prices in product categories like apparel, home products, and foods (private labels). In fact, modern retailers are now also selling private labels with consumers looking out for cheaper brands.

Retail companies are also developing and promoting their in-house brands. The Future Group will be targeting profits worth US$ 2.05 billion from its in-house brands in FMCG, household consumer durable and electronics and apparel categories by 2012. After the good performance of its in-house consumer brands such as Tasty Treat, Fresh & Pure, DJ&C, Koreo, the company now wants to extend it to additional categories like health & beauty, dairy, apparel, and accessories.

Furthermore, Big Bazaar, the hypermarket chain of Future Group, is introducing Customer Advisory Boards (CABs) as a measure for receiving valuable customer feedback.

With the US$ 6.31 billion pharma retailing becoming progressively more organised, players are now looking at newer formats to attract more people to their stores. Pharmacy chains like MedPlus and Goodlife have started providing health check-ups, diagnostic services, dental care and medical counselling to its patients, besides selling pharma and wellness products.

Goodlife is tying up with the retail major, Future group, to set up these convenience clinics at malls and in the high streets. MedPlus operates 15 such integrated clinics, and is planning to open at least 50 such clinics by March 2009.

Innovative concepts in recreational retail are pulling people to malls, and big retail set-ups account for a small but rapidly growing part of a multi-million dollar industry. There are a variety of concepts like made-to-order pottery-painting, portrait-making, creating toons or casting gold and silver impressions that have proliferated in malls or exist as standalone ventures. In fact, a whole new concept of customised, leisure retail has opened up for the Indian consumer.

Investments on the Anvil India's vast middle class with its expanding purchasing power and its rapidly growing retail industry are key attractions for global retail giants wanting to enter newer markets.

Impact Retail Private Ltd is planning to invest US$ 41.16 million for launching 30 Xcite consumer electronics retail showrooms in Indian metros by December 2009.

Pyramis India (retailers of branded kitchen accessories), is planning to launch 215 exclusive showrooms with at an investment US$ 4.11 million, over the next four months.

German lifestyle brand Puma is getting into a joint venture with Knowledge Fire to sell Puma products ranging from apparel to shoes and accessories. Puma will hold 51 per cent stake in the JV. The JV targets to open 40 retail stores in India in 2009 and take it up to 140 by 2015.


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Indian ethnic wear chain, Fabindia has picked up a 25 per cent stake in the UK-based womens' wear retailer EAST. The amount was not disclosed and Fabindia has the choice to buy out the remaining stake in the next three years.

Footwear retail company Pavers England Footprint, will be investing US$ 10 million to set up 1,000 stores across India by 2013. Presently, the company has 25 stores in India. The company is also looking at setting up an R&D facility in Chennai for designing footwear, with an investment of US$ 3 million.

In partnership with the Future Group, Axiom Telecom (a mobile retail company from West Asia) will be forming a joint venture company called Future Axiom Telecom Ltd. The 50:50 JV plans an initial investment of around US$ 40 million, and targets setting up 1,500-outlets by the end of December 2009.

Mumbai-based retail food and grocery player Wadhawan Food Retail (WFRL) plans to invest US$ 308.90 million to set up 1,300 stores across India during 2008-2012. The retail chain currently has 200 stores, managed through four branded formats - 'Spinach', 'Sabka Bazaar', 'The Home Store' and 'Smart Retail'.

Spencer's Retail will be establishing 300 additional stores by 2010 with an investment of US$ 102.88 million. Presently, Spencer's has 700 stores, which account for a retail space of 2.5 million, which will increase by another 1.3 million sq ft by 2010.

Similarly, ITC's Wills Lifestyle and John Players plan to expand their presence in tier II & III cities, increasing their retail space around 15-20 per cent. Currently, there are over 50 Wills Lifestyle stores in India.

Shopper's Stop is also planning to invest US$ 205.78 million for increasing its present store space of 1.3 million square feet to 2.7 million square feet over the coming 3-4 years.

Leading footwear retailer Bata India is planning to establish 60 stores in 2009 across the country.

Leading garments retailer Raymonds is planning to establish 50 additional stores in tier II & III cities across the country. According to Aniruddha Deshmukh, President, Rretail and FMCG, Raymond, its retail stores have witnessed revenue growth of 12 per cent in recent months, despite the ongoing economic slump.

Tata Group's Trent, (which operates Westside), is planning to add 8-10 stores every year to its present 31 store in India.

The Future Group will be investing US$ 30.86 per sq ft and US$ 41.15 per sq ft respectively for an additional 3.5 lakh sq ft for Big Bazaar and 50,000 sq ft for Pantaloons stores over the next one year in eastern India.

Bisk Farm, the US$ 41.16 million biscuit brand promoted by Saj Industries, will be launching a bakery retail chain called ‘Bisk Farm, Just Baked'. The company plans to open 100 franchise stores in different parts of the country soon.


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Government Initiatives and FDI PolicyThe government has taken various measures to promote and encourage investment in the Indian retail industry.

The Government allows 100 per cent FDI in cash and carry through the automatic route and 51 per cent in single brands. Besides, the franchise route is available for big operators. To further attract global retailers, the economic survey 2007–08 has suggested a share for foreign equity in all retail trade and 100 per cent in respect of luxury brands and other specialised retail chains.

However, many industry experts feel that the Indian tariff structure has to be streamlined as India levies one of the highest duties and taxes on imported luxury goods. This fuels the growth of the grey market and duty-free purchases, even as the stringent regulatory environment encumbers investment by foreign brands.

Recent updations in Indian FDI Policy10 : Retail and a host of sectors in which foreign direct investment (FDI) is restricted stand to gain from changes in FDI policy that the Cabinet Committee on Economic Affairs (CCEA) cleared recently linking approvals to the concept of control for the first time. The new norms were proposed by the Department of Industrial Policy and Promotion (DIPP) and discussed by a Group of Ministers on February 3.

