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NAME OF THE PROFESSOR: CAROL TERENTIAK

ESSAY STATEMENT:

THE RETAIL SECTOR IN INDIA IS GROWING AND HAS THE POTENTIAL TO ACCELERATE THE ECONOMY BY PROVIDING JOBS AND CHANGING THE LIFESTYLE OF THE PEOPLE

CONESTOGA COLLEGE

INTRODUCTION

In this essay I will be writing about the retail industry in India. The structure of Indian retail is different from that seen in the western countries. Indian retail industry is growing at an exponential rate and attracting the attention of a lot of global retailers, however there lie challenges in penetrating into the Indian market. The growing industry over the years has generated a lot of jobs and contributed significantly towards the economic growth of the country.

The paper will begin by an overview of the Indian retail sector accompanied by its typical characteristics and this will provide an insight on how the Indian retail industry works. I will then talk a bit about the history or how the retail sector in India has grown over the years as it is always important to know the transition. Later on I will describe how policies passed affect the retail sector in India followed by the risks and opportunities it offers. This will also include cultural and other factors (will also include some examples of foreign companies that succeeded). Then I will mention the socio economic impacts of the retail sector. The essay will conclude with my opinion about the retail sector.

OVERVIEW OF INDIAN RETAIL INDUSTRY

The net worth of the Indian Retail market is estimated around $ 450 billion USD and it secures a place among the top 5 retail markets in the world. It significantly helps the economic growth of the country by contributing around 14-15% of the GDP (ASA & Associates, 2012). The growth of the retail industry is quite promising as it is growing by 10-12% per annum (TNN, 2012). The policies formulated by the government greatly affect the penetration of foreign retailers in the market and the recent declaration allowing 100% Foreign Direct Investment has surely opened the doors for global players (TNN, 2012). Multi retail branding is not allowed as of now and most of the single retail brands operate as franchise or joint ventures for example Starbucks collaborated with Tata ( a major corporate house that handles diverse business like automobiles, hotels, home goods etc).

The retail in India is broken down as follows: specialty apparel accounts for 33.3% of the total retail space followed by departmental stores that stand at 29.4%, grocery stores cover 5.9%, hypermarkets about 3.9%, home center and hard good/ electronics both cover 2% of the total retail market and almost 23.5% is covered by other types (ambiguous) (Frost and Sullivan, 2008). The structure of the Indian retail industry is different as it is broken into organized an unorganized sector and this stands as a major characteristic. Another characteristic is the lack of skilled labor for managing retail sector. However there lie a lot of opportunities as the middle class is expanding and as the youth in India are exposed to the western world their demand for western products or western lifestyle increases.

The metro cities in India are surely the hot spot for the retailers as the literacy rates in these cities are high and these cities house some of the hubs for example Bangalore is an IT hub and Mumbai is known as the financial capital of Maharashtra (a state). Delhi being the federal capital has a demand for luxurious products and Kolkata is gaining momentum is term of growth too. Thus Mumbai, Delhi, Bangalore, Kolkata and Chennai are the key cities in terms of location. Another addition to this is the city of Ahmedabad and the credit goes to the politician Narendra Modi who has been striving for the welfare of the state (Gujarat).

EVOLUTION OF THE RETAIL INDUSTRY IN INDIA

India has witnessed a huge transition in terms of retailing. It started with families owning a store in front of their house to earn a living followed by farmers market, weekly markets, village fairs and then the ‘Kirana’ system. ‘Kirana’ system still exists in the cities of India and consists of family run stores that sell groceries. Fresh vegetables are sold by the vendors on the streets and this is preferred by a lot of people. All these examples fall under the ‘unorganized sector’ in India and one cannot ignore that this sector accounts for around 98% of the industry and it also includes local store brands (Economy Watch, 2010).

