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Demystifying retail enigma

Why is it that a sector which has been in existence ever since commerce of any kind existed managed to create such fervor in the country in so short a time? Ritesh Chandra tells more.
Hindustan Times | By Ritesh Chandra, New Delhi
UPDATED ON JUL 10, 2007 01:37 AM IST

The retail sector in India has had an enviable track record in the past few years. Committed investments of over $30 billion over the next four years; the biggest corporate houses in India (Tatas, Birlas, Reliance, Bharti to name a few) honing their retail plans; the world’s biggest retailers (Wal-Mart, Tesco, Carrefour) evaluating the Indian market; politicians of all hues having a vocal opinion on the sector; real estate mandarins licking their lips at the prospects of the retail trade… the list goes on. Perhaps no other sector in India’s recent economic history has managed to stir such a buzz as the retail trade.

What is the hullabaloo all about? Why is it that a sector which has been in existence ever since commerce of any kind existed managed to create such fervor in the country in so short a time? Are the macro-economic implications of corporate investment into this sector detrimental to India’s long-term socio-economic interests? What is the right model for development of the retail sector in the country? Is FDI in the retail trade the end of the world for the mom-and-pop retailers? Similar queries and issues have been posed and deliberated at length over the past few years.

The facts — the size of the retail market in India is estimated between $320-350 billion growing at 30-35 per cent. Organised retail trade, a predominantly urban phenomenon, constitutes about 4 per cent of the total retail trade in India. India has about 13 million retail outlets providing direct and indirect employment to nearly 18 million people.

The mom-and-pop stores represent the bulk of the retail formats present in the country. With the democratic profile significantly skewed towards the youth, brought up in an environment wherein consumerism is the king, specialty and luxury brands have a captive market which is unparalleled in scale through the world. The opportunity for the retail industry truly looks unprecedented.

Unfortunately, most of the debate in this sector has focused on the issue of permitting FDI and the consequences of loss of business due to the entry of the global monoliths. That is unfortunately an extremely myopic view of the issues at hand. The colour of money is still green irrespective of where it comes from.

Corporate India has committed significant amounts of funds to the sector on its own accord without having any foreign investment. The real issue in my view is corporate investment (be it Indian or foreign) into the retail trade and its impact on the economy.

In my view, the impact of corporate investment into retail is likely to be multi-faceted. The first and foremost is on the supply chain — starting from the farmers to the small and medium enterprises manufacturing goods. The impact on such segments will be tremendous. With limited access to marketing and financial resources, organised retailers have become a panacea for the SME segment as most of the private label manufacturing is likely to be done by these companies for the large retailers.

Small and medium sized manufacturers are being offered off-take agreements for as much as three years of their production capacities. On the agricultural front too, farmers are being provided with seeds and being taught how to increase yields with the understanding that their produce would be sold directly to the retailers. This has increased the net realisations to the farmers as it obviates the need for middlemen in the transaction.

Moreover, the likely investment into the cold storage chain including warehouses, refers, stores and displays is likely to result in significant efficiencies on the supply chain.

Despite the tremendous opportunity posed by the retail sector, it is not going to be easy for the organised retailers to establish themselves in the market. Competition from the mom-and-pop stores is likely to continue for the foreseeable future – it will be difficult to replicate the “trust” and “convenience” factors (the corner stone of the mom-and-pop stores) in the short to medium-term. With the current infrastructural constraints, the proposition of the organised retailers needs to be compelling enough to “pull” customers.

Significant competition is likely to also come from established co-operatives like Amul. It is thus imperative for organised retailers to develop a model that is unique to India. The model needs to be inclusive, easy to implement and scalable. The other challenge facing organised retail is the cost of realty. It has been argued that the retail boom is fuelling the real estate market. With a projected demand of 455 million sq ft nationally in the next four years there seems to be some merit in this argument. However, the cost of leasing realty has reached an inflection point today, wherein most retailers find it uneconomical to take large positions on leases.

The challenge for regulators is to ensure that the on-going transition is handled smoothly. The solution does not lie in shying away from the issue by banning foreign investment or by issuing licenses to retailers for operating stores. Organised retail is a reality which cannot be wished away. In order to realise its complete potential it is important to make the transition inclusive for all the stakeholders.

Surely there is likely to be short-term pain for some constituents. The long-term benefits from the development of this sector could have a far-reaching impact on the economy which cannot and should not be ignored.

(The writer is Associate Director of Ernst & Young)

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