“The objective of these new guidelines is to make FDI norms simple and transparent according to DIPP,” Home Minister P Chidambaram told when he announced the new measures. The new measures will be implemented with prospective effect.

Under the new guidelines, downstream investments by an Indian company that has foreign investment but is “owned and controlled” by Indians will not be considered FDI. “Owned” in this context will mean having a more than 50 per cent shareholding and beneficial ownership. “Controlled” means that the owners will have the power to appoint the majority of board directors and legally direct the board’s actions. “This means there is a huge opportunity for Indian-owned and -controlled companies to bring in FDI and then undertake downstream investments, without bothering about sectoral limits or restrictions,” said a senior government official.

However, if the investing Indian company is foreign-owned and controlled, then its entire downstream investments will be considered indirect FDI. But there is an exception. If the foreign-owned and controlled Indian company undertakes downstream investments in 100 per cent owned subsidiaries, the amount of indirect FDI will be equal to the percentage of foreign investment in the Indian company.

10 http://www.indianrealtynews.com/retail-market/new-fdi-policy-will-benefit-retail-sector.html


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“Although the proposed policy puts to rest the debate on computing FDI in sectors in which limits apply, it also implicitly allows FDI (without control) in all sectors and industries through downstream route.

Retail, in which FDI is only allowed in single-brand and wholesale cash and carry business, is likely to benefit to a great extent because of the new guidelines. Many foreign players currently operate through the franchisees. If foreign investments can be routed through Indian-owned and -controlled companies, overseas retailers will definitely like to be a part of this.


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Porter’s Five Forces applied to the Retail Industry(the model has been applied to Non-Apparel category)

The intensity of rivalry increases with the following : a. A large no. of firms : As the no. of firms increase, the rivalry increases. Indian Retail Industry is

populated with numerous organized players and is, therefore, has high rivalry.

b. Slow Market Growth : As the market growth slows down, firms fight with each other for market share. On the contrary, in a growing market, firms are able to improve revenues with the

Barriers to Entry

Buyer Power

Threats of Substitute

Supplier Power

Rivalry Matrix


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growing market. Indian Retail Market is a growing market and, therefore, has low rivalry on this account.

c. High Fixed cost : To be studied in greater detail

d. High Storage costs : to be studied in greater detail

e. Low switching costs : When customers can switch from one product to another, the rivalry increases. In retail there are no switching costs, therefore, rivalry is high on this account.

f. Low levels of product differentiation : Low levels of product differentiation creates higher rivalry. Differentiators do not exist in case of retail industry as the products on offer are by and large same. However still, in Indian scenario (which is a growing market), companies can differentiate on the basis of formats. But even with this, the level of rivalry in retail industry remains high on this aspect.

g. Strategic Stakes are high : When a company has the potential for losing market position or for making great gains, the rivalry increases. In Indian Scenario, the rivalry is high on this account as there are large business houses that have forayed into retail and are vying for a large share for the large share of the growing market.

h. High Exit Barriers : To be discussed in more detail.

i. Diversity of rivals : With different cultures, histories and philosophies make an industry unstable. There is a greater possibility for misjudging rival’s moves. Rivalry is volatile and intense. In Indian retail scenario, this factor does not play much, as though different firms have different histories, they are all professionally managed firms that have forayed into retail space

j. Industry Shake-out : A growing market and a potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached when the industry becomes crowded with competitors, and the demand cannot support the new entrants and the resulting increased supply. A shakeout ensues with intense competition, price wars and company failures. Indian Retail Market certainly has not reached this stage where supply supersedes demand. In fact, the gap in demand and supply is actually too large for retail industry in India to grow in a sustained manner over the next few years. The level of rivalry, therefore, remains very low on this aspect.

Threat of SubstitutesThreat of substitutes occurs when price of a product’s demand is affected by the price change of a substitute product. A product’s price elasticity is affected by substitute products. More the substitutes, the demand becomes more elastic since customers have more choices. Threat of substitutes not only


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exists in the same industry, but also, in related industries. Price of aluminum beverage cans is constrained by prices of glass bottles, steel cans and plastic containers. Retail Industry in India is facingcompetition not only from other players, but also from the traditional mom-n-pop stores. With little scope of product differentiation, price discounts are the only way to attract customers. However, since the industry as a while is still in growth phase, and has still more arsenal to be used than just price. This includes physical presence (fight to open as many stores or points of presence as possible) and presence in different formats in order to make themselves more accessible and more relevant to the customers. So, threat of substitutes, although still there has still not converged onto price wars. Having discussed this, today there are areas where one would have multiple departmental stores in less than 500 m radius. Price wars do become eminent in such areas as threat of substitutes does become eminent.Agility and flexibility to the respective stores or stores under that geographic area would determine which ones are in better position to attract / service and retain customers.

Buyer PowerBuyers, in this case are end customers and in some cases smaller departmental stores for the cash-n-carry formats. In Indian scenario, the buyers themselves are not very strong in terms of influencing the pricing or the product. This applies to both the individual customers and to the smaller retail shop owners that are potential customers of the cash-n-carry format.

Seller PowerIn Indian scenario, strength of the suppliers is determined by the category of the product. For example, each of the retailers has its own brand of products like pulses, rice, spices, flour and related products. But when it comes to personal care products like toothpaste, soaps, creams, deodorants, shaving products etc. and home care and other FMCG products like washing powder & soaps brands still enjoy a large part of customer’s mind share11. Phenyls are an exception to the same, with some of the retailers introducing private labels in these categories. Juice suppliers are also facing competition from retailers like Reliance who have introduced there own private label for juices.