The government of India then started taking an initiative towards rural retailing with assistance from Khadi and Village Industries Commission. Items like cloth materials, match sticks, wooden decorated show pieces were sold at these fairs. These institutions basically catered to local people. Shopping centers started taking its baby steps in the year 1869 in Bombay in form of shops sprawling across the streets called as ‘Crawford market’ (Help Me, Accessed 2014). The real concept of retailing took its roots around 1980 when companies such as Bombay Dyeing, Raymonds opened their stores (textile industries) (Indian Mirror, Accessed 2014) (Indian Mirror, Accessed 2014)

In the year 1995 the retail sector in India was in a developing stage, in the year 2003 and 2004 domestic as well as international retailers started penetrating in the market as it seemed lucrative, between 2005 and 2007 it really started gaining momentum and by 2008 it reached at the peak of its growth and by 2010 it touched the mark of $ 427 billion (Frost and Sullivan, 2008).

With industrialization, rise in the number of educated Indians and progress in technology the retail sector started shaping in a proper structure. With the rise in the disposable income and the rise in the middle class came a demand for western products, western concepts and western brands. International brands like Zara, Jack and Jones, Mango, Pizza Hut, Subway, Mc Donald’s. Dominos, Vera Moda have tasted success in India. Some of the recent entrants are Starbucks and Forever 21.

The organized retail sector in India can be categorized as follows:

1. Malls

Malls are the most organized form of retailing and they are mostly located in major cities. They are spread across 60,000 sq. ft. to 70,000 sq. ft. and are devoted towards giving a luxurious shopping experience to the customers coupled with entertainment, food and gaming zones (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

 

2. Specialty stores These stores cater to a specific segment of the society and are unique in their offerings for example there is a store called as Crossword that deals in books, Planet M is well known as a music store (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

3. Discount Stores These stores comprise of the factory outlets where products are available at a lesser cost and often you can purchase them in bulk. Some times to get rid of the stocks these stores sell items at a lesser cost (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

4. Department Stores These stores are usually spread across an area of 20000 to 50000 sq. ft. and consist of stores that sell everything from groceries to child care products, clothing etc (Shanthi & Dr. Dhanabhakyam, Accessed 2014)

5. Hyper marts/Supermarkets The stores primarily sell food and grocery and can be found near wealthy residential areas and are spread across 1,500 sq. ft. to 5,000 sq. ft. (Shanthi & Dr. Dhanabhakyam, Accessed 2014).

POLICIES AND REGULATIONS

India recently allowed 100% foreign direct investment for the single brand retailers however these retailers have to comply with the regulatory issues formulated by the government. The Indian retail industry is expected to touch $ 804.06 billion by 2015. Accepting FDI was a gradual process in India and it took a while before we welcomed this change, in the year 1995 the World Trade Organization agreed upon wholesale and retail services. In 1997 the FDI was only permitted towards wholesale and in the year 2006 government agreed to sanction 51% FDI for single retail brands and it was in the year 2011 that the bill for 100% FDI was passed (for single brand) (ASA & Associates, 2012).

FDI with regards to multi brands is confined to 51% at the moment (ASA & Associates, 2012). FDI in single retail means that the retail shop will only be allowed to sell one brand under their umbrella for example Adidas can sell their products at an Adidas store however if they plan to sell Reebok products that they also own it won’t be possible. As per the agreement they will have to take permission from the government and essentially establish a new store for selling Reebok products (ASA & Associates, 2012).

FDI for multi brand retailers stands at 51% and it was approved in the year 2010 by the Ministry of Commerce and the Department of Industrial Policy and Promotion. The interested candidates however had to make sure that there was a minimum investment of $100 million and they had to invest 50% of the amount in back end operations which comprises of safeguarding the farmers and community (ASA & Associates, 2012).

FROM A RETAILERS POINT OF VIEW

India is surely a market of opportunities as the economy is growing at the rate of 6% (TNN, 2012), there is a rise in the middle class and disposable income, majority of Indian population is young, there is a demand for western products, technology is progressing, people have started using credit cards. However there is a shortage of land as India has a huge population to cater to and due to that the cost of real estate is pretty high. Typically the malls are established in prime locations and setting up a shop and maintaining it is an expensive affair. Moreover stores like Walmart have a huge store format and that could be a challenge. Corruption, lack of recycling the products, circulation of fake products, complex supply chain management might deter some companies to expand in India. Needs of Indian consumers are unique. In Canada I have observed that people cook in big batches buy a lot of frozen fruits and vegetables as well as frozen meals. However in India consumers prefer to buy fresh fruits and vegetables and cook meals everyday thus these factors will have to be taken into consideration (PwC, Accessed 2014).

