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Indian Retail Industry Overview

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Growing at a compounded annual growth rate (CAGR) of 15 per cent overall retail
market in India, including both organized and unorganized sectors, is likely to reach a
whopping Rs 47,00,000 crore by 2016-17, according to recent assessment by ASSOCHAM
and Yes Bank. The retailing sector in India is estimated to account for nearly 20% of the
country’s gross domestic product (GDP) and 8% of total employment.
Store-based retailing is anticipated to grow by 44 percent, with food and grocery
retail constituting a major chunk of the total retail market. The factors driving the growth of
the organized retail sector include:
 Higher incomes driving the purchase of essential and non-essential products
 Evolving consumption patterns of Indian customers
 Changing demographics, and growing trend towards nuclear families
 New technology and lifestyle trends creating replacement demand
 Increase in rural income, as well as higher urbanization
 Increase in easy access to credit, and greater consumer awareness
 Growth of modern trade formats across urban, Tier I, Tier II and Tier III cities and
towns
Industry Structure
The Indian retail industry has primarily been dominated by the unorganized
segment. The primary reason for the higher share of unorganized retail emanates from the
fact that rural sales account for more than one-half of the total industry sales. Even in urban
areas, a significant proportion of the retail revenue is generated by unorganized retailers
such as kirana stores, fruit & vegetable vendors, petty shops, hawkers, etc.
Retailing in India is highly fragmented, and is dominated by independent owner-
managed outlets commonly known as “mom & pop stores”. These stores number nearly 12
million, and more than 80% are small family businesses utilizing household labor. One-half
(50%) of these retail outlets specialize in the food & grocery.
Food and groceries has the biggest share in the overall retail pie, accounting for the
around 76%. However, it has the lowest organized retail penetration. Within the organized
retail sector, apparel constitutes the largest segment. “Food and Grocery” and “Mobile and
telecom” are the other major contributors to this segment. The consumer is more brand
conscious in Consumer Electronics, Footwear and to some extent in Apparels. For Food and
Grocery, the expenditure is predominantly on non-branded products.

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Despite the rapid growth of the industry, both organized and unorganized retailers
are expected to coexist as each offers different value propositions to customers. Organized
retailers provide discount on bulk purchase and on ambience, whereas, traditional retailers
provide convenience and top-up shopping. Flexible credit options and convenient shopping
locations will help traditional retail outlets to continue their dominance in retail sector.
Advent of Modern Retail
Textile manufacturers like Bombay Dyeing, Raymond, S Kumar's and Grasim were
the earliest to set up retail chains. Thereafter, Titan successfully implemented the organized
retailing concept in India by establishing a series of well-designed stores. The early 1990s
saw the introduction of shops by Madura Garments and Zodiac, which focused on 'one
brand'. By the latter half of the decade, players in various segments were making their
presence felt on the retail scene: Foodworld, Subhiksha and Nilgiris in food and FMCG;
Planet M and MusicWorld in music; Crossword and Fountainhead in books.
Since then organized retailing in India has witnessed a radical transformation.
Shoppers' Stop was the pioneer in department stores, and the concept of malls evolved with
Spencers in Chennai, Ansals in Delhi and Crossroads in Mumbai. Initially, the players making
forays into the mall scene were those that had a construction background like the Rahejas
and the Piramals. Gradually, competition increased with more retail chains entering the
business and setting up stores.

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The growth of organized retailing has resulted in the emergence of multiple retail
formats. These can broadly be classified as: Department stores, Supermarkets,
Hypermarkets, Discount stores, Specialty stores, Convenience stores, Kiosks and Food court
counter. Each of these formats offers a distinct value proposition to the customer. In the last
three years, both, modern retail and unorganized retailers have grown.
In order to differentiate and grow, retail players have adopted different strategies.
Some have chosen to operate in multiple formats, some are expanding to smaller cities,
while others are focusing on supply chain management and operations. Players are also
getting into new segments. Players who earlier concentrated on the lifestyle segment are
now moving into value-based retailing with food and grocery stores and hypermarkets to
tap the opportunity.
Product Sourcing
Retailing inherently is a difficult business. Forecasting is merely 65% accurate, up to
20% of the orders are filled imperfectly, 30% of the merchandise is sold on markdowns, 75%
of the new products fail to meet expectations, net margins are low (2-3%) and inventory is
high. However, even beyond that, the Indian retail scenario has a number of deficiencies.
Supply chain and logistics costs currently in some cases go up to 10% of the
organized retail sales, to the tune of Rs 50 billion, while it is less than 5% in mature retail
markets such as US. Thus, there is a current improvement opportunity of up to Rs 25 billion,
according to Technopak. In the next 10 years, this gap of Rs 25 billion could go up to Rs 300
billion, and hence a lot more investment and effort would have to be put in to reduce this.
On other measures of supply chain effectiveness also, Indian retailers lag behind that
of mature markets. Indian retail chains turn their inventory much slower, and stock-out
levels are also higher. Even the more established retail chains are able to turn their
inventory only half as fast as retail chains in US or Western Europe, and stock out levels are
also twice or thrice as much. On the other hand, shrinkage levels are in tandem with
international benchmarks.

