FDI retail sector in India: opportunities and challenges in the present scenario.
An important aspect of the current economic scenario in India is the emergence of organized retail. There has been considerable growth in organized retailing business in recent years and it is poised for much faster growth in the future. Major industrial houses have entered this area and have announced very ambitious future expansion plans. Transnational corporations are also seeking to come to India and set up retail chains in collaboration with big Indian companies. However, opinions are divided on the impact of the growth of organized retail in the country. The important role of FDI in supplementing domestic resources and in ensuring employment generation in the development of an economy is unquestionable. (Retail industry report (2006), Dinlersoz, (1999), and Rao (2006)). At present, India's retail market is largely unorganized, with an estimated 15 million tiny outlets catering to the individual needs and employing the second largest number of people after agriculture. The organized retail giants targeting the 300 million in the "middle classes" and the 200 million in the rural areas, who form a consumer market worth more than $100 billion. Even though India has the highest number of per capita outlets- 6-per1000 populations; it has the lowest retail power. The retail outlets are dominated by grocery in both the urban and rural areas and this represents 71% of the retail market in the rural market.
Organized retailing should be given policy support and time by the government to establish itself firmly. Investments into the Indian retail sector are estimated at Rs. 20,000 crore (Rs. 200 billion) by 2010. According to Sreejith and Raj (2007) the organized retail segment is growing at the rate of 25-30 per cent per annum, revenues from the sector are expected to triple from the current US$ 7.7 billion to US$ 24 billion by 2010 and making it among the fastest growing industries in the country. Study conducted by the Indian Council for Research on International Economic Relations (ICRIER, 2008) shows that organized retail, contributes only 4.0 % at present in india, while in USA and Taiwan it is about 85% and 81% respectively (see Fig.1), It will grow by 25-30% every year and become Rs.100,000 crore (Rs.1000 billion) by 2010. With the growth of malls, multiplexes and hypermarkets, the consumer is being exposed to a new kind of shopping experience and services which is quietly and surely redefining her expectations from shopping. India is having a more than 30% young population and the younger generation, which was comfortable with the buy--today, pay-later concept would drive the retail boom. This can be understood simply by seeing the growth of No. of credit card by more than 35% in last few years. The younger generation is taking loans that did not exist a few years ago, another important thing for retailers is that around 45% of credit card spends are on consumer durables, apparel, footwear and music products that land themselves to organized retailing. (CII -Mc Kinsey report 2005).
India is the 'second most attractive destination' globally from among 30 emergent markets for foreign direct investment. It provides India the cause of good deal of excitement and the cynosure of many foreign eyes. With a constitution of 14 % to the national GDP and employing 7 % of the total workforce in the country, the retail industry may definitely be one of the strong pillars of the Indian economy. At present the share of organized retail in India is very less and there is a wide scope for growth available in near future (see Table1 and Figure1).
[FIGURE 1 OMITTED]
In the era of the organized retail boom in India still 85% organized retailing has so far been concentrated in the metros. It would also percolate to tier II cities with population of 5-10 lakh, the contribution of these cities in organized retailing sales would grow to 20 25%. Prominent Tier-II cities which are likely to witness a pick-up in retail activity include Surat, Lucknow, Dehradun, Bhopal, Indore, Baroda, Nasik, Bhubneshwar and Ludhiana. Similarly, cities like Chandigarh, Pune, Indore and Ludhiana will also see high retail activity by 2010. India's tier III cities are also growing rapidly due to the cost advantage of these cities have the talent pool, low real estate cost The overwhelming 73% contribution of malls towards retailing was likely to be unique to India. Even in more mature retail markets like US, business from malls is well below 40%. The availability of cheaper real estate options and brand acceptance among consumers in these cities is leading retailer and property develops to break even much faster as compared to larger cities. Top 10 cities contribute 96% of total organized retailing turnover in India. The important factors behind this figure are mainly availability of high income group, brand consciousness among the consumers, favorable laws and regulations for businessman and availability of developed infrastructure which force the retailers to open the market in these cities.
Organized Retail in India
The study of the history of the retailing shows that organized retailing sector evolution passes through the four important phases:
(1) The companies create awareness of modern formats and raise consumer expectations.
(ii) As the market grows up, the consumer demand also develops towards modern formats.
(iii) As the markets develop, intense competition forces retailers to invest in back-end operating efficiency.
(iv) Retailers explore new markets as well as inorganic opportunities as growth tapers off.
