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Term Paper
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Analysis of Retail Industry

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3/15/2011

Anurag Reddy| Garima Bagga|Abhinav Agarwal

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 EXECUTIVE SUMMARY

The retailers in India have to learn both the art and science of retailing by closely following how
retailers in other parts of the world are organizing, managing, and coping up with new challenges in
an ever-changing marketplace. Indian retailers must use innovative retail formats to enhance shopping
experience and try to understand the regional variations in consumer attitudes to retailing.

Retail marketing efforts have to improve in the country:

1. Advertising, promotions, and campaigns to attract customers have to be designed and

executed to build loyalty by identifying regular shoppers and offering benefits to them.

2. Efficient management of high-value customers is vital.

3. Monitoring customer needs constantly must be done with long-term relationships in view. The
above are some of the aspects which Indian retailers need to focus upon on a more proactive basis.

Growth Drivers for the Organised Retail are identified over here:
 Higher Disposable Income
 Growing Working Women population
 Adoption of Nuclear Family culture
 Baby Boomer Effect
 Growth in Urban Population
 Robust Outlook towards branded products
 Growth in Retail Malls and various other new formats
 Plastic Money becoming a greater pie of credit
 ABSTRACT

Retailing consists of all business activities involving the sale of goods and services to ultimate
consumers. Retailing involves a retailers traditionally a store or a service establishment, dealing with
consumers who are acquiring goods and services for their own use rather than for resale. Wal-Mart,
The Limited, Best Buy and other familiar organizations are retailers. Retailing is based more on
whether the business deals directly with public. Retail banking, service stations local coffee shops are
also retailers with the emergence of online retailing, retailers are no longer concerned about location
of stores.

E-retailing has emerged. Consumers are always hungry for modern ways of shopping. Indian retail
sector is growing fast and its employment potential is growing fast. The retail scene is changing really
fast. Retailers are rethinking their approaches towards the suppliers so that they can get the best
pricing strategies for them. Retail sector in India is also catalyst for the growth of stalling tactics of
below the line marketing used by major retail players like Spencer, big bazaar, reliance fresh etc. For
tapping customers by creating points of sales displays. So we can say that India is a rising star and
going to be one of the fastest growing regions of the future.

CURRENT SCENARIO OF INDIAN RETAIL INDUSTRY

Marketers need to understand the existing scene in India before they invest in organized retailing local
kiranas are incorporating changes with time, but people still prefer to buy their goods from them.
Organized retailing is concentrated only in the cities. Organized retailing has been attacking the
average middle class consumers in large cities. Retail Trade, which is currently the largest contributor
to our GDP, requires the current marketing environment needs to be improved.

It is observed that the share of organized retailing in India is around 2%, compared to 80% in USA,
40% in Thailand and 20% in China approx. At Kearney‘s global retail development index shows India
on the top of emerging retail market. Retailing through non-traditional channels is becoming more
popular. Retailing through supermarkets, hypermarkets, department stores are increasing. Top
business houses like Reliance, Tata, and Rahejas are investing in this sector. The retail sectors also
employ over 10% of national workforce.

A report by KPMG predicts that organized retail is expected to grow stronger than organized retail is
expected to grow stronger than GDP growth in the next 5 years and this is expected to be a result of
changing lifestyles, consumption patterns and demographics.

The face of grocery retailing in India is seeing the change because of the huge investments by the
corporate. To name the few are RPG Spencer, Future group, Food Bazaar, Reliance, Subhiksha etc.

Retail sector is the fastest growing sector in the Indian economy. Traditional markets are making way
for few formats such as department stores, hypermarkets, books, supermarkets and specially stores.
International players like Tesco and Carryfour are expected to enter India very soon.

The business sectors of banking and retail have always had close links. Finance should also be made
easily available to facilitate expansion and restructuring plans undertaken
by retailers.
 GLOBAL SCENARIO

The Global retail Industry is one of the largest industries worldwide, increasingly being controlled by
a handful of powerful corporations based mainly in the U.S and Europe, namely, Wal-Mart, Tesco,
Carrefour and Metro. These MNCs retailers have by and large have saturated in their home countries
and are looking for penetrating emerging markets of India, China and Russia as they are minimally
penetrated by organised retail.
Shopping will become more experiential; eating, being entertained and ―living‖ the shopping
experience will take on prominence. The global market will grow rapidly in our flat world, with
markets such as China and India granting access to the world‘s best retailers.

RETAILING IN UNITED STATES

Retail Sector is the second largest industry in U.S. both in number of establishments and number of
employees. The U. S. Retail industry generates $3.8 trillion in retail sales annually ($4.2 trillion if
food service sales are included), that is approximately $11,993 per capita.

