Essay: Retail in business

Introduction
Retail is a vital sector for the economy of a country. Without retail, life would be completely different. It ensures that our standard of living is maintained. That’s why it’s so important to study this sector and to ensure that retail becomes available to everyone.
Another question that rises, is: why India? India is not only a member of the BRIC countries ‘ the fastest-growing countries ‘, it’s also a very flexible country with an enormous potential. Many companies already see that potential and try to do business in India. Therefore, it’s useful to study this country with its strengths and weaknesses.
This paper deals with some facts and figures about the Indian retail sector, and then it discusses how the retail market looks with a brief presentation of various Indian retailers. The second part of this paper deals with the Indian attitude towards retail, more specific the reforms that have been achieved over the years. Finally, there’s something said about e-commerce, because this is a form of retail which is gaining a lot in popularity.
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Facts and figures about the Indian retail sector
Retail is one of the most vibrant sectors in India. As we’ve seen in the courses, demography is very favourable. There are about 1.22 billion people living (Find the Data, 2015), with half of their population less than 30 years of age and roughly one-third living in cities. By 2050, the population is expected to reach the cape of 1.6 billion. This implies a huge demand for food and beverages, etc. That’s why the economic value of the Indian retail sector belongs to the top five of all retail sectors worldwide (BBC, 2011). Besides that, the available income of Indian urban people is increasing. In other words, the purchasing power of Indian people is increasing. Finally, there is a trend of urbanization in India, with products such as apparels, jewellery, etc. becoming widely accepted lifestyle products for the Indian urban customer (Dhanabhakyam, & Shanthi, 2013).
Retail is one of the most important sectors for India’s economy and accounts for 15% of the Indian GDP (Dikshit, 2011). The sector employs about 40 million people, which is around 3.3% of the total Indian population and around 8% of total employment. The retail sector has a market value of around 500 billion USD and is expanding at a compounded annual growth rate of 15% (BBC, 2011). By 2020, they expect this sector to double his market size and reach the border of 1 trillion USD (IBEF, 2015).
The first graph shows the market size of the Indian retail sector (IBEF, 2015). As you can see, there was an immense increase in 2012. To understand this spectacular development, we have to look a little bit closer to the history of Indian attitude towards retail (cfr. infra).
On the second graph, you can see the market revenue breakup of 2013 (IBEF, 2015). It shows that the biggest part of the revenues was earned in food and groceries (69%), followed by apparel (8%) and thereafter by jewellery and IT (both 6%).
The third graph depicts the mall space break-up in India (IBEF, 2015). Hypermarkets would be the largest retail segment, accounting for 21% of total retail space by 2013-2014, followed by apparel stores, accounting for 19%. This makes sense if you compare it to the market revenue breakup.
We can say that the future looks very favourable for the Indian retail sector. The great potential of the solid middle class, the increasing number of cars, credit cards and refrigerators, the technological progress in supply chains, etc. ensures that multinational retailers want to enter the market. This will allow the sector to ‘boom’ in the very near future. Megalomaniac shopping malls rise in several cities, such as Mumbai, Gurgaon, Bhopal, etc. At this moment, the largest shopping mall ‘ LuLu international shopping mall ‘ is situated in Kochi, with a surface of 160,000 m2 (Rediff, 2013).
Retail in India
In India, you have both organized as unorganized retailing. Organized retailing includes all the commercial activities by licensed retailers, which means that those people pay taxes. In most rural areas, organized retailing is quite absent. Remarkable is the fact that organized retailing only accounts for 7% of the total market in 2011 (RAI ‘ Retailers Association of India, 2013).
Unorganized retailing refers to the traditional way of retail: local corner shops, pavement vendors, etc. It’s remarkable that most of the Indians do their shopping in small grocery shops, also called ‘kirana stores’ (The Economist, 2008). Estimated, there are about 12 million of these unorganized stores, which are widely spread across 600,000 villages and 5,000 cities (Patibandla, 2014). Most of the time, the customers can’t take the products from the shelves themselves, but are waiting outside the shop and ask the shopkeeper to bring them their products. Transactions are done with cash, which makes it difficult for the government to control these shops.
In those unorganized shops, products don’t have a fix price. It only shows a maximum retail price on the price label. Shopkeepers can’t sell their products above this maximum price, but they can choose the price arbitrarily. This has everything to do with the culture of the Indian people, who love to haggle. With the system of the maximum retail price, this becomes possible.
