STRATEGIC MANAGEMENT

Case 5: WHAT LIES IN STORE FOR THE RETAILING INDUSTRY IN INDIA?

India is not known as the ‘nation of shopkeepers’, yet it has as many as 5 million retail outlets of all shapes and sizes. Some other optimistic estimates “place the number at as high as 12 million.  Whatever  be  the  number, India can  claim  to  have  the  highest  number  of  retail outlets per capita in the world. But almost all of these are small outfits occupying an average of 500 square feet in size, managed by family members,  having negligible  investment  in land and assets, paying little or no tax and known  as the kirana dukaan (‘mom and pop’ stores in the U.S or the corner grocery stores in the U.K.). These outlets offer mainly food items and groceries—the staple of retailing in India. Customer contact is personal and one- on-one, often running  through  generations.  There are a limited number  of items offered! often sold on credit—the payment to be collected at the end of the month. The quality of items standard, with moderate pricing.

There is great hype about the growth and prospects of organised retailing industry in India. It must be noted, however, that organised retailing constitutes barely 2 per cent of the total retailing industry in India, the rest 98 percent being under the control of the unorganised, informal sector of’ kirana dukaans. Market research agencies and consultants come up with encouraging   forecasts   about   this   segment   of   the   retailing   industry.   For   instance, AT. Kearney’s Global Retail Development Index ranks 30 emerging countries on a 100- point scale. Its 2007-ranking  places India at number one for the third consecutive  year, with 92 points,   followed   by Russia and China.   The  size  of  the  organised   retailing   industry   is estimated at US $8 billion and projected to grow at a compound annual growth rate of 40 per cent to US $22 billion by 2010. Overall, the Indian retailing  industry is expected to grow from the current US $350 billion to US $427 billion by 2010 and US $635 billion by 2015.

The economic environment in the post-liberalisation period after 1991, has created several factors that have made this high growth of the organised retailing industry possible. India’s impressive economic growth rate of 9 per cent is the prime driver of increasing disposable incomes in the hands of the consumer. The growing size of the consuming class in India, in tandem with the entry and expansion of the organised sector players in recent years, has set the  pace  for  corporate  investment   in  retail  business.  Practically,  every  major  Indian business group is looking for opportunities in the growing retailing industry. Among them are the big names in the Indian corporate sector such as the AV Birla group, Bharti, Godrej, ITC group, Mahindras, Reliance, Tatas and the Wadia group.

The international environment presently is replete with examples of the fast-paced growth of the  retailing   industry   in  many  developing   countries   around   the  world.   In  the  post- liberalisation  period,  there  is more  openness  and  awareness  of the international developments   among  Indians.  The  ease  of  travel  abroad   and  the  exposure   through television and Internet have increase the awareness of the urban Indian consumer to the convenience of modern shopping. The modern retail formats thus have gained acceptance in India.  Carrefour,  Tesco  and  Wal-Mart  are  the  international  players  already  operating in India, with several others like Euroset, Supervalue and Starbucks having plans to enter soon. These international  companies bring to Indiathe latest developments  in the retailing industry and help to set up a benchmark for the domestic player.

The market environment is one of the most significant in terms of the growth and prospects of the retailing industry in India. In terms of geography, the reach of the organised retailing industry has been growing. In addition to the mega-cities of Mumbai and Delhi, cities such as Bangalore,   Pune, Hyderabad,   Kolkata  and  Chennai  are  also  witnessing   a  boom  in organised   retail   activity.Retailers   are   now   trying   to   focus   on   smaller   cities   such as Nagpur, Indore, Chandigarh, Lucknow or Cochin.    There   are   interesting    possibilities regarding  the  retail  formats.  Traditionally,  street  carts,  pavement  shops,  kirana  stores, public distribution systems, kiosks, weekly markets and such other formats unique to India, have  been  in  existence  for  a  long  time.  At  present,  most  organised  retail  formers  are imitations of those used abroad. These include hyper and supermarkets, convenience store, department stores and specialty chains. Among these formats, a notable trend has been the development of integrated retail-cum-entertainment  centres and malls as opposed to stand- alone developments. Besides these, there are some attempts at indigenous formats aimed at the rural markets-such as those by ITC’s Choupal Sagar, DSCL’s Hairyali Kisaan Bazaar and Godrej group’s Godrej Aadhar. Pricing is an important issue in the retailing industry. Generally, the bulk buying yield lower costs of procurement for the big retailers—a part of which they pass on to the customer in the form of lower prices. In food retailing, for instance, there is a clear trend of low prices being the determining factor in purchase decisions by the cost-conscious Indian consumer. But, lower prices may not be a major issue with the higher-income groups that may place greater emphasis on the quality of products and retail service, store ambience and convenience of shopping. For the majority of Indian consumers however, price is likely to remain a significantly important issue in the purchase decision. Competition has already accelerated with many Indian business groups having entered or likely to enter this booming industry.

