INDIAN ORGANIZED RETAILING SECTOR: CHALLENGES AND OPPORTUNITIES PGDM (SEMESTER I) NDIM For class discussion at NDIM

INDIAN ORGANIZED RETAILING SECTOR: CHALLENGES AND OPPORTUNITIES

PGDM (SEMESTER I)NDIM

For class discussion at NDIM

FDI

• Stands for “Foreign Direct Investment” “Interested Investors beyond the borders of a

country being allowed to invest in local economy either through participation or partnership with a local company or directly as per regulations in force”

• India- 2 Routes ; Automatic & Government• The controversy mostly is on FDI in Retail

RETAILING BUSINES: CONCEPT

• Retail is the sale of goods and services from individuals or businesses to the end-user.

• Retailing is the last point of contact between sellers and buyers.

• Retailers are part of an integrated system called the supply chain.

• A retailer purchases goods or products in large quantities from manufacturers directly or through a wholesale, and then sells smaller quantities to the consumer for a profit.

INTERNATIONAL RETAILOne of the world’s largest industry exceeding US $ 9 trillion.

Total retail contribution in World GDP is 27%. Organized retail in US accounts for 22% of GDP. The Share of organized retail in developing markets ranges between 20% to 55%

Dominated by developed countries. US, EU & Japan constitutes 80% of world retail sales

Market size: USA= US$ 2,350 Bn, UK= US$ 406 Bn, China US$ 313 Bn

Highly evolved US market has Wal-Mart taking only 8% market share UK market has Tesco with only 13.4% market share

China market still does not have a clear leader.For class discussion at NDIM

INTERNATIONAL RETAIL


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Current share of organized retail as a % of total retail

Current Share of Organized Retailing (% )

USA 80

UK 80

Western European Countries 70

Brazil 40

Thailand 40

Korea 35

China 27

Malaysia 22

India 05

Country

DATA : 2010 -2011

RETAIL: ASIAN FALLOUT CASESTHAILAND :

Since entry of METRO, CARREFOUR, and METRO – they have captured 10% of market share.

Predatory pricing leading to profit margins below 1%.

Several local retailers shutting shops and about 60000 retailers unemployed and out of business

CHINA:

Carrefour and Wal-Mart making significant inroads to take charge of China Market.

Small local retailers finding it difficult to survive and cope with competition, some forced to close shops


RETAIL: ASIAN FALLOUT CASES

INDIA DEBACLE:

LILLYPUT: Bankruptcy as it is saddled with huge debt pile up

Subhiksha: Improper business planning as they adopted aggressive expansion plans without stabilizing their cash flows

Working capital problems mounted, resulting in delays of payments to vendors. Severe financial crunch and hence had to shut operations

Pantaloons and Reliance: Saddled with huge debts, finding it difficult to fund their expansion programs, scouting for M&As options.


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Indian Retail Poised For Significant Indian Retail Poised For Significant GrowthGrowth……

Indian Retail expected to grow close to 12% p.a. in the next 10 years

*Projected


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Retail Business: Rapid Retail Business: Rapid Transformation AnticipatedTransformation Anticipated

Modern retail expected to gain 12 -14% additional share in 5 years

2007 2012



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Retail Business: Factors driving Growth

1. Healthy GDP growth rate and commitment to economic

reforms

2. Burgeoning Middle Class Population and rising

disposable income

3. Entry of MNCs and availability of wider range of products

for buyers

4. Younger minds and rising income levels.

5. Dramatic change in consumption habits and aspiration

for better lifestyle


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4. Rising awareness due to sophisticated market

communication pattern

5. Changing role of women and children in decision making

process

6. The media revolution and the publicity and brand

promotion measures

7. Consumers desire for having access to better ambience

and diversity of choice under one roof


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Plastic Revolution: Increasing use of credit cards for categories relating to Apparel, Consumer Durable Goods, Food and Grocery etc.

Urbanization: Increased urbanization has led to higher customer density areas thus enabling retailers to use lesser number of stores to target the same number of customers.

Distance Coverage easier: With increased automobile penetration and an overall improvement in the transportation infrastructure, covering distances has become easier than before.


