DISSECTOR A B-Gyan Initiative

DISSECTOR: Retail Sector

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

Introduction
Indias retail market is expected to cross 1.3 trillion USD by 2020 from the current market size
of 500 billion USD. Modern retail with a penetration of only 5% is expected to grow about six
times from the current 27 billion USD to 220 billion USD, across all categories and segments.
The Indian retail sector accounts for over 20% of the countrys gross domestic product (GDP)
and contributes 8% to total employment.
The recent wave of reforms by the Government to incentivize Foreign Direct Investment in
various sectors is bringing a new zeal to the investment climate in India. One of the most
debated reforms is the policy for allowing 51 per cent FDI in multi-brand retail.

Retail in India
Market Size

Figure 1: Retail Market in India

The Indian retail industry has experienced growth of 10.6% between 2010 and 2012 and is
expected to increase to USD 750-850 billion by 2015.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

Figure 2: Growth trends of Indian Retail Industry

Organized retail, which constitutes 8 per cent of the total retail market, will grow much faster
than traditional retail. It is expected to gain a higher share in the growing pie of the retail
market in India. Various estimates put the share of organized retail as 20 per cent by 2020.

Figure 3: & Bradstreet retail sector overview, India Retail Report 2013

Within the organized retail sector, Apparel is the largest segment. Food and Grocery and
Mobile and telecom are the other major contributors to this segment.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

Factors driving the organized retail sector include the following:

Higher incomes driving the purchase of essential and nonessential products
Evolving consumption patterns of Indian customers
New technology and lifestyle trends creating replacement demand
Increase in rural income as well as urbanization
Increase in easy access to credit and consumer awareness
Growth of modern trade format across urban, Tier I, Tier II and Tier III cities and towns
Rapid urbanization and growing trend towards nuclear families

Figure 4: Organized Retail in different countries. (Source-PWC)

Online Retailing
We are now in the age where retailers are sending personalized messages via SMS or emails.
The Indian retail landscape is evolving from the brick-and-mortar model to adopt technology
for connecting with consumers. The aim is to achieve a complete seamless customer
experience. Its a new world for both retailers and the customers where the latter is the king.
Indians spend 25.2% of their time on social networking websites. As we move from the world of
skeptics to early adopters to ultimately the tacticians, online retailing and mobile retailing are
the new modes of growth.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

Rural retailing
With several states in the country permitting retailers to purchase produce directly from
farmers, the farmers too are adapting to the new opportunity to cultivate assigned crops and
take special care of the same. This gets them instant credit at higher prices than what they
received from the erstwhile traders/middlemen. Corporate retailers like ITC, Godrej, Reliance,
AV Birla and many others have already established the farm linkages. Indian farmers are finally
making good money, after centuries of social and economic exploitation. The Indian
government too has chipped in with a massive loan waiver worth Rs.60, 000 Crore to lighten
the farmers debt burden.

Evolution of the FDI policy in Multi-Brand Retail Trade

The Government of India had been considering opening up the MBRT sector to FDI for some
time. The changes in some of the policy conditions indicate government intention to provide a
window to foreign retailers to cultivate/grow the SME segment.

As aforementioned, Mass Grocery and Apparel are two of the fastest growing organized retail
segments. In both these segments there are large domestic retailers who could be potential
joint venture partners for foreign retailers. Whereas, Multi-brand specialty retail segment such

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

as Beauty & Wellness and Consumer Electronics are still in their nascent stage. Their current
market size may not hold a big potential for foreign retailers.

Related Policies
1. 50 per cent of FDI in backend infrastructure in three years
Minimum investment of INR 250-220cr is to be invested in backend infrastructure in the
first three years. However, different retail segments have dynamic requirements of
backend infrastructure.

Figure 5: 50 per cent of FDI in backend infrastructure in three years

Mass Grocery needs significant investment in the backend. For example food processing
unit, cold chains, etc. However, other segments such as Apparel, Beauty & Wellness and
Consumer Electronics have limited requirements in the backend. Further, as per the policy,
land cost and rentals that might be incurred for warehousing are not included in the
definition of backend infrastructure. Hence, meeting this policy constraint would be a
challenge for any player in the retail segment other than Mass Grocery.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

2. 30 per cent of sourcing from small industries

This policy constraint implies that retailers should have at least 30 per cent sales from
private label brands or unbranded products sourced from small industries. Existing Mass
Grocery retailers in India source many products directly from producers and small food
processing units. However, suppliers of Consumer Electronic and other specialty stores such
as Beauty & Wellness are large size companies.

Figure 6: 30 per cent of sourcing from small industries

3. Only cities with population more than one million

This policy constraint restricts the access to retail marketing all sub-one million
populated cities and towns. More than 80 per cent of stores of various multi-brand
retail chains (such as Spencer, Spar, Shoppers Stop, Croma, Titan Eye+ etc.) are in
cities with more than one million populations. Hence, the policy condition may not
significantly affect operations in most of the retail segments.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

Figure 7: Only cities with population more than one million

4. Approval from State Government required

There are only 18 cities in India with population more than one million and the
corresponding State Government supporting FDI in multi-brand. More than 50 per
cent of the existing retailer stores (such as Spencer, Shoppers Stop, Lifestyle, Apollo
etc.) are in states not supporting FDI in multi-brand. This policy condition impacts
the access to a significant market. Further, limited cities means limited stores and
reduces economy of scale.