COMPANIES THAT MADE THEIR WAY THROUGH IT

During international expansions it is extremely important to be aware of the local market and it is for this reason that most of the international retailers have a partnership or joint venture with an Indian company. ‘Starbucks’ opened their first two stores in Bombay in the year 2012. They are in a partnership with Tata group, selecting a partner is the most important aspect and Tata group has a long standing history of business excellence, conducting business with honesty. Starbucks was welcomed by Indians with open arms and they are expanding quite rapidly. They have over 30 stores in the country now (Starbucks, 2013).

Dominos has a joint venture with Jubilant foods and Kraft with Cadbury. These retailers however have to take some factors into consideration. The price of a McDonald’s burger in India was INR 60 (1 CAD) however coupled with a fries and a coke it meant a lot of money for a middle class family 10 years ago. College going students are the main target of McDonalds’s in India and spending 100 INR a day was not that easy. Taking into account all these factors as well as the income structure in India McDonald’s launched ‘Happy Price Menu’ and one could now get selected items at INR 25 (25 cents). This move was incredible.

Taking into consideration the social factors is critical too. India comprises of a huge non meat eating population and Indians worship cow and beef is not even sold in some parts of the country. Approximately 9 years ago McDonalds was severely criticized for using/ selling beef products in the state of Maharashtra where people worship cows. After that incident they implemented strict measures to make sure such an incident does not surface up again and even started having separate fryers for chicken and vegetarian products.

THE IMPACTS

Some political parties such as ‘Aam Aadmi Party’ (the translation would be a Party of common people) are against the evolution of retailing, specifically foreign retailers penetrating in India and argue that it will affect a common man’s pocket. They argue that it will lead to loss of jobs (TNN, 2014) (TNN, 2014). However it is not true and there are various positive socio economic impacts of FDI in the retail industry. First of all it will lead to the creation of thousands of jobs and if retail is expanding they will need people to manage it. As I mentioned earlier the unorganized sector in India consists of 98% and the workers in such stores might not have health benefits or other perks, they might not be even getting a salary worth making a living.

The retail sector has the capacity to employ 9.4% of the total labor force (Limaye, 2014) and the international retailers will make sure they are paid equivalent to the international standards moreover they will have benefits, human rights (healthy working conditions, gender equality, working hours, minimum wage). Another social aspect doing rounds is the issue that these huge retailers are replacing the traditional shops. On this note I strongly feel that the market is completely different for these two categories, there was and there will always be income disparity in India thus people from lower economic strata will prefer these groceries stores over Walmart. The traditional shops are easily accessible thus they will always enjoy the benefit of convenience. On an average people above the age of 40 who were used to shopping from these stores will continue doing so for example my parents won’t drive half an hour to visit a big box grocery store inspite of having a car because for them it is a huge transition.

Slow death of traditional stores started occurring due to emergence of Indian retailers in the first place hence pressuring FDI is pointless. I also feel that if foreign retailers enter the market they might bring around some positive reforms in the country. They will engage into corporate social responsibility sooner or later, the reasons might be different (gain subsidies, goodwill, attract investors) but it will lead to the improvement of the vast rural sector in India if they are investing in rural sector. Waste disposal in India is still in an embryo stage and execution of recycling is a dream, the foreign retailers are used to specific standards in their home countries and there is a hope that they might implement it in India.

Some people are of the opinion that the farmers will be exploited during this process. Earlier in the report I mentioned that as per the rules the retailers will have to invest in back end channel which means that they will have to contribute towards development of infrastructure and they will have to employ local people. Also they will have to source produce from farmers. Agriculture is the pre dominant occupation of India, we infact export fruits, vegetables, grains and spices, if the retailers work in India they will establish relationships with the farmers and this might lead to increase in exports due to their contacts or if they wish to export products to their home country.