Barriers to EntryBarriers to entry are more than the normal equilibrium adjustments that markets typically make. Barriers to entry are unique characteristics that define an industry. Barriers reduce the rate of entry of new firms. There are different sources of barriers :

a. Government creates barriers – The latest amendments by the government in the FDI Policy, wherein, any Indian firm with majority stake in a Foreign-Indian JV can further create a new firm

11 Class discussion learnings


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with the new firm being given domestic treatment has come in as a breather to the ailing Indian Retail Industry. This actually clears the air for increased FDI in retail as in other industries as well.

b. Patents and Proprietary knowledge – these have little or no relevance in the Retail Industryc. Organizational Economies of Scale – This is by far the most important factor in restricting

companies from entering the retail sector. With price discounts being there at the center of the key messaging, economies-of-scale becomes a very important factor for the success of any firm. This also implies that only large firms that have the capacity to build huge capacities in order to usher in economies-of-scale at a fast pace.

The entry / exit barriers can be summarized as mentioned below :


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Indian Retail : A SWOT Analysis

A SWOT analysis of the Indian organized retail industry is presented below:

Strength

Retailing is a "technology-intensive" industry. It is technology that will help the organized retailers to score over the unorganized retailers. Successful organized retailers today work closely with their vendors to predict consumer demand, shorten lead times, reduce inventory holding and ultimately save cost. Example: Wal-Mart pioneered the concept of building competitive advantage through distribution & information systems in the retailing industry. They introduced two innovative logistics techniques – cross-docking and EDI (electronic data interchange).

On an average a super market stocks up to 5000 SKU's against a few hundreds stocked with an average unorganized retailer.

Consumerism on the rise : Consumer sentiment is on a high in India. This, despite the global meltdown. Indian retailers have been able to extract

Indian Economy on a roll : Despite global meltdown, Indian economy has been on a roll. It is, still the 2nd fastest growing economy in the world. Indian market, therefore, still has macro indicators that are among the best in the world for investing.

Weakness

Less Conversion level : Despite high footfalls, the conversion ratio has been very low in the retail outlets in a mall as compared to the standalone counter parts. It is seen that actual conversions of footfall into sales for a mall outlet is approximately 20-25%. On the other hand, a high street store of retail chain has an average conversion of about 50-60%. As a result, a stand-alone store has a ROI (return on investment) of 25-30%; in contrast the retail majors are experiencing a ROI of 8-10%12.

Customer Loyalty: Retail chains are yet to settle down with the proper merchandise mix for the mall outlets. Since the stand-alone outlets were established long time back, so they have stabilized in terms of footfalls & merchandise mix and thus have a higher customer loyalty base.

12 http://www.indianmba.com/Occasional_Papers/OP129/op129.html


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Learning Curve : Indian retail companies are still at the beginning of their learning curves and are, therefore, learning from initial mistakes. Lot of players, as has been discussed in subsequent sections, have taken corrective recourse after initial mistakes as committed by them.

Opportunity

The Indian middle class is already 30 Crore & is projected to grow to over 60 Crore by 2010 making India one of the largest consumer markets of the world. The IMAGES-KSA projections indicate that by 2015, India will have over 55 Crore people under the age of 20 - reflecting the enormous opportunities possible in the kids and teens retailing segment.

Organized retail is only 3% of the total retailing market in India. It is estimated to grow at the rate of 25-30% p.a. and reach INR 1,00,000 Crore by 2010. Nestle India, reportedly, has still draws 95% of its revenues from unorganized retail.

Percolating down : In India it has been found out that the top 6 cities contribute for 66% of total organized retailing. While the metros have already been exploited, the focus has now been shifted towards the tier-II cities. The 'retail boom', 85% of which has so far been concentrated in the metros is beginning to percolate down to these smaller cities and towns. The contribution of these tier-II cities to total organized retailing sales is expected to grow to 20-25%.

Rural Retailing: India's huge rural population has caught the eye of the retailers looking for new areas of growth. ITC launched India's first rural mall "Chaupal Saga" offering a diverse range of products from FMCG to electronic goods to automobiles, attempting to provide farmers a one-stop destination for all their needs." Hariyali Bazar" is started by DCM Sriram group which provides farm related inputs & services. The Godrej group has launched the concept of 'agri-stores' named "Adhaar" which offers agricultural products such as fertilizers & animal feed along with the required knowledge for effective use of the same to the farmers. Pepsi on the other hand is experimenting with the farmers of Punjab for growing the right quality of tomato for its tomato purees & pastes.

Threat

If the unorganized retailers are put together, they are parallel to a large supermarket with no or little overheads, high degree of flexibility in merchandise, display, prices and turnover. Unorganized retail, still dominates the Indian retail space in terms of market share. As we shall see in subsequent sections of the report, the initially hit unorganized players have bounced back to earlier earning levels over a period of time. The Blue Ocean Strategy for the unorganized retailers as discussed in the subsequent sections of the report shall also entail the threat level that could be posed to the organized retailers.


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Shopping Culture: Shopping culture has not developed in India as yet. Even now malls are just a place to hang around with family and friends and largely confined to window-shopping.


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How can mom and pop stores fight the Big Fish (own survey)

Organized retail is a threat to the traditional retail stores in the country. The key advantages that these stores offer consumers over the traditional mom-n-pop formats are13 :

a. Price advantage in terms of price discountsb. Leverage private labels and transfer benefits to end consumerc. Adequate in-store displayd. Greater no. of stock keeping units or SKUse. Professionally dressed, helpful and responsive staff f. Transparent billing and measurementg. Fixed timings

Having counted the advantages, it becomes imperative to enlist the disadvantages that these stores have over the traditional formats14 :

a. Do not offer Free-Home-Deliveryb. Lack of personalized relationship. The chances of better personal rapport that the owner of a

shop can build with customers than an employee of the retail store is far betterc. No real differentiator when it comes to pricing of SKUs like pulses, atta, maida, spicesd. Lack of flexibility and agility. Given their smaller size and hence lesser no. of SKUs, Mom-n-pop

stores have greater agility and flexibility to adapt to newer products.e. Marketing and pricing support from large FMCG companies.f. Higher logistics and operations costg. Poor quality of fruits and vegetables

Survey

Three unorganized retail store owners were spoken to in order to find the impact of organized retail foraying into there space. Names and locations and formats of these store owners are as mentioned below :

a. Rozana Store – Departmental Store – Prashant Vihar, Rohinib. Food King – Departmental Store – Noida

13 Class discussions

14 Own Survey Findings


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c. Kumar Electronics – Electronics Store – Rohini

The approach adopted for questioning was “Probing” and hence there was no specific question format adopted.

