The Indian consumer and the marketer are trying to battle it out with each other like the
' Two swords in one scabbard '. It has been equally challenging and thrilling on both sides. Suddenly we find the Indian consumer in an ocean of options and preferences to deal with. From the marketer's point of view, the retail sector continues to be the battle arena, where the destinies of the leading brands are decided based on the judgments made by the judge; the Consumer. If we consider the myriad options and mega-myriad tastes, the Indian retail scenario is likely to get churned. The entire consumer base is mostly going to suffer from one huge crisis i.e., The Problem of Plenty.
Primary objective of the Study
Present study is to understand the market structure of retail industry in India, the forces which affect the functioning of the industry, untapped potential of organised retail sector , strategic impact on the sector after introduction of FDI , and another objective of the study is to analyse prospect of retail sector in India through the various report published by various market research firms.
SALIENT FEATURES OF THE STUDY
The Indian retail market is presently valued at 396 billion US dollars and is likely to grow at the rate of 12% to reach 574 billion US dollars by 2015. This sector provides the second largest employment after agriculture, employing more than 35 million people with wholesale trade generating an additional employment to 5.50 million more. The rising disposable income in the country is chief factor behind the increasing consumer habits. India is the fifth largest retail destination on world map. The Indian retail industry has undergone tremendous change over the last decade with a dynamic shift towards organised retailing format and development taking place in major cities and metros. Tier II and Tier III cities follow this transformation. The overall retail market in India is predicted achieve the Rs.47 trillion (US$ 792.84 billion) mark by FY 17. As India's retail industry aggressively expands itself, great demand for real estate is being created. Further, with the online medium of retail gaining more and more acceptance, there is a tremendous growth opportunity for retail segment. Companies, both domestic and international. Favourable demographics, increasing urbanisation, nucleated families, increasing affluence amongst consumers, growing preference for branded products and higher aspirations are other factors which will drive retail consumption in India. Both organised and unorganised retail are bound not only to coexist but also achieve rapid and sustained growth in the coming years.
Size of Retail Market
The Indian retail market, currently estimated at around US$ 490 billion, is projected to grow at a compound annual growth rate (CAGR) of 6 per cent to reach US$ 865 billion by 2023. Food and grocery contribute to 60 per cent share followed by the apparel and mobile segment. Organised retail, contributed to 7% of total retail in 2011'12 is predicted to grow at a CAGR of 24 percent and achieve 10.2 per cent share of total retail by 2016'17, (Source: 'FDI in Retail: Advantage Farmers'). India has about one million online retailers ' small and huge ' which sell their products through various e-commerce Portals. As per a recent report by the Internet and Mobile Association of India (IAMAI) the online retail industry in the country has achieved 12.6 billion USD in the year 2013.
BROAD CLASSIFICATION OF RETAIL
It basically constitutes of the local kiranas, the vendors on the pavement etc., It constitutes around 98% of the total retail trade. The introduction of FDI in retail is expected to cut down the employment opportunities in the unorganised sector and expand that in the organised one.
It basically constitutes of the retailers those who are licensed and are liable to pay Income Taxes and Sales tax. The hypermarkets and the retail chains come under the purview of this sector. It constitutes 8% of the total retail sector.
Further this sector is subdivided into Instore Retailers. These are popularly known as Brick and Mortar format. These are the fixed point sale outlets designed to attract the customers.
FORMATS OF RETAIL
The following formats are prevalent in the retail arena.
' Mom-and-pop stores: Small family owned businesses catering to small sections of society with meagre sales and profits. They are known for their excellent customer services.
' Department Stores: They are sellers of general mechandise. They offer mid-range to high range products to the customers. Examples : ' Westside' and ' Lifestyle'
' Category Killers: These stores are specialised to offer only one type of product.
Examples are: 'Sports Authority' and 'Best Buy'
' Malls: One of the most popular and visited retail formats. Probably the largest retail format in the country as customer gets everything under one roof. Example : Forum Mall etc.,
' Discount Stores: Stores that offer discounts on MRPs and focus on stock clearing sale luring the bargain shoppers to the stores.
' Supermarkets: One of the most popular retail formats offering foods and household goods catering to the normal households. It fulfils the needs of the middle class so that they can stock on future groceries.
