Indian Retail Industry Essay Example

quantities or as individual items. Retailers play a crucial role in the supply chain as they are where consumers can obtain desired goods or services.

From a marketer's perspective, retailing is crucial for distribution strategy and assessing market demand. It contributes to efficient supply chain management. Leading retailers by revenue include:

1. Wal-Mart (US)
2. Carrefour (France)
3. Metro (Germany)
4. TESCO (UK)
5. Lidl Stiftury (Germany)

The global retail sector constantly changes with innovation and fierce competition. In India, the retail sector contributes to 22% of GDP and employs roughly8%. Currently valued at US$350 billion, it is projected to grow at a rate of15-20%, reaching US$450 billion by2015. This growth has attracted foreign investors, especially in Grocery and Apparel sectors as part of Foreign Direct Investment(FDI) in multi-brand retail.

The top four retailers in India are:

1. Reliance Fresh
2. Food Bazaar
3. Pricewaterhouse Coopers
4. Deloitte
5. Nilgiri's

The organized retail sector currently represents only a small portion of the market, accounting for just 5%. However, it is projected to increase to around 9% by the year 2015. Figure1 displays the penetration rates of both organized and unorganized retail.

In recent decades, there has been notable growth in the retail

industry. Supermarkets have emerged as the dominant form of grocery retail, thanks to technological advancements like barcodes and RFID. These technologies enable efficient management of large inventories and facilitate just-in-time store replenishment. Moreover, computer-operated logistical systems have integrated with stores to assess consumer demand through a unified electronic system. This integration has further fueled the expansion of the retail sector.

Despite facing saturation and intense competition in their local markets, major retailers were forced to expand globally. This was due to policies implemented by numerous governments in the mid-1990s that allowed foreign retail investors to enter their economies. However, the economic downturn caused by uncertainty in the IT sector and reduced financial spending has led to a slowdown. Additionally, consumers have become more price-conscious and hesitant to make purchases, particularly in developed economies.

Nevertheless, the retail industry remains the largest private industry worldwide, with annual sales surpassing US$8 trillion. This represents approximately 10-15% of GDP in most economies.

Major employers in most economies include: 18% in the US, 14% in Poland, 9% in China, and 17% in Europe. The biggest retail countries based on sales are the US, EU, China, UK, and India. Sales figures for these countries are as follows: US$ 4.7 trillion, US$ 2.9 trillion, US$ 800 billion, US$ 498 billion, and US$ 350 billion.

This data clearly demonstrates that developing countries like China and India have become leading global retailers due to the dominance of the unorganized sector. This reveals significant potential for retail in these economies.

Please refer to Table 1 for a comprehensive overview of global retailers.

The table above presents the rankings and percentages of international retailers in different countries. The rankings span from 1

to 10, with the top six countries being the UK (55%), Spain, France, Germany, Italy, and Switzerland (42%). This data is sourced from CB Richard Ellis in 2010.

Additionally, Austria (5%), UAE (7%), China (8%), and Russia (9%) are also included in the rankings. It is important to mention that India ranks 44th on this list, emphasizing a need for further clarification regarding international retailers operating there. The study's findings suggest that developed economies continue to be preferred markets for international retailers.

Indian Scenario

The retail industry in India is highly attractive globally due to its predominantly unorganized market. In India, around 90% of the retail market comprises unorganized sectors like kirana stores and family businesses. In contrast, organized sectors constitute less than 10%, a much smaller percentage compared to countries such as the US and UK where organized sectors make up 50%-70%. The growth potential of the Indian retail sector lures global retailers. While food and grocery retailers hold the largest market share at approximately 69%, their presence in the organized market is only 3%. This suggests that retailers specializing in food and grocery have a competitive edge over other retailers in India.

The research conducted by Technopak states that the food and grocery sector in India accounted for 69% of the total retail industry in 2011, with an estimated value of USD 325 billion. It is projected that this sector will reach USD 425 billion by the end of 2016, experiencing a Compound Annual Growth Rate (CAGR) of 5.5%. The organized food and grocery market was valued at USD 9 billion and is expected to grow to USD 34 billion by 2016 with a

CAGR of 30%. Therefore, the study suggests a significant expansion in the Indian organized food and grocery sector over the next few years.

Leading Players in Food and Grocery Retail

The prominent retailers operating in India include Reliance Fresh, Spencer Mart, More, Nilgiri's, and Big Bazaar.