Wal-Mart is the world's largest retailer and the world's largest company with more than $312 billion
(USD) in sales annually.

Wal-Mart employs 1.3 million associates in the United States and more than 400,000 internationally.
The second largest retailer in the world is France's Carrefour.

RETAIL TRENDS IN OTHER COUNTRIES

 China had initially restricted FDI in retailing to only joint ventures at 49 percent foreign
holding and only at specified locations subject to a ceiling on the number of stores.

 Malaysia, Indonesia, Thailand and Japan have enforced zoning restrictions for mega-retailers.

 There are minimal capital requirements for foreign retailers in Sri Lanka.

 The Philippines has imposed ―sourcing‖ and reciprocity requirements on foreign retailers.

 In Japan, mega-retailers must seek the views and permission of small local stores before
opening a new store.

 In the US, major cities such as Los Angeles, California, Chicago and New York City have
restricted the opening of Wal-Mart stores within city limits.

 France enacted the Raffairin Act that regulates the growth of hypermarkets larger than 300
square feet.

 In Thailand, the government has set up an assistance fund for local retailers due to the impact
of mega retailers.
 MODERN RETAIL- SWOT ANALYSIS

SWOT analysis is a tool for analyzing modern retailing. In this analysis, a study can be
made regarding the strength, weaknesses, opportunities and threats of retail industry.

STRENGTH OF MODERN RETAIL.

The benefits of larger organized retail segments are several. The consumers get a better product at
cheaper price. So consumers get value for their money. Employment opportunities both direct and
indirect have been increased. Farmers get better prices for their products though improvement of
value added food chain.

A large young working population with median age of 24 years, nuclear families in urban areas, along
with increasing working women population and emerging opportunities in the service sector are going
to be the key growth drivers of the organised retail sector in India.

It has also contributed to large scale investments in the real estate sector with major national and
global players investing in devolving the infrastructure and construction of the retailing business.

The trends that are driving the growth of the retail sector in India are low share of organised retailing
and falling real estate prices. Increase in disposable income and customer aspirations are important
factors. Increase in expenditure for luxury items is also vital.

The governments of states like Delhi and National Capital Region (NCR) are very upbeat about
permitting the use of land for commercial development thus increase the availability of land for retail
space.

The growth of sachet revolution emerges for reaching to the bottom of the pyramid. The annual
growth of departmental stores is estimated at 24%. The size of Indian organised retail industry
reached at Rs.1,30,000 crore in 2006.

Ranked second in Global Retail Development Index of 30 developing countries drawn up by AT

Kearney.

WEAKNESS OF MODERN RETAIL

The rapid development of retail sector is the sharp improvement in the availability of retail space. But
the current rally in property prices, retail real estate rentals have increased remarkably, which may
render a few retailing business houses unavailable.

Retail companies have to pay high rentals which are blockage in the turn of profits. Small size outlets
are also one of the weaknesses in the Indian retailing. 96% of the outlets are lesser than 500 sq.ft. The
retail chains are also smaller than those in the developed countries for instance, the superstore food
chain, food world is having only 52 outlets where as Carrefour promotes has 8800 stores in 26
countries.

The volume of sales in Indian retailing is also very low. India has largest population in
the world and a fast growing economy.

OPPORTUNITIES OF MODERN RETAIL

Global retail giants take India as key market .It is rated fifth most attractive retail market. The
organised retail sector is expected to grow stronger than GDP growth in the next five years driven by
changing lifestyles, increase in income and favourable demographic outline. Food and apparel
retailing are key drivers of growth.
Rural retailing is still unexploited Indian market. It can become one of the largest industries in terms
of numbers of employees and establishments.

Indian retail industry has come forth as one of the most dynamic and fast paced industry with several
players entering the market.

THREATS OF MODERN RETAIL

One of the greatest barriers to the growth of modern retail formats are the supply chain management
issues. No major changes are needed in the supply chain for FMCG products; these are well
developed and efficient. For perishables, the system is too complex. Government regulations, lack of
adequate infrastructure and inadequate investment are the possible bottlenecks for retail companies.
The supply chain for staples is less complicated than the net groceries. But staples
have a unique problem of non- standardization.

Organized retailing in India is yet to get an industry status.100% Foreign Direct Investment (FDI) is
not permitted in retailing in India. Ownership of retail chain is allowed only to the extent of 49% but
without FDI, the sector is deprived of access to foreign technologies and faster growth.

Lack of uniform tax system for organized retailing is also one of the obstacles. Inadequate
infrastructure is likely to be an obstacle in the growth of organized retails.