The political environment in India is ambiguous! in terms of its support to the organised retailing industry. This is obvious as the unorganised sector employs nearly 8per cent of the Indian population and is widely spread geographically. The whelming presence in terms of

98 per cent of the total retailing industry also is a significant political issue. In a democracy, the politics  of numbers  makes it imperative  for the political  class to adopt an ambiguous stand.  In  some  cases,  politicians  have  acted  in  favour  of  the  unorganised   sector  by disallowing the setting up of large retail some states. Overall, however, there is ambiguity as there are several environmental trends in favor of the development of the organised retailing industry.

In the regulatory environment, there has gradual easing of the restrictions albeit at a slow pace,  in  view  of  the  ambiguous  political  stance  as  indicated  above.  Interestingly,  the retailing industry, is still not recognised as an industry in India, Foreign direct investment of up to 100 per cent is not permitted though it is possible for foreign players to enter through the routes of agreements, cash-and-carry wholesale trading and strategic licensing agreements.   Another   problem   area   is  of  the  real  estate   laws  at  the  level   of  state governments that are yet to be clear on the issue of allowing large stores. Restructuring of the  tax  structure  for  the  retailing  industry  is another  regulatory  issue  requiring governmental action. However, tariffs on imported consumer items have been gradually aligned to meet the prescribed WTO norms and reduction of import restrictions are likely to help the growing organised retailing industry.

The socio-cultural environment offers many interesting insights into the changing tastes and references of the urban and semi-urban Indian consumer. There is a large rural market consisting  of  nearly  720  million  consumers,  spread  over  more  600,000  villages. India’s consumers are young: 70 percent of the country’s citizens are low the age of 36 and half of those are under 18 years of age. These people have deep roots in the local culture and traditions, yet are eager to get connected with and know the outside world. According to a DSP Merrill Lynch report, the key factor providing  a thrust to the retail boom in Indiathe changing age profile of spenders. A group of seven million young Indians in their mid- twenties, learning over US$ 5000 per year, is emerging every year. This group constitutes people who are enthusiastic spenders and like to visit the new format retail outlets for the convenience  and time saving they offer. Malls are also being perceived as just places for shopping,  but  for  spending  leisure  time  and  as  meeting  places.  There  has  been  an emergence   of   a   combination   of   the   retail   outlet   and   entertainment   centres   having multiplexes, with food courts and video game parlours.

But there are some pitfalls too. For instance, organised retailing in India has had to deal with the misconception among middle-class consumers that the modern retail formats being air conditioned, sophisticated places are bound to be more expensive.

The  supplier  environment  probably  offers  the  biggest  constraint  on  the  growth  of  the retailing  industry  in India.  Reaching India’s  consumers  cost  effectively  is  a  distribution nightmare,  owing  to  the  sheer  geographical  size  of  the  country  and  the  presence  of traditional,   fragmented   distribution   and   retailing   networks   and   erratic   logistics.   For instance, the apparel segment that is one of the two top segments,  the other being food, have   had   to  invest   in  back-end   processes   to  support   supply   chains.   Supply   chain management   and   merchandising   practices   are   increasingly   converging   and   apparel retailers are establishing collaborations with their vendors. Another area of concern is the severe shortage of skills in retailing. Human resource development for the retailing industry has  picked  up  lately  but  may  take  time  to  fill  the  gap  caused  due  to  the  shortage  of personnel.

The technological  environment  for the organised  retailing  industry  straddles  many areas such  as  IT  support   to  supply   chain  management,   logistics,   transportation   and  store operations. Some global retailers have demonstrated  that an innovative use of technology can provide a substantial strategic advantage. The large number of store items, the diversity of sourcing and the gigantic effort required to coordinate actions in a large retail context is ideal for using IT as a support function. For instance, an innovative use of IT can help in a wide variety of functions such as quick information processing and timely decision-making, reduction in processing costs, real-time monitoring and control of operations, security of transactions and operations integration. The availability of supply chain management, customer relationship management an merchandising software can help much while performing activities such as ordering and tracking inventory items, warehousing, transportation and customer profiling.

Overall, the Indian scenario offers an interesting mix of possibilities and challenges. A successful model of large-scale retailing appropriate for the Indian context is yet to emerge. The modern retail formats accepted globally are in the process of implementation and their acceptability is yet to be established.

Questions:

1. Identify the opportunities and threats that the retailing industry in India offers to local and foreign companie

2. Prepare an ETOP for a company interested in entering the retailing industry in India.

   Case 5: WHAT LIES IN STORE FOR THE RETAILING INDUSTRY IN INDIA?

