issues in retail project

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JAIPURIA INSTITUTE OFMANAGEMENT

LUCKNOW

ISSUES IN RETAIL

Submitted to:

Dr. Ranjanabh Chatterjee

Ravi Pratap Singh (CFTR08-37)

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ACK N OWLEDGEMENT

We express our sincere gratitude to our respected Dr. Ranjanabh Chatterjee, faculty ofJAIPURIA INSTITUTE OF MANAGEMENT who has helped us to clarify our conceptsby sharing her valued experiences in her teaching, research and training which havethereby become an unconscious part of our ideas and thoughts while analyzing one of themajor issue of retail industry and help for this project report.

Without her sincere help and guidance the project report would have not been a grandsuccess. We thank all our members of the team who had worked hard to make the report

to its present form.

Lastly we would like to give our sincere thanks to the computer lab staff who had givenus the opportunity to use all the resources available.

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ORGANIZED & UNORGANIZED

RETAIL

MEHTODOLOGY:

We use a very simple process that is, we got data from different sources like A T Kerney,Price Water House Cooper and others. Then gone through various shopping malls togather data and information about organized retail. Firstly we did data collection thenanalyze it that, what its effect on consumers as well as on unorganized retail. We also didwork on potentials, obstacles and whatever the impact on small mom n pop stores alsobeen analyzed. Population segmentation is play very significant role in this industry sowe also worked on that particular context, so we can know what is the impact and whatare there thinking and views about organized and unorganized retail. Latest consumptionrate, class and trends are also used as they have strong impact in this concern. Rural andurban retailing also discussed because there are growth factors which should not beignored. In future they will become revenue hub. So, in this way we used all above

methods to analyze the retail industry (organized & unorganized) of India.

FINDINGS:

We find organized retail as a helping hand of unorganized retail and also find out what isthe impact of population segments, consumption patterns, shopping malls, rural & urbanretailing on retail industry of India. Small retailers will grow and employment in bothdirect & indirect will also increase. We find that small shopkeepers should not afraid ofbig retailers.

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Overview :

This report examines the current trends and patterns demonstrated by Indian consumers.Studying the trends of consumption in India will assist in gaining knowledge about thepotential of Indias economy, both currently and in the future. Not only do consumption

patterns provide insights into the future areas of strength in the countrys economy, butthey also paint a picture of the relative standard of living levels that are likely in thefuture. In addition, understanding consumption habits of the countrys consumers willalso serve to explain the reasons for recent multi-national companies successes andfailures in the region. Over the last few years, retail has become one of the fastestgrowing sectors in the Indian economy. In fact, India has topped the annual list of themost attractive countries for international retail expansion, according to AT KearneysGlobal Retail Development Index 2006. Of the currently estimated $270 billion Indianretail market, organized retailing comprises of just 4.6 percent. However this segmentgrew nearly 40 percent in 2007. With the entry of major global players and larger Indiancorporate houses into the arena, the Indian organized retail sector is estimated to grow toabout 15 percent of the total retail sales by 2010. The booming services sector combinedwith the growth in disposable income is considered to be providing impetus to this boom.In spite of the size and scope, retailing is not yet recognized as an industry. India does notallow 100 percent foreign direct investment (FDI) in the retailing sector. However theIndian government does allow FDI (100 percent) in wholesale cash-and-carry trade aswell as in single-brand retail outlets with 51 percent foreign investment. Severalinternational companies are taking advantage of these as well as franchising and strategiclicensing routes to enter India. The Indian organized retail pie offers huge opportunitiesto U.S. companies offering: packaged foods, house wares products, apparel andaccessories, cosmetics, footwear and watches. The Indian consumer is very price

sensitive and expects value for money. U.S. exporters need to keep this in mind whiledevising pricing strategies for India. In addition, there are new opportunities for retailindustry equipment and services suppliers to cater to the booming Indian market

Statistical Snapshot :

