Penetration of the corporate retail sector

 

Penetration of organized market:a matter of concern

The concept of organized retailing in India is not much old but there has been much hope over its future in India. People are confused (actually unaware) of its merits and demerits. This ignorance has been used by political parties to create different sensations to create political advantage. In this study we make an attempt to clearly point out the pros and cons of expansion of the organized retail sector beyond metros and the possible risk-averse ways of entering the suburbs and towns

The present foray and its implications

According to “The Great Indian Retail Story” a report on the Indian retail sector published by Ernst & Young, 220 mall projects will come up by the end of 2007. The planned positioning of these malls are shown in the pie chart below. The diagram clearly depicts the bias of retail giants to set up shops in metropolitan areas.

This failure to reach suburban dwellers will jeopardize the profit making motive of the retailers. As products are services are pure imitation of each other, the intense price battle among competitive retail owners will undermine the supernormal profits that could have otherwise accrued (known as the theory of Bertrand Oligopoly).

An improper analysis of facts has further aggravated the situation. The state government in Delhi and NCR(National Capital Region) has been lenient in granting permission for commercial use of land whereas the local authorities in remote place have shown narrow-mindedness. However according to economists, this roadblock can be overcome by franchising. The mega retail players can surely explore the opportunity of strategic partnership with domestic retailers.

Let’s now come to another debate that has generated much heat in the recent past but failed to ameliorate the situation. It is a well-known fact that agricultural growth rate is lagging at less than 4 percent (average annual growth rate for 2002-07 was 2.3 percent)and this rate must be increased to a stable 6 percent in order to attain the accolade of the fastest growing nation. According to the Ernst & Young report, the Food and Groceries comprises of 41 percent of private consumption expenditure and account for about 77 percent of total retail sales. So far so good, the pie diagram below shows the share of the sector in organized retailing

This diagram demonstrates that footwear has a whopping share in the organized retail market. But food and groceries, the leader in private consumption expenditure has a modest share of 1 percent in organized retailing. This is the channel that must be bettered. Organized retailing in the agricultural sector can do miracles in improving the revenue from it. Organized retailers face the customers directly and thus can easily communicate the consumer’s preferences and grievances to the producers in terms of both quality and quantity. This market information crucially affects producer’s investment decisions and their risk domain. In addition, organized retailers have very large scope of operations and so can bring in cheap credit, insurance and other services to the poor farmers. Moreover removing the middlemen is akin to providing wide consumer base.

Penetration: Ways for improvement

1. Production comes before supply and sales comes after supply. This must be understood by retailers. It is imperative that they check out the supply chain management from vendors and the type of products that are in demand. This must be done without fail before setting up retail chains as “A 5 percent reduction in customer defections can treble profits”, according to Ranjan Biswas, Partner, Ernst & Young India. A lot of importance is attached to this because the climate as well as culture of India is diversified. So ensuring a non-stop supply of commodities as well as guesstimating people’s ever changing choice is mandatory.

2. Though India tops among its competitors for its attractive retail sector prospects, one wishing to build a retail outlet chain in India still has requires about 20-33 licences from governments at various levels. ‘Single window clearance’ was demanded recently by Retailer Association of India(RAI). This will help retailers to set up retail outlets without much hassles. Under the single window clearance system, it will be possible to get an application cleared within seven days and those already having an existing store in the state will be able to get a licence for opening a new one by merely applying and taking an extension.

3. International retailers coming to India will set up shop in only those malls that are maintained at par with international standards. Proper mall management is urgent from the view point of Indian mall developers. Mall management includes not only right positioning(deciding on the product that the mall targets) but also includes proper tenant mix and zoning(placing the appropriate retailers at the ideal places inside the mall). Promotion, marketing and financial management are of no less importance. The organized retail sector in India is projected to grow at a CAGR(Compound Annual Growth Rate) of about 49.53 percent from 2006 to 2010 and FDI of 51 percent in single brand retailing will pave the red target for Indian retail in the coming years.

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