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Indira School of Business Studies, Pune Retail Management

Sem: III Batch: 2012-14

Study Material (PGDM IB)

Unit 3 3.1 Introduction to Retailing Session Allotted: 1

Significance of retail industry, new role of retailers, Indian retail scenario and its future prospects

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. Food and Grocery is the largest category within the retail sector with 60 per cent share followed by Apparel and Mobile segment. 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. The recent wave of reforms by the Government to incentivize Foreign Direct Investment (FDI) 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.

Prepared By Prof. Srishti Joshi

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.

Until 2011, the Indian Central Government denied Foreign Direct Investment (FDI) in multibrand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or other retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process. In late 2012, the Government of India passed a Foreign Direct Investment policy which allows foreign retailers to own up to 51 per cent in multi-brand retail and 100% in single brand retail. It is expected that these stores will now have full access to over 200 million urban

Prepared By Prof. Srishti Joshi

consumers in India, approximately 47% of which are below the age of 30 with high levels of consumption. According to A T Kearneys Global Retail Development Index (GRDI) 2012, India is the 5th most favorable destination for international retailers (Fig 1). Of the total Indian retail market, 8% constitutes the organized retail segment which is estimated to grow at a rate of almost 30% by 2015, and hence at a much faster pace than the overall retail market which is forecast to grow by 16% in the same period. Clothing & Apparel make up almost one third of the organized retail segment, followed by Food & Grocery and Consumer Electronics. India currently has a small penetration within the organized retail segment as compared to other emerging markets such as China, which has a penetration of more than 20% within organized retail according to the Global Retail Index report by the World Retail Conference.

The new FDI policy implies greater autonomy in functioning for foreign single-brand retail players who can now own 100% of their Indian stores, up from the previous cap of 51% with only the stipulation that they will have to source 30% of their goods from small and mediumsized Indian suppliers. The new policy allows a maximum 51% ownership for the multi brand retail sector subject to the following conditions: Each Indian state government has the option to accept or reject the implementation of this policy.

Prepared By Prof. Srishti Joshi

Retailers can only set up in cities with a population of more than 1 million (total of 53 cities in India) provided they have the approval from the respective state governments. The figure below shows state wise acceptance of this new policy. Currently 18 cities are eligible for multi brand retailers to enter under this new policy.

Multi-brand retailers must have a minimum investment of US$100 million with at least half of the amount invested in back end infrastructure. They will have to source 30% of their goods from small and medium-sized Indian suppliers. E-commerce is not allowed as an alternate channel as it can serve the customer beyond the physical location of the store.

Macroeconomic Impact FDI in multi-brand retail is likely to bolster retail capabilities by attracting foreign investments. Appropriate implementation of the policy is expected to address a number of supply side constraints plaguing the Indian agricultural sector and help reduce inflationary pressures. Indian agriculture has been traditionally plagued with low food-grains productivity and inefficient distribution. Increased scale of investments and better supply chain processes will help increase productivity and distribution efficiency. The agricultural sector can see higher use of technology in farming, packaging and storing leading to reduction in supply chain

Prepared By Prof. Srishti Joshi

impediments, thereby, reducing supply side inflationary pressures. Better retail access is also likely to provide consumers with wider product choice and rationalized prices. Expected future trends in the retail segment in India 1. 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 2. Dominance of unorganized retail: Flexible credit options and convenient shopping locations will help traditional retail to continue its dominance in retail sector. 3. 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. 4. Talent Pool Availability: The introduction of the FDI in retail policy will impact the availability of talent. Many institutes have now introduced specialized post graduate degrees in retail management; i.e approximately 6,000 qualified professionals with expertise in the field of retail management are being trained every year. Until now, retailers have sponsored courses in some of the top B-schools to attract talent at a junior level as shown in fig. 4 below, while hiring at a mid to senior level has primarily been from competitors.

The current trends and the rapid growth of the market will create an acute shortage of talent at the mid to senior level, creating high demand for candidates that are experienced in setting up large retail chains as well as candidates with international exposure. This increase in demand is likely to drive up salaries. The figure below illustrates the inflation rate in India over the last 5 years;, consequently average annual increase in salary will be between 12-18% in the retail sector as a result of skill shortages spurred by the entry of new foreign players. In addition, salary increases are likely to go up by 20-25%. On a sectoral basis, demand is likely to be highest for candidates with experience within Clothing & Apparel followed by the Food & Grocery sectors which constitute the highest

Prepared By Prof. Srishti Joshi

part of the organized retail market as well as the areas where foreign retailers are likely to enter the fastest.

Prepared By Prof. Srishti Joshi