The unorganized sector has dominance over the organized sector in India because of low investment
needs. Labour rules and regulation are also not followed in the organized retails. The sector is unable
to employ retail staff on contract basis.Problem of car parking in urban areas is serious concern.
Difficult to target all segments of society. Emergence of hyper and super markets trying to provide
customer with –value, variety and volume.

Heavy initial investment is required to break even with other companies and
compete with them.

Retail today has changed from selling a product or a service to selling a hope, an aspiration and above
all an experience that a consumer would like to repeat. Retail chains are yet to settled down with
proper merchandise mix for the mall outlets. Retailing today is not about selling at the shop, but also
about researching and surveying the market, offering choice, competitive prices and retailing
consumers as well.
 FDI IN RETAIL- A POLICY PERSPECTIVE

Competition within the host country sector is a critical driver of improvements in sector
performance as a result of FDI.
However, FDI's potential for impact can be greater because of the combination of scale,
capital, and global capabilities which allow MNCs to close existing large productivity gaps
more aggressively.
FDI can be a powerful catalyst to spur competition in industries characterized by low
competition and poor productivity. Examples include the cases of consumer electronics in
Brazil and India, food retail in Mexico, and auto in China, India, and Brazil.

Competition is also key to diffusing FDI-introduced innovation across an industry. In

Brazilian food retail, high competitive intensity caused by informal players forced all modern
retailers to rapidly increase productivity; in Mexican and Brazilian auto cases, increasing
competition from imports induced foreign players themselves to increase their productivity.

Increasingly, foreign direct investment is integrating developing countries into the global
economy, creating large economic benefits to both the global economy and to the developing
countries themselves. Industry restructuring enables global growth as companies reduce
production costs and create new markets. For the large developing countries, integrating into
the global economy through foreign direct investments improves standards of living by
improving productivity and creating output growth. The biggest beneficiaries from this
transition are consumers - both global consumers that reap the benefits from global industry
restructuring, and consumers in the host countries that see their purchasing power and
standards of living improve.
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current
scenario of low competition and poor productivity. It can bring about:

 Supply Chain Improvement

 Investment in Technology

 Manpower and Skill development

 Tourism Development

 Greater Sourcing From India

 Up gradation in Agriculture

 Efficient Small and Medium Scale Industries

 Growth in market size

 Greater Productivity

 Benefits to government: through greater GDP, tax income and employment generation
The report inter alia made the following recommendations:

 Permit FDI in retail

 Remove Bottlenecks in the supply chain

 Relax SSI Reservation

 Remove distribution constraints

 Organize market for real estate

 Increase land supply

CENTRE FOR POLICY ALTERNATIVES

FDI IN INDIA’S RETAIL SECTOR - MORE BAD THAN GOOD

 The retail sector is severely constrained by limited availability of bank finance.

The Government and the RBI need to evolve suitable policies to enable retailers in
the organized and unorganized sector to expand and improve efficiencies.

 A National Commission should be set up to study the problems of the retail sector
which should also evolve a clear set of conditionalities on foreign retailers on
procurement of farm produce, domestically manufactured merchandise and
imported goods. These conditionalities must state minimum space, size and other
details like construction and storage standards.

 Entry of foreign players must be gradual with social safeguards so that the effects
of labour dislocation can be analysed and policy fine tuned. Foreign players
should initially be allowed only in metros.

 Manufacturing sector in India must be developed to address the dislocation of

existing retailers.
POLICY FOR FDI IN RETAIL TRADING IN OTHER COUNTRIES

FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand
without limits on equity participation, while Malaysia has equity caps on FDI in the retail sector.

EXPERIENCE OF FDI IN RETAIL TRADE IN CHINA

 FDI in retailing was permitted in China for the first time in 1992. Foreign retailers were
initially permitted to trade only in six Provinces and Special Economic Zones. Foreign
ownership was initially restricted to 49%.

 Foreign ownership restrictions have progressively been lifted and, and following China‘s
accession to WTO, effective December, 2004, there are no equity restrictions.

 ‗Wholesale and retail projects‘ forms part of the Catalogue for Encouraged Foreign
Investment Industries.

 Retail trade in China has been growing since 1992.

 Employment in the retail and wholesale trade increased from about 4% of the total labour
force in 1992 to about 7% in 2001. The number of traditional retailers also increased by
around 30% between 1996 and 2001.

 In 2006, the total retail sale in China amounted to USD 785 billion, of which the share of
organized retail amounted to 20%.