' Street Vendors: These are probably the oldest retail formats prevailing in India. They keep shouting to their customers for selling of local wares. They sell not only clothes and accessories, but also local food.
' Hypermarkets: These are a combo of supermarket and department stores. They provide all kinds of groceries and general goods. They draw enormous crowds, particularly in the weekends.
' Kiosks: Typical box-like shops which sell small and inexpensive items like toffees, newspapers, water packets and sometimes tea and coffee. These are most commonly found in each and every street in a city and cater to local residents.
MARKET STRUCTURE IN RETAIL INDUSTRY
Retail market structure refers to the cluster of companies that sell similar or identical products in the same geographical area. An oligopoly defines a small group of companies that practise collusion in order to raise prices on products because of high demand. A market structure characterized by competition among a few number of large firms that have market power, but that must consider their rivals' actions when developing their competitive strategies.
Effects of Oligopoly
Oligopolies in the retail sector result in increased profits for companies that are part of the market structure as they can elevate the prices on their products beyond fair market values. These market structures have a pronounced effect on customers who have to spend more for goods and services. Customers with little discretionary income suffer the most as their primary share of their budget comprise of consumables. Oligopolies provide little scope for incentives to lower costs, thereby leading to hardly any efficiency improvements and innovative changes in their sector.
In free markets, oligopolies are a rare occurence in retail markets because existing companies compete with new players and can't handle the losses indefinitely to compete with new players. This market structure creates a prisoner's dilemma that limits the time an oligopoly can exist. This is because each firm in the oligopoly has sufficient scope of cheating by lowering its prices to gain more profits.
Companies in an oligopoly typically undermine new competitors either informally though common pricing tactics or formally through the formation of a cartel. Participants will usually reduce their prices lower than their actual costs to drive competitors out of business. Competitors cannot usually compete with established businesses because of their lack of established customers and inadequate capital. After competitors go out of business, the companies in the oligopoly often will raise their prices.
Natural oligopolies are a product of paucity of resources, hence retail oligopolies must use artificial barriers to prevent new sellers from entering the market. They maintain their hold on a market by relying upon government intervention at the local, state or national level to and reduce competition. For example, grocers in a country might advocate a law that restricts the sales per square foot in order to keep a Walmart out of their county.
Natural oligopolies on a national or global scale are a product of Trademarks and patents, promoted with expensive advertising campaigns. Natural oligopolies differ from artificial ones as customers have options for purchasing a product and can choose from other players. Businesses spend a lot on selective distribution channels, increasing the price bar price in order to encash themselves along with their partners. For example: Coca-Cola and Pepsi
KEY PLAYERS IN RETAIL
The table below shows the Key players operating in retail industry :
KEY PLAYERS MARKET REACH
Pantaloon Retail Ltd Over 2 million sq ft of retail space spread over 35 cities with 65 stores and 21 factory outlets
(Future Group venture)
Shoppers Stop Over 3.21 million sq ft of retail space spread over 23 cities with 51 stores
(K Raheja Group venture)
Spencer Retail Retail footage of close to 1 million sq ft across 45 cities with 200 stores
(part of RP-SG Group)
Lifestyle Retail Approximately 15 lifestyle and eight Home Centre stores
(Landmark Group venture)
Bharti Retail 74 Easyday stores with plans to invest about 2.5 billion USD over the next five years to add about 10 million sq ft of retail space in the country
Reliance Retail 700 stores with a revenue of 7,600 crore INR
Aditya Birla 'More' 575 stores with approximate revenue of 2,000 crore INR. Recently, purchased stake in Pantaloon Retail
Tata Trent 59 Westside stores, 13 Starbazaar hypermarkets and 26 Landmark bookstores
ENTRY OPTIONS FOR FOREIGN PLAYERS PRIOR TO FDI POLICY
Prior to Jan 24, 2006, FDI was not to seen in retail arena, mostly the general players had been in operation. The routes taken by them have been summarized below:
' Agreement in Franchising:
It is an easiest track to come in the Indian market. In franchising and commission agents' services, FDI (unless otherwise prohibited) allowance is made possible once RBI approves the same under the Foreign Exchange Management Act. Not only quick food bondage players like Pizza Hut, but also players like Nike, Lacoste etc., have entered through this route.