The sections of this report will explain the different aspects of these retailers. Due to the small size of the organized food sector, it is difficult to find market share information for these retailers. Research objectives include identifying the market share and competition in the Indian retail industry, understanding market segmentation, conducting a PEST analysis, studying diversification, analyzing mergers and acquisitions, studying international exposure, determining technologies used, studying marketing initiatives, analyzing future prospects, and comparing the Indian retail industry with the US, UK, and France.

1. Introduction

   The Indian retail market's size stands at approximately US $350 billion, yet it remains largely unorganized.

   The Indian retail industry is primarily composed of 15 million independent retailers, such as small stores, pharmacies, shoe shops, clothing stores, paan and bedi vendors, and street vendors. This sector is commonly known as the "unorganized market." However, multinational companies are showing interest in entering the Indian market, potentially leading to a change in this situation. According to Ernst & Young's 2012 report on foreign direct investment (FDI) attractiveness, investors consider India an appealing investment destination and rank it fourth. Likewise, Kearney's Global Retail Development Index (GRDI) from 2011 suggests that now is a favorable time to venture into the Indian market.

   Some major retailers in India (Kumar, 2011) include:
   Food & grocery: Big Bazaar, Food Bazaar
   Consumer electronics: e-zone

Entertainment: Bowling Co.
Books, Music, and gifts: Depot
Fashion and accessories
Electronic retailers
Time wear retailers
Pharmaceutical retailers
Telecom retailers
Jewellery retailers
Footwear retailers
Catering service retailers

Conditions in Retail Industries

Globally, a survey in small towns in Minnesota (Brennan,1991) revealed that specialized services, which offer higher quality products and improved customer service, were more successful compared to sales and promotions or lowering prices. The survey also found that consumers are more interested in new discounts rather than old ones. Another survey conducted in south India identified various decision-making styles among south Indian people, including brand consciousness, a focus on high quality, confusion caused by too many choices, and recreational shopping.

According to (Canabal,M. E,2002), the Indian central government previously did not allow FDI in multi brand retail and restricted ownership in single brand retail to 51%. However, in November 2011, the central government announced retail reforms for both multi brand and single brand retail (Business monitor international, Indian retail report Q1,2012). These reforms were later put on hold in December 2011 due to opposition pressure, until a consensus could be reached. In January 2011, the government approved reforms allowing single-brand stores to enter the Indian market, with the condition that 30% of goods should be purchased from local suppliers.

The rate of growth for organized retail is 45-50% annually and is expected to reach a 16% market share by 2012. In contrast, unorganized retail is growing at a rate of 10%. There is a significant increase in sectors such as personal care, jewellery, sports goods, and

beverages. According to a report by A associates, multi-brand retail offers several advantages including the elimination of intermediaries, job creation, and no threat to local small retailers (kiranas). India has been ranked as the most attractive country for the retail industry among 30 emerging markets.

(Senjam Dwijorani, Consolidation phase in Indian retail industry). According to a Mc Kinsey ; company report titled “The great Indian Bazaar: organized retail comes of age in India”, the percentage of organized retail is expected to increase from 5% in 2008 to 14-18% by 2015. Additionally, private labels make up 10-12% of the organized retail industry and are experiencing rapid growth.

The retail industry is growing despite challenging economic conditions, as reported by Deloitte's "Global powers of retailing 2013, Retail beyond." Key players in the industry are Westside, Shoppers stop, Spencers, Future group, Reliance, and Bharti Walmart. With a penetration rate of 90%, Westside has the highest market share followed by Reliance at 80% and Pantaloons at 75%. Shoppers stop and Spencers have a penetration rate of 20% and 10%, respectively. The report also indicates that although many companies faced declining sales, most of the 250 retailers saw an increase in their retail revenue.

The net profit of the top 250 companies in 2011, which was similar to their performance in 2010, amounted to 3.8%. These companies had an average retail revenue exceeding US$17 billion that year. According to a crisil report, the Indian retail market is predominantly fragmented, with only 2% being organized. This indicates substantial growth opportunities.

INDUSTRY ANALYSIS

Market Share and Nature of Competition

The retail industry in India currently

accounts for 22% of the country's GDP and contributes to 8% of total employment. It has also become an attractive market for international retailers. According to AT Kearney's GRDI (2012), the retail sector is expected to grow rapidly at a rate of 15-20% over the next five years. Pricewaterhousecoopers (PWC) research predicts that the Indian retail sector, valued at $350 billion, will continue to expand at a rate of 15-20%.

Deloitte's study shows that the mass grocery and apparel sectors are the top choices for foreign direct investment (FDI) in multi-brand retail in India. The Department of Industrial Policy and Promotion (DIPP) has disclosed data indicating that a total of US$42.7 million has been invested through FDI in single-brand retail trading from April 2000 to December 2012. However, a report by KPMG in 2010 states that the retail industry in India has fallen short of expectations, with only a few players achieving success.