The farmers are literally exploited by the middle men in the government led system thus presence of foreign retailers might make a difference by giving them the money they deserve. To make sure that these retailers do not create a monopoly the government can make it mandatory for them to adopt a framework (ASA & Associates, 2012). On an economic front the government will now get taxes from these retailers which means more revenue for them, it is estimated that the government will get around $ 25-35 billion, the consumers will also be able to save around 5-10% due to competitive pricing of the products etc (TNN, 2014).

MY OPINION

I do feel that the government should not keep the FDI on hold for multi retail branding. If it takes too long it might discourage the retailers. There are other arguments that due to increase in the number of malls there is a greater demand for electricity and power in the cities and due to this the rural areas are experiencing power cut. Though this is slightly true another side to this story is that rural areas have always been facing this problem even before modern retailing emerged. There is a lot of power being wasted and if used in an appropriate way this issue can be tackled.

Indians have a fast paced life, the family patterns are changing to nuclear families in the cities and the young generation is increasing and because of this there is a lifestyle change. More and more women are working and this creates a need for products that save time. I do see the frozen food segment and ready to eat meals gaining a slight popularity. Consumers have access to cars and have money to spend on luxurious brands. Retailing looks promising in transforming the lives of Indian consumers, farmers and business. It will give India an opportunity to be on par with other countries with regards to lifestyle and economy.

BIBLIOGRAPHY

ASA & Associates. (2012, August). A brief report on Retail Sector in India. New Delhi: ASA Associates. Retrieved from www.asa.in: http://115.112.165.74:81/Rahul%20Singh/Mexico%20ISP%20prog/8.%20Retail-Industry-in-India.pdf

Economy Watch. (2010, June 29). Structure of the Retail industry in India. Retrieved from www.economywatch.com: http://www.economywatch.com/business-and-economy/indian-retail-industry-structure.html.

Frost and Sullivan. (2008). Overview of the Indian Retail Market. n.a.

Help Me. (Accessed 2014, February 21). Retail In India: Revolution or Evolution. Retrieved from www.123helpme.com: http://www.123helpme.com/retail-in-india-revolution-or-evolution-view.asp?id=167115

Indian Mirror. (Accessed 2014, February 21). Indian Retail Industry. Retrieved from www.indianmirror.com: http://www.indianmirror.com/indian-industries/retail.html

Limaye, A. (2014, January 8). Foreign Direct investment in multi- brand retail: A hope in abeyance. Retrieved from www.indiatvnews.com: http://www.indiatvnews.com/business/india/breaking-news-foreign-direct-investment-in-multi-brand-retail-9565.html

PwC. (Accessed 2014, February 21). Winning in India's retail sector. Retrieved from list2.pwc.fr: http://list2.pwc.fr/assets/files/lettre_retail-and-consumer/pwc_winning_in_india_retail_sector_1.pdf

Shanthi, A., & Dr. Dhanabhakyam, M. (Accessed 2014, February 21). Indian Retail Industry: Its Growth, Challenges and Opportunities. Retrieved from www.fibre2fashion.com: http://www.fibre2fashion.com/industry-article/free-retail-industry-article/indian-retail-industry-its-growth-challenges-and-opportunities/indian-retail-industry-its-growth-challenges-and-opportunities1.asp

Starbucks. (2013, November 22). News. Retrieved from news.starbucks.com: http://news.starbucks.com/news/starbucks-continues-expansion-in-india-with-opening-of-new-flagship-store-i

TNN. (2012, June). Retail sector in India growing at a phenomenal rate. Retrieved from timesofindia.indiatimes.com: http://timesofindia.indiatimes.com/home/education/news/Retail-sector-in-India-growing-at-phenomenal-pace/articleshow/14381624.cms

TNN. (2014, January 15). Blocking Retail FDI to rob India of 1 crore jobs. Retrieved from timesofindia.indiatimes.com: http://timesofindia.indiatimes.com/business/india-business/Blocking-retail-FDI-to-rob-India-of-1-crore-jobs/articleshow/28807283.cms