OPTIONS FOR RETAILING

Retailing can be undertaken from • Fixed Locations• Door 2 Door• Online Portals• Through Net Working

Other Supporting Services• Delivery• Short Term Credits • Service Supports

INDIAN RETAIL: TYPES OF RETAILING

Organized Retailing: Refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include, hypermarkets and retail chains, and the privately owned large retail businesses.

Organized Retailing offers a different experience and ambience under one roof under organized framework starting from entry into shop till exit after billing and delivery

Unorganized Retailing, Refers to traditional formats of low-cost retailing. For example: - the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, pavement vendors, etc.

Share of organized sector in total retailing business is expected to touch around 13% depending on the pace of reforms and interests of foreign/ private investors to diversify in this field For class discussion at NDIM

INDIAN RETAIL: FORMATS OF RETAILING

Independent Retail Shops/ Own Retail Showrooms – SONY, LG, Walt Disney, HITACHI

Corporate Retail/ Supermarket Chain – Food Bazaar, Big Bazaar, SPENCERS, etc

International Franchising system – McDonalds, Pizza Hut, KFC

Hyper Markets like Westside, Ebony: The preferred format for international retailers entering India.

Convenience Stores like Mother Dairy, 24x7,

Departmental Stores: BENZER, SHOPPERS STOPFor class discussion at NDIM

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Retail : Contemporary Trade Formats

* Other formats include specialty stores in Apparel, Footwear, Watches, Furniture & Furnishing, Toys, Convenience formats etc.

Multiple formats would be introduced in a simultaneous rather than a sequential manner in

IndiaFor class discussion at NDIM

INDIAN RETAIL : TYPES OF PLAYERS

BIG PLAYERS

• FUTURE GROUP: FOOD BAZAAR, BIG BAZAAR, PANTALOONS

•RELIANCE AND RPG GROUP – INCLUDING SPENCERS, MUSIC WORLD RELIANCE DIGITAL, AND RELIANCE FRESH

• TATAS: WESTSIDE AND CROMA

SMALL PLAYERS :

• VISHAL MEGA MART• CANTARBIL• SHOPPERS STOP• EBONY• NATURES ESSENCE


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Specialty Retailing gathering prominence

Specialty Retail is Emerging in the following Specialty Retail is Emerging in the following fields:fields:

Food and Grocery – MOTHER DIARY, Food and Grocery – MOTHER DIARY, RELIANCERELIANCE

Apparels – SEVERAL SUCH IN INDIAApparels – SEVERAL SUCH IN INDIA Entertainment – MUSIC WORLDEntertainment – MUSIC WORLD Health Care - APOLLOHealth Care - APOLLO Travel & Tourism Travel & Tourism Telecom & ITTelecom & IT Office supplies and Stationery - W H SMITHOffice supplies and Stationery - W H SMITH


INDIAN RETAIL : CHALLENGES


• Lack of right formats

• No investment in supply chain infrastructure

• Sole focus on front end and reduced focus on back end linkages like cold storage, warehousing facilities, logistics, farmer development, etc

• Minimal focus on prudent customer service over the fast life cycle

• Lack of trained and competent manpower and ground staff - critical constraint indeed

• Non availability of credit at competitive rates – leading to high capital costs

INDIAN RETAIL : CHALLENGES


• Inconsistent availability, quality, and pricing

• Spending by consumers visiting malls, retail shops not encouraging and promising as expected – mainly window shopping

• High Real Estate Prices and rising Rentals

• Industry margins very thin as low as 5-6% and therefore volume growth to support generation of positive cash flows

• Taxation structure skewed: e.g. sales tax, VAT, Import duties, etc

• FDI policy announced – but still some ambiguity pending

RETAIL: CRITICAL SUCCESS FACTORS


• The differentiating factor - Product decisions should be based on local market dynamics such as customer diversity, account needs, competition, etc

• Location of stores: Cluster Approach, proximity to areas where potential customers reside, and centralized warehousing

• Convenience: Approach, Parking, Flexible Timings, Amenities, ambience

• Creating tangible/ Intagible assets: outputs, goodwill, technology, brand equity,

RETAIL: CRITICAL SUCCESS FACTORS


• Building the right workforce: Ability to deliver positive experience for consumers, product knowledge, communication, etiquettes, personality, etc