India at this time in the second phase of evolution cycle where the consumers becoming more demanding due to their rising standard of living and changing lifestyle. In the age of retailing, they just not only want buying; they want to enjoy buying, entertainment and experience it. This space can be filled up through organized retailing formats only. From 25 operational malls in 2003, the country is expanding to have over 600 malls by 2010, with as much as 100 million sq. ft. retail space required. Availability of retail space is expected to increase further whenever funds and investments trusts are permitted, which will help to create a secondary market for real estate market in the country. Most of the world's leading brands, including L'Ordeal, Louis Vuitton, Espirit, etc now present in India. Media proliferation like advertisement and brand promotions also play a vital role in increasing consumer demand. Many reasons give fuel for the growth of organized retailing in India:
(1) The main reason is that the big population of the India, and the increase incomes of the consumers, increasing awareness of the customers, real estate development, availability of better sourcing options both from within India and abroad and changing life styles .
(ii) In India the younger generations is growing rapidly, which is likely to fuel accelerated consumerism in the years to come. The country is believed to have an average age of 24 years for its population as against 36 years for USA and 30 years for China. A younger population tends to have higher aspirations or expectations and spends more as it enters in the earning phase. Another reason that the disintegration of the traditional joint family system into the nuclear family, which in turn has to led to enhanced demand. At the age of consumerism, increasing the population of working women and new job opportunities emerging services like IT, enabled services, retail, Call Centers, food services, entertainment and financial services. Declining the interest rate, the diversion of the domestic consumers to taking loans or savings in banks also fast disappearing. Priyanka Sharma (2007) has shown that in India around 29.3 % of the total work force lives in urban areas while 62% of the urban population lives in class 1 cities and metro cities as clear from the Figure 2.
(iii) As the income increases, the consuming class also increases. The fig. 4 clearly shows that about 186 million household covers the income group from 16 thousand/month to 215 thousand/month. This large base of households with growing disposable income is expected to drive demand for organized retail.
[FIGURE 2 OMITTED]
[FIGURE 3 OMITTED]
If we compare India's case with retail sectorin China, China is moving much faster than India in the retail revolution due to the consumer goods industry in China opened up before India. So, the number of products available in China is much larger than in India. The per capita income in China is almost double of India. The people of China have more affluence there. The government has been more supportive for retailers. FDI has been allowed in the retail industry start joint ventures with local companies are allowed. WAL-Mart, Carrefour and many other big giants in China as the government has been very supportive. They see the value of good retailers. This is one of the basic reasons why India lags behind China.
One of the biggest opportunities from the retail is that it will create purchasing power, even at the bottom of pyramid. As many as 10 million to 15 million jobs would also be generated over the next three to five years due to the explosion in the retail sector. The brand manufactures face in the new retail paradigm, that India is the only country in the world where price is determined by the manufactures and not the retailers. But now changes start coming as the power of price determination had already moved from the manufactures to retailers all around the world with the Internet explosion. The Organized retail also exposed the local retailers to modern retailing techniques. The end results will that the surviving domestic retailers quickly learned through from their new competitors and became stronger in the market and matured rapidly. Modern retailing does not benefit only the consumer; it can give huge benefits to the other industries, to government and to the entire economy. On average, 30% of manpower employed in retail could be potential income tax payers. According to a white paper jointly by CII and KSA Tecnopak (2003) organized retailing has the potential to bring 100,000 new tax payers in the tax bracket in five years. Organized Retail sector growth will also help various sections of the society and country in a number of ways such as:
(1) Creation of employments for people.
(ii) Price stability of the products and quality improvement in product and service.
(iii) Development like roads etc.
(iv) Economic development due to FDI inflow, increase in no of tax payers and VAT collection
(V) Other sector like Agriculture, Entertainment, Food processing, Real estate etc gets benefit.
(vi) India's retail boom has been beneficial for a variety of allied industries such as logistics and air conditioning. Both foreign and Indian companies working in sectors such as airlines, commercial refrigeration and air conditioning, logistics, smart card makers are all tieing up with retailers to be a part of the growth.
One of the first industries to see this growth is the commercial refrigeration and air conditioning sector, due to rise of organized food retailers. Several foreign Logistics companies such as Bax Global, Prologis and PWC logistics are expanding operations in India. Indian operators including the Tata Group which as tied up with DHL for its Croma stores, Air Deccan which is in talks with several retailers and go air which is soon launching its Cargo division.
Major Indian Players
Private players such as the AV Birla Group, Tata and RPG in Food superstores, Raheja's shopper's stop and the future Group, which owns the popular Big Bazzars have more than double business over the past couple of years. In a flurry of activity in the recent past, India's second largest corporate house, Tata Group, has announced an alliance with Australian retail major Woolworths to start a specialized retail chain for consumer durables while the Dubai based Landmark Group, which runs life style stores in India, is in talks with Europe's biggest retailer, French based Carrefour for acquiring its franchise in India.