Following is a summary of findings :

Rozana Store (to be added – pictures of the store, catchment area)Rozana Store started operations in the Prashant Vihar area around 9 years back. Started by two brothers, Nitin and Manish, the store brought about a fresh lease of professionalism in the departmental store format. The covered area of the store is approx. 800 sq. ft. It addresses a small but densely populated catchment area of Sector 13 and 14 of Rohini and certain portions of Prashant Vihar. The store was the first in the area to sport aisles and products on display shelves. It carried the whole gamut of products a typical departmental store carries. In addition, it also provided a free home delivery up to 3 kms. Transparent and competitive pricing, cleaner store conditions, and the fact that people could walk in and themselves pick items from the store made the store an instant hit in the area. The store also carried private labels for unbranded items like pulses, flour, maida, etc. Quite similar in its marketing approach to the traditional departmental stores, the store did not advertise or carry any promotional campaigns.

Rozana Store under attack from big players : Today the catchment area that fell under Rozana Store is flanked by Reliance Fresh, Spencers and Fair Price stores. Of these, Reliance Fresh is the biggest threat in terms of carrying the items that compete directly with Rozana Store and heavy promotions.

Q & A (carried out in December `08):

Q : Has coming up of Reliance Fresh and other stores in the area impacted business ?A : Initially it did, but gradually in 6 months we have come back to our normal levels of earnings.

Q : What would you attribute this recovery of business to ?A : Reliance is a very large player. It is like an elephant that takes long time to react. Also it cannot introduce short term products that are celebration specific. For example, we sell crackers during Diwali, good variety of rakhis during raksha-bandhan, etc. Reliance did not have these products this time. May be they shall have them next time. Secondly, they do not offer the quality of service that we do. They still do not have free home delivery. Their costs are higher than ours, due to huge staff that they carry. They have to do billing for each and every item even if it is a one rupee item. There also have been multiple instances of products not being available at the Reliance Stores. People have eventually turned to us for those products.


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Q : Why don’t you too stock fruits and vegetables ?A : We never wanted to stock them. They are better when not mixed with departmental store. They have perishable nature and we don’t want to deal in them.

Q : Do you believe in private label strategy ?A : Private labels is not new to us. We have been selling pulses, atta, maida, etc. as private labels. We too make better margins in these category of items.

Q : What about promotions ? Reliance gives gifts on purchase of 5 Kgs of sugar and also has other promotions ?A : They give you gifts out of the money you paid to them. People of this area prefer upfront discounts to gifts. End of the day, they end up paying more to Reliance. Many of our customers have come back and told us the same. We believe in giving upfront discounts / best prices and give you hom-like treatment which Reliance does not and cannot.

Q : What about branded products ? Reliance, must be getting better price on these. A : They have advantage, but at the cost of a disadvantage. First of all, the advantage to them gets beaten down by the fact that companies like HUL have set up their godowns very close to this place. They are offering better margins to large store owners like us. But anyways, the margins are not sufficient for even players like reliance to give discounts. it is yet to be seen as to how do these people (Reliance) sustain these price discounts for the same items over longer periods of time. We have heard Subhiksha is in bad shape and might close down. We must wait and watch who survives to become a player for all seasons.

Q : We heard the new store that had come under PNB closed down after opening up of Reliance ?A : It would have closed down, whether or not Reliance was there. This is because the guy did not have financial leverage. He was playing on credits and loan fund. Only some one who has money muscle can survive in this game. Retail is not everybody’s game.

Q : You address a given catchment area. Suppose we help you create an establishment wherein, other smaller retailers like you (smaller as compared to players like Reliance) are brought under one umbrella. They can then defeat the challenge of size and scale which players like Reliance bring.


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The advantages are cost, opportunity to create more private labels, scale, size which also brings better ability to bargain, marketing support from the executive body which shall be formed from the members of the facilitating members.

What is your take on this ?A : It is a good idea. But implementation will be difficult. First of all, how will you get so many players under one roof. Thereafter, however will you make them adhere to one policy. Also, there needs would be different. All of them might not agree to one set of products or might have differing requirements at different points in time. Finally, how do you ensure that one such store owner does not encroach in on the catchment area of the other. Selection of players shall be of utmost importance. Also as explained earlier, HUL has anyways created such facilities for us. But exploring this would depend on the kind of players that join and the policy document.

Food King Food King is also a large departmental store owned by an individual. Spread over 2000 sq. ft., it is a store inside apartments ATS Greens Village, located on Greater Noida Expressway Sector 92, Noida. It’s catchment area is a captive audience of 700 families residing inside the apartments. The surrounding area is still under development and speaking to people nearby makes one understand that the area would still take at least 5 more years to reach a decent and sizeable population. Food King, therefore, enjoys advantages of captive audience and of exploiting virgin market. Food King (FK) also stocks fruits and vegetables, frozen food, etc. Organized players still were not a threat to Food Kings. Quite recently, however, FK’s captive audience started travelling to Big Bazaar in Great India Place (GIP) for weekly needs of goods and FK has become more of a gap fulfiller as GIP is around 16 kms from ATS. This has not resulted in loss of revenue as the no. of residents also kept growing. But Big Bazaar, due to large stock keeping units SKUs, discount practices, presence of premium brands (this big bazaar stocks them as well) and recently added atta chakki has become vendor of preferred choice for the residents of sector 92. Owner of FK, however, sees sense in getting united and helping each other grow collaboratively rather than getting killed by the onslaught of larger players. When floated with the idea of joining hands under common umbrella the owner was very keen to do so, as according to him, even though competition is not nearby, seeds of it have been sown and can be sensed by Big Bazaar.