Marketers are just beginning to understand the full potential of the Indian market. Firstand foremost, the economy of India is growing rapidly at the rate of 6% each year. Incomparison to the growth rates of Western Europe and the USA at 2 and 3%, respectively,

the Indian market demonstrates notable growth. From the principles of macroeconomics,economic growth suggests an improvement in the standards of living. This is true;however, the increase in economic growth and output has also broughtabout an increasein inflation: consumer prices increased by 5.3% in 2004, compared to 3.2% in 2003.Foreign direct investment, a good indicator of confidence in the potential of a countrys

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economy, also serves to demonstrate Indias importance as a globally significant market.Foreign direct investment in India, as measured in inflows of US dollars, has increasedfrom $3.6 billion in 2000 to $4.6 billion in 2003 and $5.3 billion in 2004. The populationof India is comprised of over 1 billion people in 164.8 million households. As a result ofIndias growing population, now 35 cities in India have over 1,000,000 citizens. Indian

GDP reported in the Atlas method measured $620 per person in 2004, ranking 159th

in theworld. As a basis for comparison, the USA per capita GDP ranked as the fifth highest inthe world, with $41,440. Despite the comparatively lower GDP per capita, statistics onphone and internet usage suggest an increasingly sophisticated and technologically-savvypopulation. The amount of internet users has increased exponentially since 2000: from5.4 users per 1,000 members of the population, to 17.4 users per 1,000 in 2003, to 32.4users per 1,000 in 2004. The same exponential growth also applies to land line andcellular phone usage in India. In 2000, 35.4 per 1,000 members of the population utilizedphone technology. This figure increased to 64.0 per 1,000 in 2003 and further to 84.5 per1,000 in 2004. In addition, according to the MATRADE report published in October2005, e-commerce in India represented $0.1 million in revenues in 2000. By the end ofthe current year, this number is expected to climb to $5.8 billion, $5.41 billion of whichwill be spent in the business-to-business sector. Clearly, the use of both mobile phonesand the internet is contributing to the increasing sophistication of the Indian population.

Population Segmentation :

According to The National Council of Applied Economic Research, Indias population of1.1 billion is considered to consist of five distinct socio-economic segments. The largestof these population segments is the Climbers. About 54.1 million households who earnbetween 22,000 and 45,000 Rupees annually are members of this segment. This segmentis followed in size by the Aspirants, who make up a total of 44.0 million households thatearn 16,000 to 22,000 in income each year. Destitutes, the poorest of the socioeconomicsegments, earn below 16,000 Rupees each year and comprise 33 million of Indiashouseholds5. The Consumers make up 32.5 million households who earn 45,000 to 215,000 Rupees each year, and the Rich, who earn over 215,000 Rupees each year, constitutejust 1.2 millionhouseholds. Please see below:

A: Population Segments:

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B: Population segment growth of Indias socioeconomic classes:

Socioeconomic class growth in India from 1994-2006.

As shown in Figure B, the Destitutes segment has nearly halved in size over thepastdecade, while The Rich, Consumers, and Climbers have all doubled in size. From

these trends, it can be deduced that the economic growth India has been experiencing isevening the distribution of wealth in the country, enabling more of the population topartake in consumption activities.

Consumer Spending Specifics :

Increases in disposable incomes throughout the population represent significantopportunitiesfor marketers. According to the MATRADE Report, the middle and lowerincome classes combined constitute 60% of the aggregate value of the Indian market.Also reported in the MATRADE Report,the growth of the Indian middle class has causeddiscretionary incomes and consumer spending to increase. In 1992-1993, the typicalIndian consumer spent just $133.60. The following graph, Figure A, demonstrates therelative sizes of each of the five Indian socioeconomic population segments. The graphclearly depicts the Indian middle classs dominance over the other population segments,

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Population Segments

Destitutes

20%

Aspirants

27%Climbers

32%

Consumers

20%

The Rich

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particularly The Rich. Below, Figure B depicts the growth of the five socioeconomicpopulation segments from 1994 to the current year.