• Aggressive Customer Relationship Management: Loyalty Programs, Customer experience to be enriching, Response to customer feedback, sound customer interaction, resolving queries

• Redesigning supply chain framework: Better inventory control mechanism, availability of appropriate storage facilities, and replenishment of shelves with products preferred by customers. Stabilizing procurement and replenishments cycle, mimize logistics costs, prefer direct sourcing, etc

INDIAN RETAIL : SOME PROGRESS


• Quality of merchandising and packaging improving and visible

• Firms investing in staff and sponsoring people for training and development workshops

• Ambience and facilities in malls – a distinct improvement

• Multi Brand Stores offering a plethora of choice for customers

• Availability enhanced for domestic and foreign brands

INDIAN RETAIL : SOME PROGRESS


• Organized retailing stores like Big Bazaar, Shoppers Stop expanding into tier II and tier II cities

• Metro, StarBucks – TATA, Marks and Spencers are already here

• Big players like Walmart, Carrefour, IKEA, TESCO planning to enter India in a big way either independently or through Joint venture

• Some have set up back end office centres e.g. TESCO, WAL-MART

• Rural Opportunity interesting for organized retailers

FDI: WHAT IT IMPLIES

“ Foreign Direct Investment “

Allowing Interested Investors from Abroad to Invest either directly or through participation with Local Players in Various Sectors of Economy

i.e. Joint venture or 100% wholly owned subsidiary

India & FDI

1. Automatic Route

• FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

• Policy allows FDI in retail under above

India & FDI

2. Government Route

• FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

• Most Oppositions revolve around FDI in Retail

INDIAN RETAIL : FDI STATUS


In 2006, 51 percent investment in a single brand retail outlet was permitted . FDI in Multi-Brand retailing was prohibited in India.

Recent Reforms Proposed: 51% FDI in Multi-brand outlets, and 100% FDI in single branded stores allowed.

FDI in Multi Brand Retail is opened up to 51%, with the following conditions:

1. Minimum investment of US$ 100 million 2. 50% of US$ 100 million to be invested in the back-end

infrastructure 3. Also, 30% of sourcing to be done from small scale industries 4. Stores can be opened only in cities with a minimum population

of 1 million 5. States will have freedom to decide entry of international

retailer with 51% FDI

INDIAN RETAIL : BENEFITS OF FDI


Competition - Catalysts to spur competition & innovation in retail industry.

Consumers - Improved product availability, wide choice, better quality & reduce wastages , and Consumers to get best products and services at reasonable price.

Back End & Supply Chain Improvement : Inadequate storage facilities cause heavy losses to farmers – so entry of foreign firms to bring in best supply chain practices and efficiency in back end operations

Capital and Tax contribution: Foreign firms infuse capital, and also spur investment and capital formation. Also, business activity earnings are subject to tax resulting in additional income for the government.

INDIAN RETAIL : BENEFITS OF FDI


Food inflation and fluctuation in food prices can be controlled.

Better Realization for Farmers : FDI to ensure better realization for farmers & producers, due to direct procurement from farmers. Absence of complex chain of distributors leads to reduced inefficiency in terms of cost disadvantages , non timely delivery, etc

Economic Growth : Sourcing from India will increase & Exports to get significant boost. India can also become a shopping destination for the world. Certain sectors like textiles, handicrafts, etc would stand to gain

Employment Will Increase - Government says lot many jobs will be created for people - In India, where unemployment is a major problem, foreign companies that come to India, will offer jobs to Indians.

INDIAN RETAIL : DISADVANTAGES OF FDI


Job Losses: Retail industry in India is the second largest employer after agriculture, Any game changing situation can lead to heavy job losses particularly in rural areas and small cities

Power of Scale: Unfair competition and abilities of big retailers to sustain losses can lead to large scale exit of domestic retailers, especially the small family managed outlets.

Prefer Localization: Indian retail sector including organized sector is still at an infancy and nascent stage. It is critical that the retail sector is allowed to grow and consolidate first, before opening to foreign investors

The fallout in Thailand and China: Government, opened its door to invite the large retailers. Government now forced to give financial assistance as local entities forced to lay off staff because Wal-Mart and others has been ruthlessly pressing down on the supplier’s margin.