Kumar ElectronicsKumar Electronics is an electronics store based in Rohini. It sells television, music system, refrigeration, and air conditioning products of Samsung and LG. It stocks the complete range of products from these two players. The store covers an area of around 1200 sq. ft. The catchment area serviced by this player is Rohini Sector

The survey exercise was carried out to understand the impact of opening of stores like Next and Croma addressing the same catchment area. Here is the questionnaire.


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Q : Has there been any impact of opening up of Croma and Next ?A : Yes, it has impacted business and margins. We have had to reduce prices. However, if someone wants to buy LG or Samsung, it is best to come to us. Next and Croma have high cost of operations and they would not be able to offer the prices we can. If a customer, comes first to us and then goes to them (Next/Croma), there are chances that they came back and buy from us. However, if they go directly to them, we might lose the deal in such a situation

Q : They (Next/Croma) have a good variety. They also stock laptops, mobile phones, ipods, etc.A : yes, they do have an advantage there. But that is not the segment we are addressing.

Q : How do you handle promotions ?A : LG / Samsung, support us for the same. We, however, do not promote ourselves like Next/Croma.We do not have such budgets. Our USP is plain and simple price and service.

Q : Do you get any support from LG / Samsung in order to fight against these players.A : yes, we do. Details, however, cannot be revealed.

Only the Questions / Answers portion is being addressed at this point for the Interim Report. There shall be a competitive analysis for the final report.

Adding to further to the landscape, are findings from a Survey on “Impact of Organized Retailing on the Unorganized Sector” carried and published by INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS (ICRIER) in September `08. The report does give very interesting findings on the various aspects of impact of Organized Retail.

The findings of the report have been discussed below.


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Impact of Organized Retail on Unorganized Retail

Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

The survey was conducted on retail outlets having an average size of 217 sq. ft. which also includes the storage area. The details of size of stores falling in specific segments are as given below :

- The textiles & clothing shops surveyed had a size of 256 sq. ft. - The fixed fruit and vegetable shops surveyed had an average size of 129 sq. ft. - The grocery and general stores have an average size of 216 sq. ft.

Impact on Employment

The study identifies that the impact that organized retail did have an impact on the employment status of unorganized retailers. However, it also states that the impact reduced with time or with the age of the organized retail. The table below gives a snapshot of the findings.

Employment Impact on Unorganized Retail by Age of Organized Retail (Compound Annual Growth)


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Average age is the average age of the organized retail outlet. n.a. : not applicable

The survey also identified that unorganized retail outlets employ more family members than hired labor. On an average they employ 1.5 family members and 1.1 hired employees.

Impact on Turnover and ProfitThe survey does identify that advent of organized retail did adversely impact the turnover and profits of unorganized retail. For a period averaging 21 months the average age off organized retail across the country), the unorganized retail registered a decline of 14% in turnover and 15% in profits. Therefore, the annual decline in the turnover and profit is about 8-9%. The negative impact has been felt most in the West with an annual fall in turnover and profit of 19 per cent followed by the North and East in the range of 10-16 per cent whereas the effect has been virtually insignificant in South.

In this case as well, the study identified that the impact withered with time.

Annual Growth in Monthly Turnover and Profit of Unorganized Retail by Age of Organized Retail

Of the retailers that reported fall in turnover, nearly 60% attributed the fall to advent of organized retailing. The table below gives a clearer picture.

Retailers Showing Fall in Turnover (% of Sampled Retailers)

Category-wise, the impact was perceived more by textiles and clothing shops at 46 per cent and least by fruit and vegetable hawkers at 34 per cent.

Adverse Impact on Unorganized Retailers by Category (% of Sampled Retailers)

Closure of un-organized outletsAn interesting find of the survey was to identify the adverse-most impact of opening of retail stores; that is closure of the stores. It as identified that only 4.2% retail outlets were reported to have got closed subsequent to opening of organized retail stores. Of the stores closed, only 41% attributed the reason to be as direct competition from organized retail.


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Response to Competition The survey identified that unorganized retailers took multiple steps in order to combat the power of organized retail players. The identified steps have been listed below :

Response to Competition from Organized Retail Outlets (% of Sampled Retailers)

The survey indicated increased home delivery sales after the advent of organized retail.

Increased Home Delivery Sales (% of Retailers reporting Home Delivery)


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The survey also suggests that over a third of the retailers (35%) currently provide cash credit to their customers. The average share of credit sales to total sales has been 21 per cent, up from 13 per cent before the opening of organized outlets.

It was also found that lot of retailers are adopting technology in order to give better experience to their customers. Credit card facility, computerized billing, scanning & bar-coding, computerized accounting and inventory control, use of refrigerators/freezers/hot cases facilities, electronic weighing machines, were some of the measures adopted.

Technological Facilities in Use by Unorganized Retailers (As % of Sampled Unorganized Retailers)


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As a response to the organized players, a large no. of unorganized players are planning to avail loans in order to expand or to diversify in the same line of business. The survey shows that 37% of the retailers as compared to 12% of last year were planning to take loan for expanding into newer businesses.

Bank Finance Situation for Unorganized Retailers (As % of Sampled Unorganized Retailers)

Despite competition from organized players, the survey found that a large no. of unorganized players indicated their will to continue in the same business. They, of course, had differing sets of reasons for the same. The chart below summarizes the same :


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The survey also tried to identify whether proximity to organized retail outlet had a greater impact on the fortunes of the unorganized retail player. Therefore, there was a second category of outlets that were situated away from the organized retailers. The survey does not define the distance of these unorganized outlets from the organized ones. This category of outlets is termed as ‘control sample’ for the purpose of the survey.