India's consuming class :

Table IEstimated households byannual income

Table II

Structure of the Indian consumer market (1995-96)

Annual income(in Rupees) at1994-95 prices

No. of households(in million)

Annualincome(in Rupees)at 1994-95prices

Classification

Number of households(in million)

Urban Rural Total

215,000 The rich 0.8 0.4 1.2

Total no. of households: 164.9million Total no. of households 46.6 118.2 164.8

Source: National Council of Applied Economic Research (NCAER).

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Proportion of goods

India in 2003.

In contrast, just a decade later in 2002-2003, the typical Indian consumer spent a total of$350.74. This represents a 10.13 compound annual growth rate. Not only have consumerexpenditures increased, they have also evolved in their nature. Whereaspreviously, the

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majority of discretionary incomes have gone towards food expenditures, current trendssuggest that this pattern is dissipating. The more available discretionary incomeIndiansallocate to non-food expenditures, the more pronounced the development of the population. Currently, according to the MATRADE Report, Indian consumers havedecreased their share of food expenditures from 54.07% of total disposable income in

1992 to 44.8% of disposable income a decade later in 2002. As detailed in the chart to theleft found in the KPMG Indian Consumers Report, in 2003, Indian consumers still spentthe bulk of their income on food purchases(41.1%). Other sizable expenditures includedpersonal care items, which comprised 8.8% of consumer expenditures, footwear, whichcomprised 7.6% of consumer expenditures, and clothing, which constituted 6.6% of totalconsumption expenditures.

According to the MATRADE Report, growth of Indian consumer expenditures is closelylinked with the growth of the countrys output and economy. The Compound AnnualGrowth Rate of consumer spending in India has measured a consistent 12% each year,rate which has increased in tandem with the GDP.

C onsumption:

Age of OrganisedOutlet

SampleSize

TurnoverGrowth (%)

Profit Growth(%)

Up to 1yr 913 -22.80 -23.50

Above 1yr up to

2yrs 551 -7.50 -6.30

Above 2yrs up to3yrs

196 -7.40 -9.90


130 -8.30 -8.10


39 -1.90 -12.60

Above 5yrs 170 -0.30 -0.80

Total 1999 -8.00 -8.90

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Unique Trends :

According to the MATRADE report Indian consumers are particularly attracted by freegifts with purchases. The most popular free items are personal goods items, such astoothpaste and soap. Another unique aspect of Indian consumption habits centers around

the desire for ecologically-responsible packaging. According to the MATRADE report,Indian consumers are more sensitive to the environmental impact of their consumptionhabits than their other global counterparts. In addition, while India has historically beenfamous for its town market businesses, the current trend in Indian consumption is awayfrom habitual visits to the smaller town markets and toward larger purchasing on a moreinfrequent basis in hypermarkets. As a result of increasing urbanization, bulk purchaseshave increased, and so too has the popularity of larger supermarket stores.

Rural vs. Urban :

Consumer expenditures have great variance atthe rural and urban levels. Rural Indians

spent an average of $12.34 each month per capita on food and non-food expenditures,$6.78 and $5.56, respectively. The most significant non-food expenditures for ruralconsumers were $3.45 or 28% spent on clothing and footwear, and $1.11 or 9%, spent onenergy.

At $23.53, the monthly amount of money spent by inhabitants of urban areas in India wasdouble the expenditure of the rural level. Only $10.00 or 42.4% of their consumptioninvolved food purchases, compared to the 54.9% of their rural counterparts. Whileenergy expenditures were higher, $2.11, this expenditure still represented 9% of the totalmoney spent on the urban level. As an interesting contrast, however, only $1.65 wasspent each month by the average urban Indian, which is significantly lower than the $1.11spent by rural dwellers.

While the distribution of wealth currently suggests an overall shift from greaterconsumption at the rural level to the urban level, the rural Indian population represents animportant market. According to the Malaysia External Trade Development Corporation,75% of the Indian population is dispersed in rural regions. These rural residentsrepresent a market that grows 3-4% annually, adding 1 million new members to its ranksevery year. These rural residents represent a large portion of the countrys non-durableitems consumption, which is currently valued at $11.6 billion. This figure is projected toincrease to $23.25 billion by 2011.