 Some of the changes which have occurred in China, following the liberalization of its retail
sector, include :
 Over 600 hypermarkets were opened between 1996 and 2001

 The number of small outlets (equivalent to ‗kiranas‘) increased from 1.9 million to
over 2.5 million

 Employment in the retail and wholesale sectors increased from 28 million people to
54 million people from 1992 to 2001

 China is witnessing robust economic growth and increasing urban and rural
incomes are fueling consumption level in this vast and complex retail
environment. According to Euromonitor, retail sales in China, which amounted to
nearly USD 554 billion in 2003, were expected to grow rapidly to reach USD 900
billion by 2009.
 China‘s retail sector registered growth in 2007. The nominal growth of China‘s
retail sales of consumer goods accelerated to 16.8% in 2007, up from 13.7% in
2006. Total retail sales amounted to 8,921 billion yuan, of which the wholesale
and retail trade sector grew nominally by 16.7%, to reach 7,504 billion yuan.
 China‘s promising consumer market has led to huge foreign interest. FDI in the
country‘s retail and wholesale trade climbed in 2007. There were 6,338 new
foreign retail and wholesale enterprises in 2007, up by 35.9% year-on-year. The
actual utilized foreign direct investment value amounted to 2.68 billion US
 dollars, up by 49.6%. China‘s retail and wholesale trade sector has witnessed
impressive growth in foreign direct investment, among others.

EXPERIENCE OF THAILAND IN OPENING RETAIL SECTOR TO FDI

Thailand is frequently referred to as a country in which FDI had an adverse effect on the local
retailers. It permits 100% foreign equity, with no limit on the number of outlets. For the retail
business, it has a capital requirement of TBH100 million and TBH20 million for each
additional outlet, while it has a capital requirement of TBH100 million for each wholesale
outlet.

The factual position, as reflected in the Report of ICRIER, is as follows:

 Wet market and small family owned grocery stores dominated the Thai Retail industry.
 Modern retail outlets by local Thai people came to prominence during the economic boom in
the early 1990s.
 Prior to 1997, no foreign investment was allowed and hence the retail sector faced limited
competition and thus had few incentives to upgrade their operation.
 With the start of the Asian crisis in 1997, the entry ban on foreign players was removed.
Within a short span of time, the foreign players expanded their operations significantly and
marginalised the local retailers who were already suffering from a recessionary trend of
economy.
 Many local players had to close down their business.
 Entry of foreign players in a recessionary economy adversely impacted all segments –
wholesalers, manufacturers and domestic retailers in the short run.
 However, entry of the foreign players had certain positive effects also, such as:
 It led to the development of organised retailing and Thailand has now become an
important shopping destination.
 It encouraged growth of agro-food processing industry and enhanced the exports of
Thai-made goods through networks of the foreign retailers

EXPERIENCE OF RUSSIA

The Russian supermarket revolution has occurred only in the 2000s. It is still a fragmented sector in a
country with a population of 140 million. Very high growth rates have been recorded. In 2002, sales
by the top-15 chains totalled US$2.7 billion; by 2006, sales by those chains had soared to US$19.2
billion. The share of the top-3 chains was 40 per cent in 2002 and 54 per cent in 2006, with the lead
domestic chains acquiring many small regional and local chains. The foreign share of sales was 33 per
cent in 2002 and 35 per cent in 2006—only inching up and spreading over 8 foreign chains among the
top 15. The two largest companies are Russian, but the origin of the capital, even of the Russian
companies, is usually a mix of domestic and foreign.
 EXPERIENCE OF CHILE

The Chilean supermarket sector is a case of a take-off driven by domestic capital, followed by nascent
multinationalization, followed by abrupt ―demultinationalization.‖ The supermarket sector in Chile
was launched in the 1990s, with the backing of domestic capital. Late in the 1990s, the number two
and number three global chains entered: Carrefour and Ahold. By 2002, those two companies had 13
per cent of the US$4.6 billion in total sales of the top-eight chains. However, by 2006 their share had
plummeted to zero per cent of the US$12.6 billion in total sales of the top eight (growing at a pace
similar to China‘s); the Chilean subsidiaries of two foreign chains had been bought by the top-two
Chilean chains in 2003. Today those top-two chains have 65 per cent of the market. The three market
leaders, all domestic, are expanding rapidly into other Latin American countries in mergers and
acquisitions, becoming regional multinationals. The domestic capital was based in a combination of
domestic bank credit and real estate, commercial, and financial services. These were the tertiary sector
ripple effects of the fundamental boom in copper and wood products, and the fruit and fish boom.

