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India is currently the fifth largest retail market in the world and the market size in 2007 was estimated at US$ 330 bn. Retailing has played a major role the world over in increasing productivity across a wide range of consumer goods and services. In the developed countries, the retail industry has developed into a full-fledged industry where the organised sector accounts for almost 80% of the total retail trade. In contrast to this, in India organised retail trade accounts for merely 4% of the total retail trade.
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The per capita consumption of around US$ 400 compares poorly to US (US$ 27,643) and Asian countries such as Japan (US$ 20,337), China US$ 609, Malaysia (US$ 2,042) and Thailand (US$ 1,572). This highlights the high degree of fragmentation of the retail sector within India and also indicates tremendous scope for growth of the retail sector in India.
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Earlier, retailers largely catered to lifestyle, clothing and apparel needs of the consumers. However currently, grocery stores, speciality stores like and stores to cater to the needs of music and book lovers etc have also started mushrooming at various locations.
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The sector can be broadly divided into two segments: Value retailing, which is typically a low margin-high volume business (primarily food and groceries) and Lifestyle retailing, a high margin-low volume business (primarily apparel, footwear, etc).
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Organised retail pie |
| Different categories |
% contribution to
organised retailing |
| Clothing & accessories |
39 |
| Food & grocery& Catering(F&B) |
22 |
| Footwear |
9 |
| Consumer durables |
9 |
| Furniture & Fixtures |
7 |
| Jewellery& watches |
6 |
| Others |
8 |
| Source: Koutons retail IPO prospectus - India Retail Report by Images and F&R 2007 |
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The sector is further divided into various categories, depending on the types of products serviced. Clothing & accessories dominate the market followed by food & grocery. The low contribution of other categories indicates opportunity for organised retail growth in these segments. The proliferation of hypermarkets and supermarkets has led to growth in food and grocery retail; thus, value retailing is seen to be gaining ground in India. The other high growth verticals are apparel and durables. Impulse goods like books and music are also gaining a larger share in the organised retail market, with players making stores more accessible to consumers.
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Historically, Indians have not been the ones to splurge on luxury items. However, increased awareness among consumers, media proliferation and the desire to look good and try new things have led to the growth of lifestyle retailing and in luxury items. There has been a transition from the traditional retail to organised retailing, from small kiranawalas to big super markets over the years. The time constraint and the convenience of shopping with multiplicity of choice under one roof are the major drivers of organised retailing in the country.
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| Supply |
Players are now moving to Tier II and Tier II cities to increase penetration and explore untapped markets as Tier I cities have been explored enough and have reached a saturation level.
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| Demand |
Healthy economic growth, changing demographic profile, increasing disposable incomes, changing consumer tastes and preferences are some of the key factors that are driving and will continue to drive demand growth in the organised retail market in India.
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| Barriers to entry |
RReforms by India in opening up its economy have greatly improved trade prospects, but major barriers still exist such as regulatory issues, supply chain complexities, inefficient infrastructure, automatic approval not being allowed for foreign investment in retail.
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| Bargaining power of suppliers |
The bargaining power of suppliers varies depending upon the target segment, the format that they follow and the products they offer. The unorganised sector has a dominant position. There are few players who have a slight edge over others on account of being established players and enjoying brand distinction.
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| Bargaining power of customers |
THigh, due to availability of wide choice.
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| Competition |
High. Competition is characterised by many factors, including assortment, format, products, advertising, price, quality, service, location, reputation, credit and availability of retail space etc. New entrants (business houses and international players if foreign participation is further liberalised) are expected to further intensify the competition. |
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The year has witnessed lot of activities such as joint ventures, expansion, capital raising to fund expansion plans such as Vishal Retail’s IPO to raise Rs 1.1 bn, Trent’s rights issue to raise Rs 1.5 bn, entry of new players like Reliance Retail, Aditya Birla Group (the latter’s store is to be called More) and so on. Further, players have also been engaged in strengthening their back end activity by joining hands with the allied service provider.
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The new entrants are finding it easier to pay a premium and acquire regional players in order to rapidly scale up their operations and establish a footprint in the sector. Recently Aditya Birla Group acquired Trinethra chain of stores. Bharti and Walmart have formed a 50:50 joint venture for back end expertise and cash and carry format.
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Historically, availability of quality retail space has been a constraint for Indian retail. However, while the surge in mall development in the recent past had to a certain extent increased supply, high rents had a dampening effect apart from the usual problems of delays in store opening and high manpower attrition. The effect of rising costs of operation was reflected in the bottomline, which either remained flat or contracted for the major players.
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Retailing in India has witnessed tremendous growth in the last few years. Organised retail that touched US$ 25.4 bn in size in 2007 ((Source: IBEF) is on a high growth path and is expected to continue to grow at the rate of 40% over the next few years.
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Sector growth prospects are likely to be limited by factors such as restrictions on FDI (foreign direct investment), the lack of a uniform tax structure, increasing pressure on infrastructure in key consumer markets, a shortage of quality real estate, hardening of interest rates & tight credit controls and inflationary situation witnessed within the economy that has puffed up the cost of operation.
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Growth in Indian retail has been driven by the country's economic fundamentals over the past few years. Going forward, we believe that healthy economic growth, accretion to income levels of the rising Indian middle class (represented by the financially independent young population) and the consequent rise in disposable incomes will fuel the growth of the retailing sector. Improved retail services, easy financing options and changing consumers’ mindset regarding credit will give further fillip to organised retail.
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Basically retail is a volume game. Going forward, with the competition intensifying and the costs scaling up, the players who are able to cater to the needs of the consumers and grow volumes by ensuring footfalls, while being able to reduce costs as well as withstand a downturn or face competition will have the competitive advantage.
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