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Besides dealing with large number of SKUs and categories, Indian retailers have to
deal with a fragmented supply base and a number of intermediaries (especially non branded
products), leading to low margins and fluctuation in price and availability. Also, due to the
presence of big manufacturers, traditionally the power equation had been resting with the
supplier, rather than the retailer in most cases. The fragmented supply base and large
number of intermediaries also leads to a swelling up of product costs by the time it reaches
the retail point. Due to the pressure of keeping prices low, the margins are often squeezed
out, leaving very little for retailers, while affecting product quality and availability.

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E-commerce in Retailing
India’s online retail industry has grown at a swift pace in the last 5 years on the back
of increasing Internet penetration and use of cheaper smart phones. While early growth
came from books, electronics and apparel, CRISIL expects new segments like grocery,
jewelry and furniture to add to the momentum.
Most of the existing retailers in mass grocery and multi-brand apparel do not use e-
commerce to sell their products. Even for specialty retailers, e-commerce does not form a
significant part of their sales. However, growing competition from online retailers and
marketplaces is starting to eat into the revenues of physical retailers, compelling them to go
online—and slow additions of new stores. The impact is highest in segments like books,
music and electronics where product specifications are standard and differentiation is low.
More recently, the competition has increased in apparel and footwear too.

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Industry Challenges
The past two years have been tough for retailing, and the sector experienced overall
single digit revenue growths. This is because of the protracted weakness in consumer’s
discretionary spending due to higher inflation, marginal real wage growth and low level of
macroeconomic activity. In terms of revenue growth, the worst affected were the retailers
focusing on the premium and luxury segments. Even value retailing (which is often
considered more resilient to economic slowdowns), has experienced pressure with
customers downshifting to unorganized formats.
To combat slowing same store sales growth, retailers are offering deep discounts to
generate volumes at the cost of margins. Retailers are also adopting cost rationalization
measures such as closure of unprofitable stores, boosting labor productivity, better
inventory management, increasing supply chain efficiencies, and boosting throughput from
new stores. Retailers are also rationalizing capex by opening new, smaller scale stores in Tier
2 and Tier 3 cities. Due to real estate space constraint in prime locations within cities,
traditional trade will continue to be a convenience store next door, whereas, organized
retail is more likely to grow in the suburbs and outskirts of large cities. Stiff competition and
saturation of urban markets is expected to drive domestic retail players to tap the potential
in small cities.

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In 2014, leading retailers are expected to put financial goal of profitability on the top
of their agenda. At store level, the retailers will be focusing on improving store profitability
further through productivity enhancement and better inventory management. At corporate
level, the retailers are likely to keep major costs such as supply chain and manpower in line
with the revenue to ensure profitable growth of the business
Organized retailers will continue to face stiff competition from the unorganized
sector. The latter have a low cost structure, are mostly owner-operated, with negligible real
estate and labor costs and pay little or no taxes. Traditional retailers have also risen to the
competition from organized retailers. The adoption of IT systems, surveillance systems,
tracking the customer database, loyalty management, SMS marketing, credit purchase, and
free home delivery have helped unorganized players retain customers.
Source: TCS-RAI