Size and Age of OutletsThe average size of outlets for the control sample was 166-167 sq. ft., which excluded the storage spaceor the godown. The average age of these stores was 9 years. The size and the age were similar in both the treatment as well as control samples.

Employment SituationOverall, the control sample does show any decline in the employment status, which was the same for treatment sample as well.

Impact on Turnover and ProfitThe control sample records an overall growth in turnover of about 2 per cent and profit of about 5 per cent in the past one year; in the treatment sample, both turnover and profit declined by about 10 per cent per annum. The dissimilar impact as between the treatment and control samples is also seen in theproportion of retailers who experienced a decline in turnover or profit. In the treatment sample, overall 50-51 per cent of unorganized retailers indicated a decline 44 in turnover and profit, while that proportion was only 28-29 per cent in the control sample.


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Amongst the unorganized players that reported loss of revenue and of profit, the proportion of retailers that attributed the prime reason as ‘competition form organized retailers’ was a high of 50%+ in treatment sample, as compared to a low of about 25% in case of control sample.

Reasons for Decline in Turnover/ Profit: Treatment Sample vs Control Sample (% of Sampled Retailers Subject to Decline)


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Consumer Survey

The objective of the survey was to identify drivers of consumer behavior for shopping/visiting an organized store and reasons for visiting an unorganized store. The survey conducted exit interviews 505consumers.

Income Level of RetailersThe survey identified that consumers shopping primarily at Organized Outlets have higher income levels than consumers shopping at unorganized outlets. However, the middle class including the aspirers (covering monthly household income between Rs.10,000 to Rs. 1,00,000) which is the mainstay for retail, shop at both organized and unorganized outlet.

Average Monthly Household Income of Shoppers (% Share)

Location AdvantageThe survey identified location as a comparative advantage for unorganized retailers. Location advantage is derived from the convenience an outlet offers to consumers given the ease of accessibility of the outlet. The survey identified that the mean distance to the residence for consumers at unorganized outlets is 1.1 km compared to 2.6 km for consumers at organized outlets.

Preference for Organized vs. Unorganised RetailersThe customers at organized retail reported that the main reasons for shopping at these outlets were :

a. Qualityb. Lower price


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c. One-stop shoppingd. Choice of more brands and productse. Option to shop for familyf. Fresh stocks

On the other hand, the customers who shopped at unorganized retail outlets stated the following as the reasons for doing so :

a. Convenience due to proximity to residenceb. Goodwillc. Credit availabilityd. Possibility of bargaininge. Choice of loose itemsf. Convenient timingsg. Home delivery

The survey also identifies that shoppers do not shop exclusively at organized outlets or unorganized outlets. The spend gets distributed between the two kinds of outlets and depends on product category being purchased. The table below gives a quick summary of split-of-spend between organized and unorganized retail for shoppers who predominantly shop at organized retail outlets and for those shoppers shopping predominantly at unorganized retail outlets.


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Share of Average Monthly Spending by Product Category of Consumers at Organized/ Unorganized Outlets (% Share)

The above table shows that amongst customers that spend predominantly at organized retail outlets, 30% of their total spend gets spent at unorganized retail outlets. The goods purchased by these shoppers at unorganized outlets include staples, cooking oils, toiletries, fruits & vegetables, etc.

For shoppers who prefer shopping at unorganized retail outlets, nearly 40% of their spend goes to the kitty of organized player. The goods purchased by these shoppers at organized retail outlets include predominantly toiletries, household cleaning products and readymade garments.

While 32 per cent of sampled consumers declared an increase in spending, 21 per cent indicated a decrease and the balance no change. Thus the arrival of organized retail has enhanced spending ingeneral. The reasons indicated for higher spending have been mainly the purchase of larger quantities due to wider range of products, availability of attractive offers like discounts and promotional schemes, and access to better quality products with higher prices.

Savings from organized retail outletsDo shoppers who shop at organized retail outlets save money? The survey identified that these shoppers do save money, but, the extent of saving depends on the type of format. The table below summarizes the findings of survey.


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Savings from Buying at Organized Outlets by Format (as % of Spending)

The above table clearly shows that discount stores offer the maximum savings opportunity to the shoppers. It also shows that percentage points of savings are the highest in cases of lower spends. This goers to show that small spenders save more from shopping at organized retail outlets.

As a further probe into the finding above, the survey identified that it was mainly the household incomes that save more at organized outlets. The table above clearly shows the findings.

Savings from Buying at Organized Outlets by Format (as % of Spending)

Consumer’s view on Opening of More Organized OutletsThe survey tried to capture the opinion of shoppers about opening up of more organized retail stores. Among the shoppers at organized retail store outlets, 73% wanted more organized outlets, whereas among shoppers at unorganized retail outlets, only 34% wanted more organized retail outlets.


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Consumer Survey at Unorganized Fruit and Vegetables Outlets

The survey above so far had not captured views of customers who shop at pure fruit and vegetable shops located in fixed markets or from the push cart hawkers. The survey carried out separate exit interviews of about 308 customers shopping at these outlets.

Income level of ConsumersThe split of income levels of the consumers shopping at pure fruit and vegetable outlets is summarized in the survey as given below.

Average Monthly Household Income of Consumers at Unorganized Fruit & Vegetable Outlets (% Share)

About 52 per cent of the sampled shoppers at fixed and push-cart fruit and vegetable vendors are the low-income households (monthly income up to Rs. 10,000). Within the sample, it is observed that about 37 per cent (114 numbers) of consumers shop also from organized retail outlets and the majority (63 per cent) shop exclusively from unorganized outlets. If we consider the part of shoppers who exclusively shop from these outlets, 66 per cent of them belong to the low-income group (Table 4.23). Among those who also shop from organized outlets for fruit and vegetables, the majority (71 per cent) belongs to the middle-income category (monthly household income from Rs. 10,000 to Rs. 1,00,000).