Barriers to Organized Retail Sector Growth
Organized retail is one of the few sectors in the country where FDI is not allowed. Other than FDI there are various other restrictions on the entry of international retailers in the country, like different sales tax rates exists in different states of the country, implementation of VAT, complex tax structure, problem of funding from the banks, lack of proper infrastructure are constraints on the way of organized retailing. The infrastructure is not in place and tax laws are totally against retailing. The government also doesn't recognize retail as an industry. In India retailers are considered as just a group of traders even now. Taxation barriers between states hinder efficient regional distribution. Consumer companies are facing various road blocs with respect to distribution such as large geographic area, infrastructure constraints, distributor cost, fragmented market, lack of national distribution networks and lack of distribution hubs. (Mukherjee A and Patel M., 2005). Along with this, organized retail faces a number of operational challenges. Three biggest challenges of the organized retail industry will be managing manpower, real estate and the supply chain. With the boom in the retail industry to continue for the next five years, at the expected compounded average growth rate (CAGR) of 30-35%, finding the right middle and senior management will increasingly difficult.
The future growth of organized retailing would depend on the ability of retailers to widen their customer base, the ability of retailers to efficiently manage the supply chain and increase operational efficiency through economies of scale, optimal space management and service ability. Ten years from now, may be 10-12% of the trade only will grow through organized retail. That means 80% will go through corner shops. Globally also, the corner shops has survived. However, two things may happen: Some of them become a part of larger chains as franchisees, while a number of them will change their format and evolve. But after ten years from now, we can clearly see the pretty large business evolving and very large companies entering in the business. Indian retail market was slowly evolving from a commodity market into an organized retail industry. The organized retail sector is expected to grow stronger than GDP growth in the next five years driven by changing lifestyles, strong income growth and favorable demographic patterns. (KPMG report "Consumer Markets in India" 2005). India is at second position in global retailing development Index after Vietnam which shows the importance of retailing sector in Indian economy (A.T. Kearney Report, 2008).
It is now well understood that organized retail sector is an important sector. Government should support this sector not only by strengthen the Indian companies but also allow the international players. FDI restrictions should be removed for better growth. Other wise we miss the bus like many other areas. Authors suggest that a FDI should be allowed Up to 49 % in organized retailing. Government may allow FDI up to100% with conditions like local manufacturing, sourcing, and part investment in infrastructure. FDI may be allowed in less sensitive areas as garments, Lifestyle products, house wares, Entertainment, Consumer Durables, FDI should be allowed in branded products. The distribution network in particular needs to be strengthened. The development of road infrastructure, especially the Golden Quadrilateral project interlinking northwest and East-West corridors, will bring efficiency in supply chain and reduce wastages.
A.T. Kearnery (2008), Emerging Opportunities for Global Retailing, pp. 1-19.
A. Sreejith and V.P. Jagathy Raj (2007), "Organized Retail Market Boom and the Indian Society, International Marketing Conference on Marketing & Society", IIM Kolkota, 8-10 April, pp. 604.
CII -Mc Kinsey report (2005), Retailing in India: The Emerging Revolution, Mumbai.
Emin M. Dinlersoz (1999), "Firm Organization and Retail Industry Dynamics", Working paper. pp. 1-44.
KPMG Report (2005), "Consumer Markets in Indiathe next big thing?", India Consumer Market, pp. 121.
Modernizing Retail in India, (2003), White paper on jointly by CII and KSA Tecnopak. pp.1-5.
Mukherjee A and Patel M (2005), FDI in Retail Sector, Academic Foundation, New Delhi.
Priyanka Sharma (2007), Mint Newspaper, July 16, pp. 10.
Rao, S.R.S (2006), "FDI and the retail sector in India: A study of opportunities and threats", The Alternative Journal, Vol. 5 (1) pp. 23-36.
Retail Industry Report (2006), The Customer Respect Group, pp.1-31.
SCMS (2006), Journal of Indian Management, pp. 56.
Shradha Jain *, Ravi Kumar Jain ** and A.K. Jain ***
* Research Analyst, 9/208 Rani Bazar, Saharanpur--247001, India,
** Pooran Mal Ram Lal Degree College, Gangoh, Saharanpur--247341, India
*** Ansal Institute of Technology, Sec-55, Gurgaon--122003, India
* E-mail: firstname.lastname@example.org
Table 1: Size of the Retail Business in India 1999 (US $ 2000 (US $ 2005 (US $ Billion) Billion) Billion) Total retail Market 150 180 225 Organized Retail 1.1 3.3 7 % share of organized 0.7 1.8% 3.2% from total retail market Source: SCMS Journal of Indian Management, Oct 2006 p56
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|Author:||Jain, Shradha; Jain, Ravi Kumar; Jain, A.K.|
|Publication:||Asia-Pacific Business Review|
|Date:||Oct 1, 2008|
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