The Indian Retail Industry :

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The unique nature of the Indian retail industry reflects the trends of middle class growthand discretionary spending growth. Demand for retail sector growth is currently fueledboth by the increasing middle class, increasing proportion of the population living in anurban setting, and by the rise in discretionary income among all population segments.According to the Images Report 2005 on shopping center development in India, the

middle class makesup 200 to 250 million citizens. These citizens spend over $300million each year, which is significant,in light of the fact that consumer spending in Indiaincreases on average 6% annually.

Forty million or 3.6% of Indias population of 1.1 billion have the same purchasingpower as Americans and 75% of the population is under the age of 40. These young,increasingly technologically-inclined members of the population represent the future ofIndias labor force and its consumers.

The Indian retail industry, including both the organized and unorganized sectors, iscurrently valued at $292 billion annually, according to KPMG. This industry is

significant to the Indian economy in that it is the greatest contributor to the Indianservices sector. Retail makes up 14% of the countrys annual economic outputandconsists of 11 million outlets dispersed throughout the country. The value of the retailindustry in India was reported in the Hindu Business Line10to have doubled in value in2005.

In comparison to just 0.9 million retail employees in the US, it is clear that the Indianretail industry serves not only to serve the population with consumer goods, but also as akey source of employment. An estimated 42 million Indians are employed by the retailsector, which constitutes 7% of the total workforce. As recently as 1998, the retailindustry employed well under 178,000 total employees. Thus, the industry has

experienced growth of over 220% in the past eight years.

Indias retail environment is unique in that it is best understood when divided intoorganized and unorganized sectors. The organized sector specifically refers to retailestablishments employing ten or more employees which includes hypermarkets,supermarkets, and shopping malls. The organized sector constitutes just four percent ofretail activity in India. Only about 500,000 people employed in the Indian retail industryare involved in the organized sector. Not only is the amount of employees in this portionof the industry expected to grow, but so too is the amount of actual organized retail space.The amount of retail space devoted to organized retail is projected to grow by20 to 25%in the next four years.

The unorganized retail setting is defined by the Hindu Business Line as a retailestablishment including fewer than ten employees. The unorganized sector includes thetraditional formats of low-cost retailing such as the local kirana shops, owner-mannedgeneral stores, paan/beedi shops, convenience stores, and handcart and pavement

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vendors. The majority of Indians who work in the retail sector are members of theunorganized portion of the industry. In fact, about 39,500,000 people are employed inthis portion of the retail industry.

Another unique aspect of Indias retailing industry is its immunity to business cycle

changes. Most industries must contract and expand in a reactionary nature tomacroeconomic environmental issues. However, as demonstrated in the chart below,Indias retail industry remains consistent in its percentage of output each year (with theexception of the effects of a natural disaster, which explains the spike from 1960-1962).This immunity to the cyclical nature of economic activity in the country suggests thegrowing strength and importance of the retail industry in India.

1951-2002 GDP of Services in India.

. The Shopping Mall in India :

The entrance of international retailers has increased the presence of the shopping mallformat. The diagram above, taken from the Images Report 2005, shows a breakdown ofthe amount of commercial shopping mall space throughout the country. Clearly, thenorthern-most part of the country contains the greatest number of shopping malls to date.By 2008, 150 new shopping malls will be constructed, which represents an investment of4-12 months of building time and at least $128 billion Rupees to adequately fund eachproject. Most of the current retail spaces, as much as 96%, consist of just 500 square

feet of retail space.

Western department stores are also rising in popularity. Currently there are around 100department stores in India. The amount of department stores in the country continues togrow at a rate of 24% each year and the sales volume of department stores grew 34%

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during the period from 1999 to 2002. The increase in the department stores has beenechoed by the similar increase in the presence of hyper and supermarket stores.