' System of Cash And Carry Wholesale Trading:
100% FDI is allowed in wholesale trading. This includes the building of Mega distribution infrastructure in order to help the local manufacturing players. The wholesaler is free from handling consumers and has to handle only small retailers. Metro AG was the pioneer in this field to enter India via this route.
' Agreements based on Strategic Licensing :
Some of the foreign players provide exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it on their own, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand in agreement with Piramyd has entered India through this route with an agreement with Piramyd, Mumbai. SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd and has entered India via this route.
' Manufacturing and Wholly Owned Subsidiaries:
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies are authorised sellers to Indian consumers by agreement franchising, internally arranged distributors, existing Indian retailers, self -owned outlets, etc. For instance, Nike has a wholly owned subsidiary, Nike India Private Limited now, only by entering into an exclusive licensing agreement with Sierra Enterprises.
Entry Barriers for retail giants to enter India:
' India has a poor supply chain due to inefficient infrastructure. Only less than half of the roads in India are paved. The length of four lane roads in India is only about 7000 kilometres (less than one-fifth of that in China). This adversely affects logistic facilities in India and stops retailers from entering India.
' Government is still apprehensive regarding the implementation of FDI in retail in India. Fear of loss of business of kirana-walas is the cause of concern.
' Tax structure in India is complex and causes double taxing for the foreign retailers, from the central government as well as from the state government.
' India's distribution network is weak. This causes the retailers to maintain high inventory.
' Trucking industry in India is highly fragmented.
' Inability to enter rural retailing: Rural India consumes about 40% of the products in India. So the retailers have a real opportunity in the rural area. But challenges like competition from local mom and pop stores as they sell goods on credit, logistic hurdles, lack of infrastructure, higher inventory cost etc., stops the retailers from entering the rural market.
' Lack of technology adoption in India.
' Unorganised retailing system in India
The idea of opening retail sector for Foreign Direct Investment has been met with lot of oppositions from all sides. The major reason behind this negative attitude towards modern retailing by FDI is the fact that it can expand only by destroying the traditional retail sector.. Politicians argue that the global retailers will put a large number of small local players and domestic chains out of business. Like every coin has two sides, this issue too has another side ' a much brighter side. FDI in retail sector if opened in a gradual manner would promote competition and contribute to the growth of Indian economy. FDI will positively affect the end consumer, create decent amount of employment and would encourage entrepreneurs to come up and take the challenges in retail marketing. FDI should be introduced in such a way that it benefits wide range of sectors ' agriculture, food processing, manufacturing, packaging and logistics. The present FDI cap in Indian retail market is 100% in single brand retail and 51% in multi brand retail
Opportunities of FDI in retail in India:
' Facilitate inflow of investments in retail sector & Improve quality of employment
' Enhanced local sourcing & Better value to end customers
' Improvements in supply chain and warehousing & Reduction in cost
' Introduction of Information Technology in retail and opportunities for local entrepreneurs
' Development of infrastructure and logistic facilities
Challenges of FDI in retail:
' Increase competition to a great extent & may cause formation of cartels.
' Rise in real estate prices & Financial strength of the foreign players will wipe out a large section of unorganized players
' Domestic entrepreneurs would be marginalized & Unfair trade practices on the rise due to lack of proper guidelines.
Side effects of FDI and solutions:
While arguing about the good things of FDI, we should also keep in mind the grey areas of FDI. Some of the grey areas are:
' Predatory pricing would choke the domestic retailers.
' It is common among the MNCs to use their big financial size to kill competitors.
' MNCs most often squeeze the margins of suppliers in order to supply goods at the lowest possible price to the customers. So, in that case the claim of FDI aiding suppliers will be invalid.
' Formation of a strong regulatory body
' Strengthen Competition Commission of India
' New laws and guidelines to regulate FDI.
E- RETAIL SCENARIO IN INDIA
E-Retail includes majorly the standalone online retailers and marketplaces. It excludes
segments such as online ticketing and online deals, as they don't compete directly with traditional brick and-mortar models of retail industry. India's online retail industry has risen in last 5 years from around Rs.15 billion revenues in 2007-08 to Rs.139 billion in 2012-13 i.e., an astounding CAGR of 56%. The 9-fold growth was a result of increasing internet penetration and changing lifestyles, being primarily driven by books, electronics and apparel.