The growth of organized retail trade decreased from 35% in 2007-08 to 10% in 2009, but a few players like Big Bazaar (Food bazaar), Reliance (Reliance Fresh), RPG (Spencer’s), and AV Birla Group (More) have dominated the Food and Grocery segment despite being unorganized. However, organized retail has been steadily increasing compared to previous years. Retail can be categorized into various sectors such as Food & Grocery, Clothing, Durables goods, Shoes, Furniture, Services, Catering, Jewellery & Watches, Books, Music & Gifts, and Mobile phones. As of 2010, grocery sales represented 18.40% of total sales across countries.

40% of the total retail market share in India is held by Indian grocery stores, while the USA, China, Russia, Brazil, and the UK make up 11%, 10%,

3%, 2%, and 2% respectively. This information was sourced from IGD International. Additionally, the highest percentage of private label products in the market is held by Trent at 90%, followed by Reliance at 80% and Pantaloons at 75%. Big retailers like Shoppers Stop and Spencer's have a penetration rate of 20% and 10%. The market breakup by revenue in 2011 is as follows: Food and Grocery accounted for 17%, Clothing and Fashion for 3%, Beauty and Wellness for 6%, Electronics for 4%, Furniture and Furnishing for 10%, and others comprised 60% of the market. The source of this information is the Indian retail market, as reported in September 2011 by Deloitte Aranca research.

The table displays the Net Revenues of the leading retailers in India, including Retailer Food Bazaar, Spencer’s, Reliance Fresh, More, and Nilgiri’s. The information is sourced from the annual reports of the companies. The figures for the year 2010-11 (in Crores) are as follows: Food Bazaar - 215.1, Spencer’s - 98.46, Reliance Fresh - 127.

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Segment Analysis

The Indian economy is experiencing significant growth, with a significant contribution coming from the increasing number of shopping malls.

Shopping malls in metro cities have become popular as hang-out places, with plans for 150 new malls in 2008. However, this often results in neglecting traditional retail formats such as pedlars, grocery stores, and tobacco shops.

They continue to coexist with modern formats. Modern retail has helped companies increase consumption and demand for their products on the market. For

instance, Indian consumers typically used to buy rice from nearby Kiranas such as Kolam for everyday use. However, with the introduction of organized retail trade, it has been observed that the sale of Basmati rice has quadrupled compared to a few years ago. As a premium quality rice, Basmati is now available at a similar price to regular rice sold at local Kiranas. Thus, the way a product is displayed, communicated, and connected affects its sales and consumption. As consumption continues to grow, we can infer that the local market will undergo a transformative change.

This implies that non-union retail trade would face significant challenges due to outdated technology, a weak supply chain, inadequate marketing, and other factors. As a result, local stores would either become obsolete or limited to unexpected last-minute purchases. Additionally, it is predicted that the average consumption of Indian consumers will decrease to 34% in CY2015 and possibly drop further to 25% in CY2025. This suggests that as income levels gradually increase, Indian consumers are allocating more of their spending towards lifestyle products, boosting the economies of lifestyle retail. Currently, the most popular organized retail formats include shopping malls, which are larger forms of organized retail.

These shopping centres are primarily situated in metropolitan cities, near the urban periphery. They range in size from 60000 m? to 7, 00,000 m? and more. The goal is to offer a perfect shopping experience that encompasses a combination of goods, services, and entertainment all within a single location. Examples of such centres include Inorbit mall and Ansal Plaza.

Specialty stores, such as Crossword and Planet M, focus on specific market segments and specialize in products like entertainment

and leisure, gifts, and more. Discounters, like Subhiksha, offer bulk sales at discounted prices to achieve economies of scale or get rid of surplus season stocks. These discounters may sell various perishable or non-perishable goods. Department stores, ranging from 20000-50000 Ft, cater to diverse consumer needs.

Popular localized departments such as clothing, toys, home, and groceries are offered by stores like Big Bazaar and D-Mart. Hypermarkets/supermarkets are large self-service outlets that focus on food and grocery sales. They can be categorized into mini supermarkets ranging from 1000 to 2000 Ft and large supermarkets from 3500 to 5000 Ft.

These stores, such as Reliance Fresh, now make up 30% of all food and grocery stores in organized retail. Convenience stores, on the other hand, are usually located near residential areas and have a limited range of convenience products available. These stores typically have high sales and are open for long periods, seven days a week.

The prices are slightly higher due to the premium convenience provided by MBO (Points of sale multi brands). MBO, also known as category killers, offer multiple brands within a single product category. They are typically found in well-established marketplaces and cities.