A unique trend that is developing in India with regard to retail space centers ontheutilization of high-end hotel space in Indias most urban settings. Noted particularly in

2004 and 2005, high-end hotels such as the Oberoi Hotel Delhi, the Taj Mahal inMumbai, the Imperial Hotel Delhi, and the Maurya Hotel Delhi have all converted10,000 to 220,000 square feet of the lower levels of their accommodationto retail space.

Zone Wise Distribution

Potential Obstacles :

While significant growth is forecasted in the Indian retail industry, there are also potentialobstacles to the further success of the industry. The Hindu Business Line reports that one

of the greatest disadvantages of the retail sector at present is its propensity tounderemploy its workers. Many members of the unorganized sector are forced into retailby unsuccessful agricultural endeavors and often have neither the training, nor the meansnor inclination to succeed in retail10. This phenomenon can serve to explain the habitual

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problems that members of the industry experience in gaining access to capital equipment,human capital, or staff, and viable real estate selection.

Another potential obstacle to the successful growth of the Indian retail industry is therelative rates of job growth in proportion to industry growth. At the beginning of 2005,

413.800 lakh were unemployed and covered by pensions. However, during the pastdecade, the organized sector only grew by 30,000 jobs. This disconnect between willingand employed workers creates an obstacle for retail industry growth.

An additional obstacle to the growth of the Indian retail sector is the potential entrance ofmultinational, multi-billion-dollar Big Box retailers, such as Wal-Mart. As the followingquote from Mohan Guruswamys article in the Hindu Business Line10 suggests,multinational retail corporations, specifically Wal-Mart, could stagnate the growth ofIndias retail industry by displacing thousands of workers in the unorganized sector:

India has 35 towns each with a population over one million. If, hypothetically, Wal-Mart

were to open a store in each of these cities and they reached the average Wal-Martperformance per store, it would mean a turnover of over Rs 8,033 crore with only 935employees. Extrapolating this with the average trend in India, it would mean displacingabout 4,32,000 persons. This would mean an employment of just 43,540 persons,displacing nearly eight million persons employed in the unorganized retail sector.

When weighing the costs and benefits of the entrance of multinational retailers, most seeexpansion of giants such as Wal-Mart as a positive way to contribute to the growth of theIndian economy. However, one must question the contribution of such giants to theeconomy if so many workers are to be displaced and the very nature of the retailenvironment is to be altered.

Foreign Direct Investment :

The impact of foreign direct investment on the future of Indias retail sector is significant.According to the Hindu Business Line10, of the 30 emergent economies, Indias retailsector is ranked as second only to China as the attractive retail sectors in which to invest.Hindu Business Line reports foreign direct investment as being one of the sole forces topush the value of the Indian retail industry to a potential of over $300 billion per year by201010. During the first half of this fiscal year, the amount of foreign investment in India

increased to $7.96 billion. This growth is significant in comparison to the period of 2004-2005 where foreign direct investment stood at $2.38 billion. The primary medium offoreign direct investment in India is through portfolio investment. Portfolio investmentsof GDRs, ADRs, and FIIs contributed a total of $5.10 billion in investment into theIndian economy. Recent government reforms mentioned on the India Brand Equity

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Foundation website11 point to an increased loosening of foreign direct investmentregulationsin the retail sector. According to the IBEF organization, 51% foreign directinvestment will now be allowed in a single brand of products in India. The opening ofmany previously closed industries to foreign direct investment will serve to boost Indiaseconomy in the long run. Foreign direct investment could increase Indias standing as the

fifth largest economy in the world and its standing as the third largest GDP in Asia12

.There are many arguments for the liberalization of foreign direct investment in Indiasretail trade. First and foremost, increased investment in the countrys retail industry isthought to increase the quality standards of all retail outlets throughout the country. Notonly is quality believed to be improved by greater foreign direct investment, so too isproduct selection for consumers, as well as more competitive pricing structures. Higherstandards of quality can lead to the increased acceptance of Indian products in the world-wide market for consumer goods. According to Business Standard, however, the Indianretail industry would most benefit from the liberalization of foreign direct investmentwithout the current bureaucratic and governmental interventions that hinder theattractiveness of foreign direct investment in so many other sectors of the Indianeconomy.