As per CRISIL, Research expects the buoyancy in the trend to sustain for long time, and estimates the market will keep growing at a healthy 50-55 per cent CAGR to around Rs.504 billion by 2015-16. The entry of new players in niche segments such as jewellery, grocery and furniture would promote the growth. This would be substantiated with large investments by existing players in the apparel and electronics segments, which would emerge as the drivers. In terms of size, India's online retail industry is very small compared with both organised and overall (organised + unorganised) retail in the country. This lets us realise about the volumes of untapped potential of the same. We expect the industry's revenues to more than double to around 18 per cent of organised retail by 2016 from around 8 percent in 2013. Yet, its share of the overall retail (organised + unorganised) pie will be just over 1 per cent.
Success factors of retail sector in India:
' Increasing urbanization and migration to towns and cities: Contribution from urban areas to GDP would increase from 60% IN 2001 to 70% in 2018.
' Rising Disposable income and consumption expenditure: Consumption spending is expected to rise from 1077 billion USD in 2012 to 2046 billion USD in 2017.
' Growing number of working women and young population: The median age of the country is 26 years i.e., lowest among major economies and is expected to be 31 years in 2025. Women employment grew at 20% from 2010 to 2012.
Supply factors :
' Rapid real estate and infrastructure development : Supply of mall space to rise 40-50% between 2012-17.
' Easy availability of credit : No. of credit cards was estimated at 18 mn in 2012 and expected to rise to 28 mn in 2014.
' Creating a differentiated experience : Leading modern trade stores stock the brands procured by local importers.
' Introduction of innovative formats : Examples are luxury formats (High end malls ) , Transit format ( Near airports and metros) , Specialty formats ( Wedding halls )
Regulatory Changes :
' Liberalization of FDI policies for retailing : Progressive liberalization between 2006-12.
' Introduction to GST ' Govt. is close to a consensus and once implemented bring down prices.
' Introduction of Direct tax Code ' Expected to roll out from 2014
' India's retail fundamentals:
Market size US$ 350 billion
Unorganised retail 12 million mom-and-pop stores
penetration 5-8 %
Retail density 6%
Contribution to GDP 14%
As per India Retail sector report, It cannot be more exciting to learn that a billion people contributing approximately $700bn to $750bn (FY15) retail market with a forecasted growth of about 13-16%. A penetration of just 8% to 10% by the organized sector and a 200 million urban consumers have captured the imagination of giant corporations on either side of the Atlantic and Pacific oceans. As the demand of the market grows due to the changes in consumer demographics and their tastes and other preferences the Indian retail industry is expected to achieve 9% growth in 2012-16, with organised retail achieving 24% growth (Agarwal and Singh, 2013) This FDI policy would have given a launching pad for world class retailers like Wal-Mart , Carrefour to jump in the booming Indian retail sector. The Indian Government believes that the FDI cap in multiband retail and further liberalization of single-brand retail trade will enhance FDI cash inflows providing new opportunities and benefits besides quality improvement. As per Ernst and Young & Retail Association of India report ' 'Pulse of India Retail Market , 2014', Consumerism is undergoing metamorphosis by amalgamation of favorable demographics, a young dynamic population, increasing income levels, urbanization and growing brand orientation.. Penetration in tier-II and III cities, improvisation in business models and operations, coupled with transformation from unorganized to organized trade are expected to play an integral role in driving this growth. Furthermore, the liberalization of FDI policy is expected to propel foray of global retailers, which will further fuel the growth of organized retail in India.
As per Tata Business Services Report/whitepapers/india-retail-trends-2014,Annual household income has been increasing and in FY 15(e), of the total 246m households in India only 29% fall under the bottom of the pyramid as against 64% in FY 06 on a 204m household base. As per Ernst and Young Report, Rebirth of E-commerce in India, 2011Annual household income to increase from $2632 (2005) to $3823 (2015e) to $6790 (2025e). Decreasing communication costs, increasing PC, internet and wifi penetration. Internet has gone up from 5.5m (2000) to 300m in FY15e, broadband user base 51000 (2001) to 150m in FY15e. Increasing credit (CC) and debit card (DC) penetration with higher limits for spending. From 4.2m (CC),0.3m(DC) in 1999 to 18m(CC), 228m(DC) in 2011 and expected to reach 73m(CC), 350m(DC) in FY15(e).