If we look at the fraction of unorganized stores that close down each year, this amount is significantly low (1.7%). In the future, unorganized retail will stay extremely important in India and will continue to dominate the market (The Economist, 2008). However, we note that due to previously described facts, in particular the use of cars, refrigerators and credit cards, there is a shift towards organized retail in towns (Patibandla, 2014). The growth of organized retail is spectacular: e.g. the percentage of sales done in supermarkets have been growing three times more than the Indian GDP (Reardon, & Minten, 2011). For now, we can state that the impact of the arrival of multinationals on the local small business is rather low.
For every 1000 people living in India, you have about 11 local shops. Most of the time, the unorganized retailers employ family members in their shop. There are no guarantees if you buy something in these stores: there is no quality control or screening whether the product is real or fake and no service and support after-sales. Besides that, they are not keen on hygiene (Lyengar, 2004).
However, a major challenge that organized retail is facing is the diversity of the Indian population across different regions. There is a huge diversity in consumption patterns, culture, climate, language, etc. As a result, it is not possible for multinationals to copy their business model and implement it like that. They need to adopt it to the needs of the Indian consumer (Patibandla, 2014).
Some Indian retailers
The most known Indian retailer is Reliance. This company, headquartered in Mumbai, operates in different segments: oil, telecom, retail, textiles, etc. The company was founded in 1966 and has grown significantly over time. They serve over 2.5 million customers every week. Nowadays, Reliance employs around 23,500 people (Reliance, 2015).
Another example is Spencer’s Retail, headquartered in West Bengal. They sell food, clothes, apparel, etc. Spencer’s has 400 stores in 60 different cities in the form of hypermarkets and convenience stores. They employ more than 60,000 people (Spencer’s Retail, 2015).
The last retailer I’m going to mention in detail is Bharti, headquartered in New Delhi. The company was founded in 1976 and operates in 20 different countries across Asia and Africa. They employ more than 30,000 people. They are active in various segments, such as telecommunications, insurance, real estate, digital TV and retail (Bharti, 2015).
In addition, there are of course many others.
Other examples are:
– Pantaloon: a clothing retailer.
– Tata: active in very different segments such as airlines, IT, steel, chemicals, etc.
– Joyalukkas: a well-known distributor of jewellery.
Indian attitude towards retail: policy
India already has come a long way to put their retail sector on the map. A series of political reforms and conflicts have succeeded each other in order to make it possible for international companies to settle and do business in India.
Until 2011, the Indian government forbade foreign direct investments (FDI) in multi-brand retail. In other words: foreign groups like Walmart were forbidden to sell products from different brands on the Indian market. Single-brand retail (brands like Nike and Apple), was limited to 51% ownership (Chhibber, & Majumdar, 1997).
In November 2011, under the lead of Manmohan Singh, prime minister, the Indian government announced retail reforms. The most remarkable was the change of ownership in both multi-brand and single-brand shops. The idea was to allow foreign multi-brand retailers to own 51%. From now on, single-brand retailers could be 100% owner of their Indian store. A remark we should make is that the Indian states could choose whether they implement the system or not. These reforms could stimulate the innovation and competition of the retail sector, but also India’s infrastructure. A study showed that the investments in the retail sector could generate millions of new jobs, both in the shops as in the distribution (Government of India, department of commerce, 2011).
In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold until they would reach a consensus with all of the stakeholders (Argawal, & Bahree, 2011).
In 2012, the Indian Federal Government managed to approve multi-brand retail despite the opposition, namely the NDA and left-wing parties. India now allowed 51% FDI in multi-brand retail formally under the Indian law. Indian States can choose whether they allow foreign investments or not (Madan, 2012). On the map added in the first annex, you can see the states that do (green) and don’t (red) approve the reforms. Those are particularly BJP-ruled states (IBN, 2011).
There are some conditions attached to this liberalization. First off, multinationals can only set up their store in cities with a population of at least one million habitants, then they should make an investment of at least $100 million, whereof at least half in the provision of infrastructure and lastly 33% of the goods need to be from small and medium-sized manufacturers (Patibandla, 2014). E.g.: Wal-Mart entered the Indian market as a joint venture with Bharti. Bharti is a franchise and can use the expertise of Wal-Mart. But in 2013, liberalization of the sector continued and the Indian central government announced that from now on, foreign multinationals could sell their products directly to the Indian consumer. At this moment, the joint venture between Bharti and Wal-Mart stopped (Patibandla, 2014).