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Operational Challenges for Organized Retail
 Competition: The retailing business is highly fragmented and extremely competitive.
This results in low margins, high spending on marketing and promotions, and the
need to continuously innovate on service and channel offerings.
 Liquidity Pressure: Rising inflation and softening buyer sentiment has resulted in a
drop in footfalls, and slowing of Same Store Sales (SSS) growth. Despite increase in
sales volume across product categories, the operating margins of retailers have
failed to improve due to rising input costs and discounted product offerings.
Although retailers are trying their best to improve sales through constant
promotions, consumers are cutting down on discretionary spending due to spiraling
inflation. Slowing sales, in turn, is resulting in lower inventory turnover, and
increased working capital requirements. This situation has resulted in liquidity
pressures for many retailers. Effective inventory management is a major lever for
efficiency.
 Availability of Retail Space: Hypermarkets require more than 60,000 sq. ft. and
departmental stores require more than 20,000 sq. ft. of retail space. Such retail
space in prime locations in the big cities is scarce, and available only at high costs.
 High rental cost: The Indian retail rentals are often 300-400 basis points higher than
international rentals. Rents in prime properties have increased by 50 per cent in just
three years. According to an industry estimate, rentals comprise almost 40% of total
cost of sales in the retail sector.
 Bureaucracy and Regulation: A large number of laws and regulations are applicable
to the retail industry. At every stage, different licenses, approvals and clearances are
required. This process is tedious and time consuming, and has an impact on
operational activities and overall costs.

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 Political Risk: Some political parties are opposed to organized retail. Political
changes—and resulting policy changes in state and central governments brings new
risks for retailers.
 Skilled Manpower: One of the major challenges faced by the existing retail players is
lack of the availability of skilled manpower.
 Logistics & Supply Chain: Sourcing goods economically and reliably is a big challenge
for retailers, given the complexity of regulations, geography and sources. Few large
retailers have been able to consolidate requirements and enjoy economies of scale.
Poor infrastructure and the availability of only a few organized supply chain and
logistics players further increases the problem for retailers leading to a delayed
availability of stock and huge costs. . Globally, the logistics cost component to the
total retail price is around 5 percent, while in India it is as high as 10 percent.
Further, internal operations of retailers, such as warehouse processes and
distribution, are often ad-hoc and inefficient. Even when retailers are keen to
outsource their logistics operations, there is a dearth of providers who can deliver
high service levels at competitive prices. For those retailers that are banking on
private label goods to push sales and margins, there is the added need to cultivate
relationships with local manufacturers. The supply base is highly fragmented, and
involves a large number of intermediaries. This squeezes the margins of all involved
participants in the chain, including the retailer. The fragmented supply chain also
increases mishandling, theft and shrinkage.
 Non-uniform market: The various states in India differ in terms of culture, language,
socio-economic development, etc. Further, differences in spending capacity results
in different customer segment even within a state. This makes it necessary for
retailers to customize their offerings to suit regional tastes.
 Retail frauds (shrinkage): Retail frauds have been a concern for the Indian sector.
According to the Global Retail Theft Barometer (GRTB) 2011, the shrinkage in India is
2.38%--the highest in the world.
 Long gestation period: Margins for the retailers are very thin and it takes a few years
for a store to break even after it starts operating. Retailers need to have patience,
deep pockets, continuous innovation and localization of products and services
achieve success.
 Funding Constraints: Since many retailers are already highly leveraged, they need
fresh equity funding to sustain growth. In the current market situation this is hard to
come by. Investors have little appetite for new public offerings, and even private
equity investors have become cautious. Banks are also nervous about financing
retailers in the context of falling demand and low profitability. With the government
undecided about FDI in multi-brand retailing, some retailers are hiving off parts of
their businesses—creating opportunities for mergers and acquisitions, and store
closures.
 Lack of industry recognition: After agriculture, the retail sector is the second largest
employer in India. Despite this, the sector is yet to be given the industry status, with

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a dedicated minister responsible for the development of the sector and balancing
stakeholder interests.
IT in Retailing
With the evolution of retail sector, IT adaptation is increasing continuously. Modern
retailers are relying on IT systems to manage the rapidly changing business scenarios and
diverse customer needs. Large players are investing in SCM, merchandise management,
customer relationship management, business intelligence systems, etc. This is helping
retailers to become agile and responsive apart from being able to reduce inventory holding
costs and thus be profitable in the long run. Small regional modern players in the retail
sector have started investing in the point of sales, barcode software, etc.
Additional reading and references on retailing in India
1. www.tata-bss.com/pdf/whitepapers/india-retail-trends-2014.pdf
2. www.rai.net.in/EY-RAI_Pulse_of_Indian_retail_market_Final.pdf
3. www.ibef.org/industry/retail-india.aspx
4. http://www.slideshare.net/prayukth1/indian-retail-landscape-2014
5. crisil.com/pdf/research/CRISIL-Research-Article-Online-Retail-Feb14.pdf
6. http://on.tcs.com/ROBES2014
7. octane.in/research/pdf-report/india_retail_e-marketing_study.pdf

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8. http://www.deloitte.com/assets/Dcom-
India/Local%20Assets/Documents/Thoughtware/Indian_Retail_Report_Opening_more_door
s.pdf