Attractiveness of Shopping from fruit and Vegetables vendorsFollowing are the reasons as sighted by consumers shopping at pure fruit and vegetable outlets for their preference.

a. Convenience on account of proximityb. Bargaining opportunityc. Better qualityd. Home deliverye. Lower price


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f. Choice of varietiesg. Credit availabilityh. Convenient timings

Own survey : Own survey also revealed that customers were not satisfied with the quality of fruits and vegetables available at the retail stores. They, therefore, preferred the all fruits and vegetable hawkers irrespective of their income level. The survey was conducted in the newer residential complexes that had come up in Noida and in Gurgaon. The residents in these complexes fell in the income bracket of INR 100,000 – 10,00,000.

Share of Purchases, Organized Vs UnorganizedOn an average, consumers buying from unorganized fruits nad vegetable outlets, make 11 purchases in a month adding up to an average of INR 1085. Nearly 81% of their purchase comes from unorganized fruits and vegetables sellers.

Share of Purchases of Consumers at Unorganized Fruit & Vegetable Outlets (% Share)


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The table above gives more details on the buying behavior of customers who shop for fruits and vegetables predominantly from unorganized players.

Preference of Additional Retail OutletsThe survey also tried to identify if these consumers preferred opening up of additional organized outlets. About a third of the respondents answered in the positive. About 29% did not want any additional organized outlets and 38% did not have any opinion.


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Impact of Organized Retailing on Intermediaries, Farmers and Manufacturers

The ICRIER survey also identified the impact of organized retailing on intermediaries, farmers and manufacturers. Following is a quick summary of the findings in the study.

Impact on Intermediaries

The study did not find any evidence so far of adverse impact of organized retail on intermediaries. There is, however, some adverse impact on turnover and profit of intermediaries dealing in

products such as, fruit, vegetables, and apparel. Over two-thirds of the intermediaries plan to expand their businesses in response to increased

business opportunities opened by the expansion of retail. Only 22 per cent do not want the next generation to enter the same business.

Impact on Farmers

Farmers benefit significantly from the option of direct sales to organized retailers. Average price realization for cauliflower farmers selling directly to organized retail is about 25 per

cent higher than their proceeds from sale to regulated government mandi. Profit realization for farmers selling directly to organized retailers is about 60 per cent higher than

that received from selling in the mandi The difference is even larger when the amount charged by the commission agent (usually 10 per

cent of sale price) in the mandi is taken into account.

Impact on Manufacturers

Large manufacturers have started feeling the competitive impact of organized retail throughprivate label, price and payment pressures.

Manufacturers have responded through building and reinforcing their brand strength, increasing their own retail presence, ‘adopting’ small retailers, and setting up dedicated teams to deal with modern retailers.

Entry of organized retail is transforming the logistics industry. This will create significant positive externalities across the economy.

Small manufacturers did not report any significant impact of organized retail


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Conclusion and recommended Blue Ocean Strategy for Unorganized Retail

The above study clearly indicates that Indian retail Industry is poised for unprecedented growth, most of which shall clearly come from the organized players. Organized players, which enjoy about 3-5% of the total retail market in India, are at a very nascent stage of their growth so is the retail industry. With growing consumerism and income levels, despite the global meltdown, Indian scenario still looks quite positive and conducive for organized retail to continue its growth trajectory; albeit the rate of growth shall come down.

The sector has received positive impetus from Government of India. The recent changes in the FDI policy norms as announced are a positive step in this direction. Retail and Real Estate go hand in hand. Therefore, a positive boost in retail would re-energize the limping real estate sector.

Given that the players are fairly new to the game, the coming few months shall see some corrections and re-organizations (including consolidation) in the industry that shall only propel further growth opportunities.

The findings also reveal that, the unorganized and the organized retail players can co-exist. Each have their own set of merits and value that they bring to the costumers.

The Blue Ocean Strategy for the retail Customers

While we envisage that unorganized retail players can co-exist with the organized ones, however still, there are be certain specific areas to be worked upon. It is not hard to imagine that unorganized players shall not have a marketing department of their own. They, therefore, are not and would not be able to run their own marketing campaigns. Nor would they be able to compete with organized players in the no. of SKUs they stock and the discounts that they offer on branded items. Like wise, organized players would have their costs of operations certainly higher than that of unorganized players, but this advantage of unorganized players shall wither with time as organized players attain scale. What is being done here is that various success factors of the retail industry have been listed and the two categories of players have been compared on a strategy canvas on these factors.

The strategy canvas is the central diagnostic and action framework for building a compelling blue ocean strategy. The horizontal axis captures the range of factors that the industry competes on and invests in, and the vertical axis captures the offering level that buyers receive across all these key competing factors.

The strategy canvas serves two purposes. Firstly, it captures the current state of play in the known market space. This allows you to understand where the competition is currently investing and the factors that the industry competes on. Secondly, it propels you to action by reorienting your focus from competitors to alternatives.


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Organized retail players clearly have advantage in the areas of price discounts on both branded items as well as private labeled items, in-store display, No. of SKUs (organized players have greater no. of SKUs), professionally dressed staff, transparent billing system, mktg campaigns, inventory turnover and easier credit facility. The areas where they have disadvantage vis-à-vis unorganized players is timings (unorg. Players offer more comfortable and stretched timings), free home delivery, personalized relationship, cost of upstream logistics (simplified logistics due to heavy usage of rickshaw or van, doorstep delivery by most manufacturers). One area where unorganized players are at par with organized players is the private label strategy for pulses, maida, etc. Both categories of players make good margins in these products and also off-load the price discounts to customers.

Current Strategy Canvas

Pri

ce D

isco

un

ts o

n B

ran

ded

Item

s

Pri

vate

Lab

els

(pu

lses

, flo

ur,

etc.