3. Policy Framework: In the context of liberalization, multiple policy measures have been implemented in areas such as regulation and control, fiscal policy, export and import, taxes, exchange rate and interest rate regulation, export promotion, and incentives for high priority sectors. Notably, the food and agricultural industries have signed an agreement that includes numerous significant releases and incentives. The following points highlight some of the major policy changes: 3. 3. 1.

According to the current policy, foreign direct investment (FDI) up to 100% is allowed

in food infrastructure (Food Park, Cold Chain / Storage) through the automatic route. However, in the food retail sector, FDI is not permitted except for a single retail brand. This policy applies to all retail operations. The FDI policy for manufacturing is the same for all items, so there is no separate dispensation for the food processing sector. There have been gradual changes in fiscal policy, including substantial reductions in excise and import tariffs.

Many processed foods are not subject to excise duty, and custom tariffs have been significantly lowered for plant and equipment, raw materials, and intermediates, particularly for export production. Corporate taxes have also been reduced, and there is a move towards using market-based interest rates. Additionally, there are tax benefits for new manufacturing units for a specific duration, excluding sectors like beer, wine, soda flavored with concentrates, confectionery, and chocolate, among others.

Indian currency (rupee) is currently fully convertible for both current account and capital account convertibility in the unified exchange rate mechanism, with an anticipated implementation of capital account convertibility in the near future. Repatriation of profits is generally allowed in many industries, with some exceptions, and can be offset by dividend income from exports.

3. PEST ANALYSIS PEST analysis focuses on the environmental influences on a business, including Political, Economical, Social, and Technological factors.

Political Environment

The Political Environment encompasses government policies, fiscal policy, labour laws, safety regulations, competitor regulations, political stability, and consumer protection.

Various organizations and individuals in society are influenced and limited by factors such as legislation related to the retail industry that has been damaged for many years. Political factors involve the goods and services that the government wants to

provide or has already provided.

Economic Environment

The economic environment encompasses factors like economic growth, interest rates, exchange rates, and inflation rate. These factors have a substantial impact on decision-making and business operations.

Exchange rates have an impact on the expenses of exporting goods and the availability and cost of imported goods in the economy. The retail market encompasses the buying power of individuals, which is determined by current income, prices, and access to credit. Alterations in economic circumstances can influence businesses or companies.

Economic forecasters are anticipating a decade ahead that will bring about forecasts of increasing costs, shortages, and fluctuations in the economy. These shifts in economic conditions present both potential opportunities and threats in the market. 3. 3. 3. 3.

Social factors encompass various aspects, such as income distribution, population growth rate, age, lifestyle changes, education, and living conditions. These factors shape people's beliefs, values, and norms as they grow in society. People residing in different regions of the country possess diverse cultural values. Hence, this analysis is crucial for retailers or companies to comprehend and align their business strategies to meet customer requirements.

trend is the social factor will also affect the business for retailers. 12 http://www. punebds. com/pf.

asp 16 3. 3. 3. 4.

The technological environment encompasses various technical factors, including research and development activities, technology incentives, the speed of technological changes, new inventions and developments, energy usage and costs. These factors can affect barriers to entry, minimum efficient production, and decisions regarding outsourcing. Technological implementation has an impact on cost, quality, and innovation. Technology is widely utilized in different areas such as product packaging, billing, mobile point of sale (POS), digital signage, inventory

management, customer service, price adjustments, and auditing. Additionally, radio-frequency identification (RFID) and location tracking are also integrated.

PORTER’S Five Forces

Porter's Five Force model is a competitive analysis framework that aids in comprehending the competitive dynamics within an industry. It provides a straightforward yet powerful framework for understanding and evaluating the competitive forces at play in the industry.

Michael Porter developed a framework that identified five forces impacting the competitive dynamics within an industry. These forces include the threat of new entrants, the power of suppliers, the power of buyers, the availability of substitutes, and competitive rivalry. In the retail industry, the organized sector has experienced growth in recent years. While this growth may not be evenly distributed, it has still had a significant impact on unorganized retailers. Over the past decade, the number of independent retailers in this industry has declined. This is evident when we visit malls, as they predominantly consist of chain stores with only a few independent shops remaining.

Although it is not entirely impossible to overcome barriers to trade establishment, achieving favourable supply contracts, leases, and competitiveness becomes extremely challenging. The competitive advantage of centralized shopping and vertical structure gives retailers an upper hand over independent dealers. 3. 3. 4.