We can ask ourselves why states fear FDI’s in retail. Critics fear that allowing foreign retailers would lead to a massive loss in jobs. If you look at Wal-Mart, for example, they don’t employ millions of people. So they would generate a few jobs, but the job creation can’t out weigh the million of jobs of local small Indian retailers that will be lost due to the arrival of the multinationals. Another thing they fear is that it will create a monopoly for foreign groups since they can lower their price to push every Indian retailer out of the market and afterwards raise their price again. Furthermore, they fear that the Indian people would do all the work and that the profits would disappear. So In conclusion: they fear the impact on the local economy (The Telegraph India, 2011).
Patibandla (2014) did a study to analyse the net effects of allowing foreign direct investments in the retail sector. The conclusion of this paper is that the arrival of multinational retailers in India isn’t that bad. It could lead to a surplus for farmers, customers and manufacturers. The foreign retailers can provide a transfer of technological and managerial knowledge and could fuel competition so prices would level.
E-commerce
In addition to the classical approach to retail, India also plays a huge role in e-commerce (IBEF, 2015). In July 2014, less than one out of five Indians was using the Internet (Naidu, 2014). Therefore, the Internet knows no real distribution in India. The good news is that the percentage is growing at high speed, with each month around 6 million new users (Ians, 2014). In addition, the number of mobile phone users is also increasing spectacularly fast. In the second annex, you can find two graphs showing the increase of the Internet enabling device users and the increase in broadband connections and users.
The market value of the Indian e-commerce market was about 3.8 billion USD in 2009. By 2012, this value already had tripled to reach 12.6 billion USD (PWC, 2014). The prospects for the future look very good too: by 2017 – 2020, India will reach the cape of 100 million online shoppers, with a market value of 10 to 20 billion USD.
Graph 4: Growth in e-commerce and e-tailing
In 2013, retail took 2.3 billion USD of the total e-commerce segment (Ians, 2014). E-retail is the fastest growing segment of e-commerce in India. In four years (2009-2013), its share has almost doubled from 10% to 18% (PWC, 2014). In 2013, the total number of e-commerce transactions exceeded 100 million, but this is still a very small percentage of the total Indian retail market ‘ approximately 1% (PWC, 2014). This figure shows that this segment of retail is still at its infancy.
If we look at the commodity distribution in e-tailing, we can see that 34% of e-commerce is done in the segment of electronics, 30% in apparels and accessories, followed by 15% in books (PWC, 2014). This is still very limited. In the future, also other segments, such as food and beverages, furnishing, healthcare, etc. will see their e-commerce activity increased.
The supporting logistics are the biggest barrier for the growth of e-commerce. E-commerce has almost no geographical boundaries and India has a huge area to cover ‘ almost 100 times bigger than Belgium. In addition, it’s all about time in this segment. Therefore, there is a huge need for investments in infrastructure, warehouses, etc. At this moment, about 90% of the e-commerce flow is done by air. The main problem here is that this increases the delivery costs. As yet, this problem hinders the sector to ‘boom’ (PWC, 2014).
Yet, the prospects are promising. E-tailers are aware of the challenges and have big plans to invest. Till 2017 ‘ 2020, they are going to spend 950 to 1900 billion USD in warehouses and logistic capabilities (Bisen, Singh, & Anand, 2013). These investments can only benefit India.
Currently, over 20,000 Indians are employed in e-retailing. Industry estimates show a very big potential, with an additional 75,000 jobs by 2017 ‘ 2020. Bisen, Singh, & Anand (2013) show that the whole e-commerce sector is about to boom and will employ nearly 1.45 million people by 2021.
Graph 6: Current and projected employment in E-tailing
Conclusion
Retail is one of the most vibrant sectors and accounts for 15% of the Indian GDP. The economic value of the Indian retail sector belongs to the top five of all retail sectors worldwide. By 2020, this sector is expected to reach a market value of 1 trillion USD due to the increasing purchasing power of Indians.
India is dominated by unorganized retail, which refers to the traditional way of retail: local corner shops, etc. In those shops, products only show a maximum retail price. Sellers can arbitrarily choose a different price for each customer, but his price can’t exceed the maximum price. This has everything to do with the culture of the Indian people, who love to haggle. Nevertheless, organized retail is gaining popularity in the big cities.
India already has come a long way to put their retail sector on the map. Until 2011, there was restricted single-brand retail and FDI’s in multi-brand retail were forbidden. In 2012, India formally allowed 51% FDI in multi-brand retail under some strict conditions. Indian States can choose whether they allow foreign investments or not.
Consumers are increasingly inclined to e-commerce. In 2012, e-commerce had a market value of 12.6 billion USD. The outlook remains promising, although this sector will face some difficulties. The main problem is the lack of infrastructure.