    

   India is not known as the ‘nation of shopkeepers’, yet it has as many as 5 million retail outlets of all shapes and sizes. Some other optimistic estimates “place the number at as high as 12 million.  Whatever  be  the  number, India can  claim  to  have  the  highest  number  of  retail outlets per capita in the world. But almost all of these are small outfits occupying an average of 500 square feet in size, managed by family members,  having negligible  investment  in land and assets, paying little or no tax and known  as the kirana dukaan (‘mom and pop’ stores in the U.S or the corner grocery stores in the U.K.). These outlets offer mainly food items and groceries—the staple of retailing in India. Customer contact is personal and one- on-one, often running  through  generations.  There are a limited number  of items offered! often sold on credit—the payment to be collected at the end of the month. The quality of items standard, with moderate pricing.

    

   There is great hype about the growth and prospects of organised retailing industry in India. It must be noted, however, that organised retailing constitutes barely 2 per cent of the total retailing industry in India, the rest 98 percent being under the control of the unorganised, informal sector of’ kirana dukaans. Market research agencies and consultants come up with encouraging   forecasts   about   this   segment   of   the   retailing   industry.   For   instance, AT. Kearney’s Global Retail Development Index ranks 30 emerging countries on a 100- point scale. Its 2007-ranking  places India at number one for the third consecutive  year, with 92 points,   followed   by Russia and China.   The  size  of  the  organised   retailing   industry   is estimated at US $8 billion and projected to grow at a compound annual growth rate of 40 per cent to US $22 billion by 2010. Overall, the Indian retailing  industry is expected to grow from the current US $350 billion to US $427 billion by 2010 and US $635 billion by 2015.

    

   The economic environment in the post-liberalisation period after 1991, has created several factors that have made this high growth of the organised retailing industry possible. India’s impressive economic growth rate of 9 per cent is the prime driver of increasing disposable incomes in the hands of the consumer. The growing size of the consuming class in India, in tandem with the entry and expansion of the organised sector players in recent years, has set the  pace  for  corporate  investment   in  retail  business.  Practically,  every  major  Indian business group is looking for opportunities in the growing retailing industry. Among them are the big names in the Indian corporate sector such as the AV Birla group, Bharti, Godrej, ITC group, Mahindras, Reliance, Tatas and the Wadia group.

    

   The international environment presently is replete with examples of the fast-paced growth of the  retailing   industry   in  many  developing   countries   around   the  world.   In  the  post- liberalisation  period,  there  is more  openness  and  awareness  of the international developments   among  Indians.  The  ease  of  travel  abroad   and  the  exposure   through television and Internet have increase the awareness of the urban Indian consumer to the convenience of modern shopping. The modern retail formats thus have gained acceptance in India.  Carrefour,  Tesco  and  Wal-Mart  are  the  international  players  already  operating in India, with several others like Euroset, Supervalue and Starbucks having plans to enter soon. These international  companies bring to Indiathe latest developments  in the retailing industry and help to set up a benchmark for the domestic player.

    

   The market environment is one of the most significant in terms of the growth and prospects of the retailing industry in India. In terms of geography, the reach of the organised retailing industry has been growing. In addition to the mega-cities of Mumbai and Delhi, cities such as Bangalore,   Pune, Hyderabad,   Kolkata  and  Chennai  are  also  witnessing   a  boom  in organised   retail   activity.Retailers   are   now   trying   to   focus   on   smaller   cities   such as Nagpur, Indore, Chandigarh, Lucknow or Cochin.    There   are   interesting    possibilities regarding  the  retail  formats.  Traditionally,  street  carts,  pavement  shops,  kirana  stores, public distribution systems, kiosks, weekly markets and such other formats unique to India, have  been  in  existence  for  a  long  time.  At  present,  most  organised  retail  formers  are imitations of those used abroad. These include hyper and supermarkets, convenience store, department stores and specialty chains. Among these formats, a notable trend has been the development of integrated retail-cum-entertainment  centres and malls as opposed to stand- alone developments. Besides these, there are some attempts at indigenous formats aimed at the rural markets-such as those by ITC’s Choupal Sagar, DSCL’s Hairyali Kisaan Bazaar and Godrej group’s Godrej Aadhar. Pricing is an important issue in the retailing industry. Generally, the bulk buying yield lower costs of procurement for the big retailers—a part of which they pass on to the customer in the form of lower prices. In food retailing, for instance, there is a clear trend of low prices being the determining factor in purchase decisions by the cost-conscious Indian consumer. But, lower prices may not be a major issue with the higher-income groups that may place greater emphasis on the quality of products and retail service, store ambience and convenience of shopping. For the majority of Indian consumers however, price is likely to remain a significantly important issue in the purchase decision. Competition has already accelerated with many Indian business groups having entered or likely to enter this booming industry.