The study includes literature study and documents study. This chapter describes the approach of obtaining an overall perspective of Market structure of Retail Industry in India.
The study is based on secondary sources of data. The main source of data are various Research papers, yearly reports published by market research analysts ,online data base of journals, articles, newspapers, etc.,
Data was collected from the papers used for this study. Data collected was used to find the types of retail formats, the retail distribution across the country, key players , competition, FDI in retail , Government regulations , Entry options and barriers for the foreign players etc.,
ANALYSIS AND FINDINGS
If we need to understand the reason behind the international success in retail industry of a nation we need to closely analyse the market structure. We would like to make use of Michael Porter's ' The National Diamond ' model to describe the current scenario of the nation. For e.g., Govt. is in talks regarding full FDI in multi brand retail after single brand retail. This model would help us understand the competitive advantage of the nation.
If we consider the six determinants which Porter used for the model , then we would come up with the following inferences. They are as follows :
Determinants of National advantage:
1. Chance and Government ' Role of Govt. is unquestionable for any huge investment
2. Factors of Production conditions- The factors of production have instrumental role to play to decide the competencies of the industry.
3. Demand condition- The trend of home demand for the industry's product or service.
4. Related and supporting industries ' The presence or absence in the nation of supplier industries and related industries that is internationally competitive.
5. Firm structure , strategy and rivalry ' The condition in the nation governing how companies created, organised, and managed, and the nature of domestic rivalry.
This model suggests that the national home base of trade and demand factor can be important in determining the extent to which it can achieve competitive advantage as compared with advantage on global level. This base provides basic factors of demand condition, which support organisations from building global competitive advantages in global basis. Due to this Indian Govt. allowed FDI in Single brand fully and upto 51% in multi brand. Retailers like Wal-mart, Nike, Spencer, Metro even if present in the India are working on the basis of franchising or joint ventures. Wal-Mart, Carrefour, IKEA, Spar, Tesco, Best Buys have expressed their desire to expand their investment plans in the retail business. Therefore , It is significant to analyse the competitive environment of India retail sector.
HIGHLIGHTS OF FINDINGS
' Indian retail market is expected to grow at a CAGR of13% till 2018 and achieve a size of 950bn USD.
' Organized retail market in India is expanding and is expected to grow at CAGR of 19-20% over the next 5 years.
' In the next few years to come, modern retail is expected to grow 50'60 percent annually in tier II and tier III cities, as compared to only around 30 percent in the metros.
' As per recent Technopak report , E-retailing has the potential to reach US$ 76 billion by 2021. This growth would be primarily attributed to the 180million broadband users by 2020, and a ever expanding class of mobile phone users.
' India is expected to come 3rd after China and US in generation of retail sales in actual terms over the 2011-2016 period.
' Various giant retailers like Carrefour, Seven & I are witnessing low growth prospects after having generated most of their sales from their domestic markets.
' India's high income consumers lie in the age bracket of 25 and 40.
' Grocery stores are expected to undergo radical change. Gone are the Mom and Pop stores as now they are being replaced by modern groceries since 2006. They provide newer and better service offerings to the urban class. But, Still it contributes to only4% of total retail that clearly shows the low level of penetration
Recommendations Proposed to Drive the Growth of Retail industry
Option 1: To regulate the Modern Retail .
Option 2: Upgrade Traditional Retail.
Option 3: Upgrade Wholesale Markets to Serve Retailers and Farmers Better.
Option 4: Help Farmers Become Competitive Suppliers to Supermarkets.
Option 5: Regulation of misleading statements and advertisements.
Option 6: Regulatory Framework to avoid monopolistic practices.
The retail sector of India is moving under the phase of golden sunshine, encouraging large number of global players to enter in the market. Changes in the Indian government policy regarding FDI in retail sector especially in multi brand retail would promote this industry on the whole economic development and social welfare of the country. There is sense of optimism that if the changes are done in a right direction it would help the consumer deal with the ' Problem of Plenty ''.
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2. Deloitte(2011) India Retail Market. Embracing a new trajectory. Retrieved from http://www.deloitte.com/assets/DcomIndia/Local%20Assets/Documents/Indian_Retail_Market.
3. Ernst and Young (2014). Pulse of Indian Retail Market. Retrieved from http://www.rai.net.in/EY-RAI_Pulse_of_Indian_retail_market_Final
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