Figure 8: Approval from State Government required

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

5. E-commerce not permissible

Multi-brand retailers with FDI will not be able to use e-commerce, whereas, Indian
retailers can use e-commerce as another channel for sales. Most of the existing
retailers in Mass Grocery and multi-brand Apparel do not use e-commerce to sell
their products. Even in specialty retailers such as Beauty & Wellness, e-commerce
does not form a significant part of their sales. Hence, this policy constraint should
not materially impact operations.

Figure 9: E-commerce not permissible

Expected future trends in the retail segment

Expected future trends in the retail segment in India

A. FDI in specialty stores:
Multi-brand organized retail in specialty stores such as Consumer Electronics,
Footwear, Furniture and Furnishing etc. are expected to expand and mature in the
next few years. However the policy condition on sourcing will continue to be a major
bottleneck for FDI in many of these segments
B. Dominance of unorganized retail:
Flexible credit options and convenient shopping locations will help traditional retail
to continue its dominance in retail sector.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

C. Growth in small cities and towns:

Stiff competition and saturation of urban markets is expected to drive domestic
retail players to tap the potential in small cities.

Recent Developments
Omni channel customer experience
Disruptive technologies (social, mobile, cloud, and analytics) are changing the face of retail
today. Omni-channel also means empowering a sales channel to enable more cross channel
activities e.g. Click and collect service i.e. buy online and collect in-store, accept customer
returns and refunds for products bought online
Mobility commerce
Use of technology in-store (e.g. web kiosks), and customers own smart phones devices is one
of the latest trends. Retailers are using store Wi-Fi, mobile apps, and beacons technology. Also,
social media is used to target customers with personalised offers, which can be done using
next generation customer analytics.
Big data and Customer
Handling the customer data (transactional stores POS data) and web analytics data is already
known to retailers until now but data is exponentially grown to become 'BIG' with advent of
social media
Customer delivery proposition
Meet ever increasing customer expectations when it comes to product and service delivery,
reduce waiting times @ home by providing real time delivery options/selection of time slots,
notification by email, SMS.
Inventory management & Order fulfillment
Out of stock situations wont be a case in the future! Endless aisle - improve breadth of
assortment by fulfilling order from any inventory location (even store stock!) to stop loss of
sale.

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

Handling Customer Payments

Accept multi tender, multi-currency, Redeem coupons and customer loyalty cards online.
Accept more than one currency in a single transaction
Upgrade e-commerce platforms
Fulfil future aspirations e.g. payment acceptance - Single click checkout for speedier
transactions, integration of PayPal, WorldPay etc. as alternative payment types, introduce
more flexibility by improving customer experience, usability etc.
Digitalise Data management
Use of tools and software to manage the master data e.g. Product Info management tools,
data modelling, product lifecycle management.
Flexible and Agile Supply chain
Improve supply chain business process by making them sleeker and lean, Cross docking, direct
delivery to stores, real time delivery, Integration of 3rd party logistics capability, cross
functional integration e.g. customer ordering & delivery to stores for pick up.

Road Ahead
The key challenges for international players looking to enter the Indian retail sector are high
real estate rentals and an uncertain political environment of the country.
Other Challenges include:

Availability of Retail Space

Hypermarkets require more than 60,000 sq. ft. and departmental stores require more
than 20,000 sq. ft. of retail space. Such retail space in prime locations in the big cities is
scarce and available only at high rental costs.

High rental cost

The Indian retail rentals have been quoted to be around 300-400 basis points higher
than international rentals. Rents in prime properties have increased by 50 per cent in
just three years.

Clarification on certain policy features

BGyan The Business Interaction Committee, NITIE

DISSECTOR A B-Gyan Initiative

The policy note does not specify whether investment in back end infrastructure needs
to be a fresh investment or if foreign companies can buy stakes in already established
backend infrastructure.

Red Tape Getting various government approvals

Entry of a multi-brand MNC retailer in the retail sector would fall under the approval
route. This implies that the MNC retailer would have to go through different layers of
Government departments before getting the go ahead.

Political Risk
The largest opposition party in India has opposed FDI in retail and some of its leaders
have indicated that they will scrap the policy if their party comes to power. A political
change in state and central governments puts a lot of political risk on investment in
retail.

Skilled Manpower
One of the major challenges faced by the existing players is the availability of skilled
manpower; any foreign retailer planning to enter India will have to face similar
challenges.

Infrastructure Challenge
Roads, ports, electricity are some of the infrastructure challenges, which increase the
operational cost of the retail chain.

Currency Fluctuation
In the past three months, the dollar/INR exchange rate has fluctuated by approx. 8 per
cent. This may put considerable currency risk on any foreign investment in India.

References
1.

http://www.deloitte.com

2. http://pwc.com
3. http://crisilresearch.com

BGyan The Business Interaction Committee, NITIE