Market Power: Market dominance by foreign players may exert severe competition for domestic retail outlets.

INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST


STARBUCKS – TATA: Already commenced operations in India in Tier I cities and select outlets have opened up, and based on the success propose to open more outlets.

BURGER KING: Huge expansion plans across India, China, and Indonesia as the management perceives that prospects are highly encouraging in emerging nations.

BHARTI – WALMART: Currently, the Joint venture terms have not been finalized and the exit of top management on account of bribery charges has affected the brand identity of WALMART. The Cash and Carry Model continues to exist for the time being.



IKEA: Swedish Furniture Chain – Unique retail model – proposes to invest sizeable capital and operate independently. The business model is zero inventory carrying costs, DO IT YOURSELF APPROACH

TESCO: One of UKs biggest supermarket chain and operates In various European Countries – Proposes to commence operations once policy guidelines are clearer and political uncertainties are diluted.

RELIANCE – HAMLEY: An innovative super specialty retail venture between Reliance Group and HAMLEY’s of UK for setting up a retail venture in sports goods, toys, etc

DECATHLON – One of the largest French Sport Retailer had shown interest in opening up stores in India, but have deferred their immediate plans due to policy uncertainties and high inflation trends



UNIQLO and H & M: Japan’s Uniqlo and Sweden’s Hennes and Mauritz (H&M) are set to be among the next global apparel labels that will have their own stores in India, although they are wary about high real estate prices and other constraints.

COSTCO – Fifth Largest retailer and wholesale warehouse Chain displaying national and regional brands at affordable wholesale prices below traditional wholesale or retail outlets.

Other firms like CARREFOUR, LOTUS ARTS (THAILAND) are planning to enter India.

Some have expressed interest in operating in Tier II and Tier III cities for scalability and economies of scale advantages. Many organizations may look at city outskirts or even micro markets as their next big bet.

FOREIGN PLAYERS: GOING SLOW


Finding quality retail space and affordable rentals may prove to be a problem. However, Mumbai and Delhi are popular destinations due to relatively better business prospects.

The rental cost/ revenue ration could provide to be unviable, especially when real estate costs are high and pay offs occur much later.

Impending elections for 2-14 induced Political uncertainties and lack of regulatory reforms leading to delays.

India has not been able to attract sizeable foreign investments in comparison with countries like China and Malaysia within the region. Issues such as high inflation, large budget deficit and the slow pace of regulatory reforms are weighing down on business sentiment.

Oppositions

Oppositions (Critics)

1. Critics are vocal that it will bring in the demise of many small shops leading to massive unemployment & they command substantial following particularly amongst wide spread illiterate population

2. Big Giants will soon take over the control of the economy with superior powers & resources at their command

Oppositions

3. Local economy & suppliers will not benefit but will be pressurized to drop prices by Giants

4. India does not require foreign retailers but home grown companies & traditional markets can serve the purpose

5. Work will be done by locals, but profits will go to foreign companies

Benefits

Benefits (Experts Opinion)

• Benefits, if India is able to succeed in attracting organized retail industry with required supports, is also significant as per opinion of experts

• Will bring in massive employment in organized sector with benefits to locals (China experienced employment growth rates of 9 m over 3 yrs) albeit with changed skill sets

Benefits

• Massive Infrastructure up-gradation will come in increasing the overall efficiency in the economy, which will reduce the current huge amounts of wastage occurring to the economy

• Increased tax revenues and profits retained within the country for local portion. History in other countries negates critics

• Multi brand stipulation requires 30% local sourcing which will benefit the local industry

• Will benefit end consumers in the area of price, convenience & quality of products & packaging

FDI in Retail (Summary)

• Take Aways• In India currently FDI in Retail is far below

International Scene• GOI has announced policies to Invite FDI

interests in this sector • There are lot of oppositions & pro’s as well in

the opinion of Experts on either side

For the class

• What is your opinion & What should be the future direction to maximize benefits to the country & minimize opposition fears?

Thank You

Documents

INDIAN ORGANIZED RETAILING SECTOR: CHALLENGES AND OPPORTUNITIES PGDM (SEMESTER I) NDIM For class discussion at NDIM