EXPERIENCE OF INDONESIA

Indonesia permits 100% foreign equity in retail business, with no limit on the number of outlets. It
also does not impose any capital requirements. The take-off of modern retail in Indonesia in the 1990s
primarily involved domestic chains. The current leading chain, Matahari, is indicative. Matahari
started as a small shop in 1958, grew into a chain of department stores, and was then purchased by a
giant banking and real estate conglomerate, Lippo Group, in 1997, just before the crisis. The crisis
created a sharp dip in modern retail sales, which began recovering in the 2000s. Matahari doubled its
sales between 2002 and 2006, becoming a billion-dollar chain by 2006. The share of foreign chains
(one European and one Hong Kong) in the top-seven chains is now 40 per cent. However, because the
sector is still fragmented, foreign chains do not have more than a 20 per cent share, similar to the
situation in China.

RATIONALE FOR FDI IN RETAIL TRADING

The Agriculture sector needs well-functioning markets to drive growth, employment and economic
prosperity in rural areas of the country. Further, in order to provide dynamism and efficiency in the
marketing system, large investments are required for the development of post-harvest and cold-chain
infrastructure nearer to the farmers‘ field. FDI in front end retailing is imperative to fund this
investment. Allowing FDI in front end retail operations will enable organized retailers to generate
sufficient cash to fund this investment. Investment in organized retail by domestic players will be
ineffectively deployed if FDI is delayed. International retailers should be mandated to bring with them
technology and management know-how which will ensure that investment in organized retail works to
India‘s advantage. In order to provide dynamism and efficiency in the marketing system, large
investments are required for organized retailing, linked with the back end of the value chain. FDI in
front-end retailing is imperative to derive full advantage of the value chain for the producer and the
consumer. International retailers will bring with them technology and management know-how that
will finally impact our whole retail sector through the adoption of best practices.
There is a need to ensure that issues of cost and quality, relating to consumers, are adequately
addressed. This could be achieved through stabilizing prices and reducing inflation, which, in turn,
could be achieved through direct buying from farmers, improving supply chain inefficiencies to lower
transit losses, improved storage capabilities to control supply/demand imbalances, better quality and
safety standards through farmer development and increased processing of produce.

Similarly, there is a need to address issues relating to farmers, through removal of structural
inefficiencies. This could be achieved through liberalized markets, with direct marketing and contract
farming programmes, from which farmers could profit, as also more predictable farm-gate prices,
steadier incomes and better access to evolving consumer preferences through private investors,
especially the organized retail sector. There is also a need to improve post-harvest management,
which could be achieved through investments in supply chains and cold storage to minimize losses
and improving processing, as also value addition for better farm incomes. Further, there is a need for
yield improvement, which could be achieved through use of contract farming to disseminate
technological know-how, working with farmers to promote awareness about soil quality, pesticides
and fertilizer usage, grading, sorting capabilities and increasing availability of low interest credit for
farmers.

FDI in retail, may, therefore, be an efficient means of addressing the concerns of farmers and
consumers, as referred to above. The private sector, especially organized retail, is best suited to make
investments of this magnitude. Permitting foreign investment in food-based retailing is likely to
ensure adequate flow of capital into the country & its productive use, in a manner likely to promote
the welfare of all sections of society, particularly farmers and consumers. Opening FDI in retail could
also assist in bringing in technical know-how to set up efficient supply chains which can act as models
of development. It would also help bring about improvements in farmer income & agricultural growth
and assist in lowering consumer prices /inflation.

It is therefore clear that organized retail cannot have a cake walk and will face a growing challenge
from the unorganized retail sector. It is possible that the unorganized retail sector may be re-inventing
itself, through new and improved practices, to meet the challenges posed by organized retail. It is also
evident that without addressing the gaps in the value chain, organized retail will neither be profitable
nor make any great difference to the economy.

Keeping in view the large requirement of funds for back-end infrastructure, there is a case for
opening up of the retail sector to foreign investment. At the same time, in the Indian context, there is
a view that this may be more appropriately done in a calibrated manner. We must ensure that the FDI
does make a real contribution to address the inadequacies of back-end infrastructure. Alongside, we
need to address the challenge of integrating the small retailer in the value chain.

CONCLUSION

Consumers are always hungry for modern ways of shopping. Indian retail sector is growing fast and
its employment potential is growing fast. The retail scene is changing really fast. Retailers are
rethinking their approaches towards the suppliers so that they can get the best pricing strategies for
them. There is no surprise why from an Ambani to Mittal, Godrej to Birla, everybody is ready with
them plans to kick start retail revolution in India. Apart from above, retail sector in India is also
catalyst for the growth of stalling tactics of below the line marketing used by major retail players Like
Spencer, big bazaar, reliance fresh etc. For tapping customers by creating points of sales displays. So
we can say that India is a rising star and going to be one of the fastest growing regions of the future.