2. The Power of Suppliers: In 1970, Sears held dominance in the household appliance market and established rigorous quality standards. Suppliers failing to meet these requirements were excluded from Sears' lineup. Retailers have since attempted to leverage their relationships with suppliers, as suppliers typically possess limited influence in the retail sector. WalMart serves as an illustration; it enforces stringent controls on its suppliers.

Contracting with a major retailer such as WalMart could

be the deciding factor for a small supplier. 3. 3. 4.

Customers have minimal bargaining power with retail stores individually. The prices offered by center-stores are typically negotiable and are labeled as "fixed price" to inform customers that it is challenging to negotiate for discounted prices upon entering the store.

However, if customers demand high quality products at competitive prices, it can help maintain honesty among retailers.

Availability of Substitutes

There is no scarcity in the retail sector; it is not a monopolistic market. The retail sector tends to offer a diverse range of goods and services rather than specializing in one particular product or service.

This means that whatever one store offers, you will most likely find it in another store. Hence, innovation and product differentiation are crucial elements required for success in the retail industry. Retailers must offer products that are distinct or have a significant advantage over their competitors.

3. 4. 5. Competitive Rivalry There is no market without competition, and the presence of competitive forces in the market is essential for enhancing various aspects such as quality, price, supply chain management, inventory management, etc. Retailers constantly encounter intense competition as the retail market experiences sluggish growth, leading companies to compete for market share against each other.

More recently, in an attempt to reduce intense price competition, retailers have started offering frequent flyer points, membership perks, and other special services as a way to foster customer loyalty. However, the unorganized retail sector, which faces financial vulnerabilities and limited physical space for expansion, is unable to meet the increasing demand. On the other hand, the organized retail sector, currently accounting for only 4%

of the total retail industry, is projected to grow at a much faster rate of 45-50% annually. As a result, its share in the overall retail trade is expected to quadruple to 16% by 2011.

Business Diversification

Diversification is a strategic approach employed by companies to boost profitability by expanding sales volume through new products and markets. This can occur at either the business unit or corporate level.

There are various types of diversification discussed in this report. At the business unit level, the most common way to expand is by entering a new segment within the industry the business is already in. At the corporate level, it is typically done by investing in a promising business that is outside of the existing business unit's scope. One of these types of diversification is called standalone diversification, which is characterized by being self-contained and usually operates independently.

They focus exclusively on a particular product category. Standalone diversification is closely related to the company's existing business. 19 3. 4. 2.

Conglomerate diversification refers to when a company markets new products or services that have no technological or commercial synergies with its current products. This means that there is very little connection between the new venture and the firm's current business. The main reasons for adopting such a strategy are to enhance profitability and flexibility within the company, as well as to attract more attention and positive reception in capital markets due to the company's expansion. Despite being a risky approach, if successful, conglomerate diversification can lead to increased growth and profitability.

Future Group, a conglomerate, has chosen to independently build its business, unlike Bharti and Tata who have partnered with Wal-Mart

and Tesco in the wholesale business. However, discussions regarding a sourcing partnership with Lawson Inc. of Japan have not resulted in an agreement for this year.

Under the new legal regime, there may be more opportunities for future groups to collaborate with international traders. Recently, Future Group restructured its retail assets to simplify its business and provide more clarity to investors. Biyani, the company's spokesperson, predicts further expansion, particularly in the profitable food sector. Moreover, he notes that while some high-margin businesses face challenges due to low demand, the food industry remains a lucrative venture. This week, Future Group acquired Express Retail Services, a supermarket chain called Big Apple based in Delhi. Additionally, Biyani sets out his objectives for the Food Bazaar store chain, which currently consists of around 200 stores.

"No. Maybe in five years, add another 150 to that number," says the spokesperson. Reliance Industries, a conglomerate, plans to merge all its retail units into one entity. This indicates that the company was not seeking a foreign partner for any of its businesses. The person with direct knowledge of the situation revealed that the company initiated this process for all of its eight independent retailers, including Reliance Trends and Reliance Digital. The aim is to eliminate flaws and enhance administrative cooperation and efficiency among the different companies."

This will allow Reliance Fresh, a single retail entity owned by Reliance Retail, the group's holding company for retail sales. Last Monday, Reliance filed a petition in the Bombay High Court seeking permission for the scheme of arrangement of its various entities, which include Reliance Retail, Reliance Fresh, 20 Reliance AutoZone formats for car accessories, Reliance Trends, Reliance

Footprint footwear chains, the consumer electronics chain Media Reliance Digital, Reliance leisure, Reliance Gems and jewelry, and Reliance Replay Gaming.

Spencers (Conglomerate)

Spencer Retail Ltd (Spencer) is one of the conglomerates.