    

   The political environment in India is ambiguous! in terms of its support to the organised retailing industry. This is obvious as the unorganised sector employs nearly 8per cent of the Indian population and is widely spread geographically. The whelming presence in terms of

   98 per cent of the total retailing industry also is a significant political issue. In a democracy, the politics  of numbers  makes it imperative  for the political  class to adopt an ambiguous stand.  In  some  cases,  politicians  have  acted  in  favour  of  the  unorganised   sector  by disallowing the setting up of large retail some states. Overall, however, there is ambiguity as there are several environmental trends in favor of the development of the organised retailing industry.

    

   In the regulatory environment, there has gradual easing of the restrictions albeit at a slow pace,  in  view  of  the  ambiguous  political  stance  as  indicated  above.  Interestingly,  the retailing industry, is still not recognised as an industry in India, Foreign direct investment of up to 100 per cent is not permitted though it is possible for foreign players to enter through the routes of agreements, cash-and-carry wholesale trading and strategic licensing agreements.   Another   problem   area   is  of  the  real  estate   laws  at  the  level   of  state governments that are yet to be clear on the issue of allowing large stores. Restructuring of the  tax  structure  for  the  retailing  industry  is another  regulatory  issue  requiring governmental action. However, tariffs on imported consumer items have been gradually aligned to meet the prescribed WTO norms and reduction of import restrictions are likely to help the growing organised retailing industry.

    

   The socio-cultural environment offers many interesting insights into the changing tastes and references of the urban and semi-urban Indian consumer. There is a large rural market consisting  of  nearly  720  million  consumers,  spread  over  more  600,000  villages. India’s consumers are young: 70 percent of the country’s citizens are low the age of 36 and half of those are under 18 years of age. These people have deep roots in the local culture and traditions, yet are eager to get connected with and know the outside world. According to a DSP Merrill Lynch report, the key factor providing  a thrust to the retail boom in Indiathe changing age profile of spenders. A group of seven million young Indians in their mid- twenties, learning over US$ 5000 per year, is emerging every year. This group constitutes people who are enthusiastic spenders and like to visit the new format retail outlets for the convenience  and time saving they offer. Malls are also being perceived as just places for shopping,  but  for  spending  leisure  time  and  as  meeting  places.  There  has  been  an emergence   of   a   combination   of   the   retail   outlet   and   entertainment   centres   having multiplexes, with food courts and video game parlours.

    

   But there are some pitfalls too. For instance, organised retailing in India has had to deal with the misconception among middle-class consumers that the modern retail formats being air conditioned, sophisticated places are bound to be more expensive.

    

   The  supplier  environment  probably  offers  the  biggest  constraint  on  the  growth  of  the retailing  industry  in India.  Reaching India’s  consumers  cost  effectively  is  a  distribution nightmare,  owing  to  the  sheer  geographical  size  of  the  country  and  the  presence  of traditional,   fragmented   distribution   and   retailing   networks   and   erratic   logistics.   For instance, the apparel segment that is one of the two top segments,  the other being food, have   had   to  invest   in  back-end   processes   to  support   supply   chains.   Supply   chain management   and   merchandising   practices   are   increasingly   converging   and   apparel retailers are establishing collaborations with their vendors. Another area of concern is the severe shortage of skills in retailing. Human resource development for the retailing industry has  picked  up  lately  but  may  take  time  to  fill  the  gap  caused  due  to  the  shortage  of personnel.

    

   The technological  environment  for the organised  retailing  industry  straddles  many areas such  as  IT  support   to  supply   chain  management,   logistics,   transportation   and  store operations. Some global retailers have demonstrated  that an innovative use of technology can provide a substantial strategic advantage. The large number of store items, the diversity of sourcing and the gigantic effort required to coordinate actions in a large retail context is ideal for using IT as a support function. For instance, an innovative use of IT can help in a wide variety of functions such as quick information processing and timely decision-making, reduction in processing costs, real-time monitoring and control of operations, security of transactions and operations integration. The availability of supply chain management, customer relationship management an merchandising software can help much while performing activities such as ordering and tracking inventory items, warehousing, transportation and customer profiling.

    

   Overall, the Indian scenario offers an interesting mix of possibilities and challenges. A successful model of large-scale retailing appropriate for the Indian context is yet to emerge. The modern retail formats accepted globally are in the process of implementation and their acceptability is yet to be established.

    

   Questions:

    

   1. Identify the opportunities and threats that the retailing industry in India offers to local and foreign companie

   2. Prepare an ETOP for a company interested in entering the retailing industry in India.