)

In-S

tore

dis

pla

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. of

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Us

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fess

ion

ally

dre

ssed

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pfu

lan

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ff

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nd

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t

Tim

ing

s

Fre

e H

om

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eliv

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aliz

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elat

ion

ship

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n M

ktg

. Cam

pai

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s

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f F

nV

Ag

ilit

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du

cts

Lo

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tics

an

d O

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ns

Co

st

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y C

red

it F

acili

ty

Org. RetailUnorg. Retail

Customer Focused Success FactorsStructural Success Factors

The canvas above represents the current scenario.

The recommended canvas has been created after applying the following two frameworks viz. Red Ocean Vs. Blue Ocean Strategy and the Four Actions Framework.

From the Red Ocean Vs. Blue Ocean framework, it would be interesting to identify what is it that could make organized players irrelevant.

The recommendations below are based on assumptions that the two most critical factors contributing to threat from organized players are their size (scale), and ability to do marketing & in-store promoting. If these two factors are made available to unorganized players, they would annihilate the very factors of existence of organized players.

This, however, can be achieved by creating collaboration between various unorganized retailers. For the purpose of our discussion, we shall call this arrangement as Collaborative Syndicate. Under this, varioussmaller retailers shall have to come under one umbrella. There shall have to be a qualifying criterion for retailers, in order to ensure participation by serious, enterprising, growth focused unorganized retailers. Once selected, an executive body shall have to be formed in order to formulate rules and policies of the syndicate. The syndicate shall have to cross the borders of cities and states in order to attain national importance and relevance. The executive body shall work not only to ensure collaboration, but shall also work to provide these retailers marketing and technology support. The funding and expenditure of syndicate shall have to come from the contributions made by the retailers on monthly basis.

The advantages envisaged shall be cost, opportunity to create more private labels, scale, size which also brings better ability to bargain, marketing support from the executive body.

From the Four Actions Framework, following are being suggested :

Eliminate Raise

In-Store DisplayTransparent Billing & Measurement

Reduce Create

Collaborative SyndicateFruits and VegetablesMktg Campaigns

Raise : Improving In-store display and bringing about transparent billing system are quick-fix measures that the unorganized players maybe able to take.


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Create : Collaborative Syndicate (as discussed above), addition of Fruits and Vegetables as product line and Mktg. Campaigns (suggestively undertaken after the syndicate formation) are new things being suggested for unorganized players.

The above is based on a self rating attributed to each of the success factors based on the ease or difficulty of execution. The same has been discussed below. High and Low represent relative ratings of organized and unorganized retailers.

Success FactorsOrg. Retail

Unorg. Retail

Easy –Difficult

Remarks

Price Discounts on Branded Items High Low 3Small Retailers lack scale which is required to give aggressive discounts

Private Labels (pulses, flour, etc.) Same Same

In-Store display High Low 2Would require time and money investment, but implementable.

No. of SKUs High Low 3

Difficult to increase as are of store is fixed. How & where do you accommodate new SKUs

Professionally dressed, helpful and responsive staff High Low 2

Implementable easily, though, this does not seem to have any customer relationship impact.

Transparent billing and measurement High Low 1

Most needed and easily implementable. Even manual systems can be implemented.

Timings Low High

Free Home Delivery Low High

Personalized Relationship Low High

Own Mktg. Campaigns High Low 2Small retailers lack the money muscle to execute.

Quality of FnV (Fruits and vegetables) Low NA Most do not stock FnV.

Agility to Introduce newer products Low High

Logistics and Operations Cost Low High

Easy Credit FacilityMarketing Support from Manufacturers --- ---

1 – Easy2 – Somewhat Difficult3 – Difficult

The new Strategy Canvas, therefore, shall look like :


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Pri

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Ite

ms

afte

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Mar

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Org. RetailUnorg. Retail

Customer Focused Success FactorsStructural Success Factors


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Policy Recommendations

On the basis of the results of the surveys and the review of international retail experience, the ICRIER study made the following major recommendations:

Encourage co-operatives and associations of unorganized retailers for direct procurement from suppliers and farmers.

Ensure better credit availability to unorganized retailers from banks and micro-credit institutions through innovative banking solutions.

Facilitate the formation of farmers’ co-operatives to directly sell to organized retailers. Encourage formulation of “private codes of conduct” by organized retail for dealing with small

suppliers. These may then be incorporated into enforceable legislation. Simplification of the licensing and permit regime for organized retail and move towards a

nationwide uniform licensing regime in the states to facilitate modern retail. Strengthening the Competition Commission’s role for enforcing rules against collusion and

predatory pricing.


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ANNEXURES


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Annexure A : “Logistics” The Core Retail Function

Supply Chain Management is where the battle for next supremacy is being raged amongst the retail players. Logistics is clearly a core function of retail. And it is not just the upstream logistics, but also the down stream logistics. With this view, a quick study was undertaken in order to understand the upstream logistics for unorganized retail players. Following are the findings as have been captured.

Following is the Supply Chain for Nestle India.

It was learnt that Nestle India has 6 factories across the country form where the goods get distributed to Distribution Centers (DC). Nestle India has about 30 DCs in India, which is roughly 1 for every state. The goods are then transferred to nearly 2000 Distributors across the country, from where they reach 1,00,000 Retailers of Nestle products.

Some facts learnt :

Unorganized retailers still form 95% of the revenue generators for Nestle.

Distributors here are paid handling charges.

Nestle implemented “Order Management System” linking the distributors directly with factory. This helped reduce Distributor Inventory levels from 4 weeks to 1.5 weeks

Factories x 6 Distribution Centers x 30

Distributors x 2000

Retailers x 1,00,000 approx.

The Indian Retail Sector (Prepared as of Mar 2009)

Documents

Transcript of The Indian Retail Sector (Prepared as of Mar 2009)