Kirana S to res Are Safe From Big R etail:

Amid a debate on whether organized retail kill livelihood of mom and pop store owners,an official study on Monday said there was no real threat to neighbourhood 'kirana' storesfrom modern retail chains. In fact, farmers as also consumers stand to gain fromorganized retail in terms of competitive pricing, says the government-sponsored study.There is "no evidence of a decline in overall employment in the unorganized sector as aresult of the entry of organized retailers," said the report by think tank ICRIER. However,it admitted that initially, mom-and-pop stores located in the vicinity of big malls haveseen drop in sales and profit, but the impact would disappear in the long run. It saidfarmers benefit significantly from direct sales to organized retailers. "Profit realizationfor farmers selling directly to organized retailers is about 60 per cent higher than thatreceived from selling in the mandi. "At a time when inflation is impacting the householdbudget, consumers have "definitely gained" from organized retail on multiple counts."While all income groups saved through the entry of the organized retail purchases, lowerincome consumers saved more," it said. The much-awaited study has recommendednationwide uniform licensing policy to facilitate "modern retailing" which will help take

India's total retail sector to a whopping $590 billion in 2011-12.The document which hasbeen submitted to the Department of Industrial Policy and Promotion, however, did notdeal with the impact of foreign direct investment on small retailers

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Organized Retail Is Beneficial :

The organised retail sector can take care of itself, but the unorganised retail sectorrequires public policy. ICRIER's policy recommendations are directed towards nurturing

and modernising the unorganised sector to bring them to a level playing field.

Improve access to credit for kiranas to expand and compete.

Encourage the formation of retail cooperatives to help increase kiranas' bargainingpower and exploit the advantages of bulk buying.

Modernisation of wetmarkets to scale-up operations and improve the efficiency of thesupply chain.

Formation of private codes of conduct' which may be incorporated into enforceablelegislation.

Strengthen the Competition Commission's role to prevent collusion or predatorypricing on the part of the organised retailer when dealing with farmers, manufacturers oreven consumers

A simple uniform license regime to facilitate the growth of organised retail to deal withincreasing demand and to avoid inevitable bottlenecks in retail if left only to unorganisedretail.

The initial decline in turnover and profit smoothen out over time as organised andunorganised retail begin to co-exist. The various positive externalities are:

Improvements in logistics and infrastructure

Efficient supply chains

Better quality produce

Increased revenue for the government through taxes, and

Lower wastage

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Clearly this is a positive sum game. Modernisation in retail in India has started late.India can therefore learn from various international experiences and not be afraid toembrace this development in the retail sector.

Future Predictions :

The growth of the middle class will revolutionize consumption habits in India. The sheernumbers and spending power of this group of consumers will assist in raising the GDPand living standards of the country in the coming years. In addition, increasingtechnological knowledge and sophistication of consumers will cause sales oftechnologically and electronically complex consumer goods to spike in the comingdecade. The growth of the Consumers and the Climbers segments and the decline of theDestitutes and Aspirants will ensure increasing disposable income and purchasing power

for the majority of the population. In the future, fewer consumer dollars will be spent onnon-durables such as food, and a growing amount of emphasis will be placed on servicesand durable goods purchases.

Conclusions :

The nature of Indias expanding economy reflects not only the growing buying power ofthe Indian population, but also the large-scale effects the rising middle classes in India arehaving on the economy. As the GDP of the country increases, so too does the importance

of the countrys

domestic retail industry. With the trend towards growth in the organized retail sector,shopping malls and hotel retail space are becoming more common in Indias urban areas.With large multinational companies attracted by Indias burgeoning economy, many inIndia are wondering if job growth in this industry will also follow. In the future, Indiasconsumers can expect more choices, higher quality, and more purchasing power withwhich to make their purchase decisions.

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