TRENDS AND CHALLENGES IN

INDIAN RETAIL MARKET

ADITH VENUGOPAL*

ABSTRACT
Current Position and FDI Norms in Indian Retail
Industry Structure
Retailing Sector Analysis Report

Challenges facing the Indian Organized Retail sector

FDI in B2C e-retail

*MBA student, SNGCE, Kolenchery

**MBA student, SNGCE,Kolenchery
***MBA student, SNGCE,Kolenchery

Key words; consumer market, Indian retail market, offline retailers, online

retailers, Foreign Direct Investment (FDI), the revenues of physical

retailers.

Introduction
India is the fifth largest retail market in the world. Current market
development of Indian retail industry is about us$ 520 bn.Retail growth
of 14% to 15% per year expected through 2015. More firms are
concentrated on B to C (business to consumers) business today. We can
see a critical competition in retail market industry because of that or to
survive in the retail industry the companies and selling platforms spared
out wide verity of advertisements. In 2014 financial year the economic
drawback impact the Indian retail segment. The high inflation rates is a
major factor that effect the retail segment. Another biggest challenge
faced by Indian retail sector is the lack of retail space. Ecommerce in
retailing make a twist in Indian retail segment. You can access anything
and everything by just a click. High discounts and offers that are offered
by ecommerce retailers are major challenge offline retailers. The Indian
Retail sector has come off age and has gone through major transformation
over the last decade with a noticeable shift towards organized retailing. A
T Kearney, a US Based global management consulting firm has ranked
India as the fourth most attractive nation for retail investment among 30
flourishing markets.
Key factors of the Indian Retail Industry

Emergence of nuclear families

An increase in the double-income households trend
Large working population
Reasonable Real estate prices

Increase in disposable income and customer aspiration

Demand as well as increase in expenditure for luxury items
Growing preference for branded products and higher aspirations
Growing liberalization of the FDI policy in the past decade
Increasing urbanization,
Rising affluence amid consumers

Current Position and FDI Norms in Indian Retail

In 2010, the Indian retail market was valued at $435 billion of which the
share of modern retail was 7 per cent. The sector is expected to grow to
$535 billion by 2013 with the share of modern retail at 10 per cent. In
2007, India was ranked the twelfth largest consumer market and it is
expected to be the fifth-largest consumer market by 2025 after the US,
Japan, China and the UK (McKinsey & Company 2007). In 2010, India
attracted the largest number of new retailers among emerging and mature
markets (CBRE 2011). According to study conducted by ICRIER, total
retail business in India will grow at 13% annually, from US $322 billion
in 2006-07 to US $590 billion in 2011-12 and further US $1 trillion by
2016-17.

Being aware of the large market, growing consumerism and brandconsciousness and to provide a greater fillip to high economic growth, in
1997, the Indian retail sector witnessed the first footprints of FDI with
100% FDI being permitted in cash & carry wholesale trading under the
government approval route, subsequently brought under the automatic
route in 2006. As a step ahead, FDI in single brand retail was permitted to
the extent of 51% in 2006, while FDI in multi brand retail remained
prohibited till recently. Despite changes in consumer behaviour and retail
modernization, India is one of the few countries where FDI was prohibited
in multi-brand retail (until 2011), primarily to protect the traditional momand-pop retailers. This policy restricts global low-cost multi-brand
retailers such as Wal-Mart, Tesco and Metro AG from catering directly to
Indian consumers. Within the country, there has been significant debate
on whether FDI should be allowed in multi-brand retail. In July 2010, the
Department of Industrial Policy and Promotion (DIPP) released a
Discussion Paper on Foreign Direct Investment (FDI) in Multi-Brand
Retail Trading to facilitate discussion and debate on whether FDI should
be allowed in multi-brand retail and, if so, what conditions should be
imposed on FDI. Although a number of issues have been discussed in the
Discussion Paper, the implications of the liberalization for Indian
consumers have not been discussed. The Economic Survey of 2010-11
mentioned that a phased opening of FDI in multi-brand retail is likely to
benefit the consumers, but did not state the exact benefits. In July 2011, a
Committee of Secretaries (CoS) had cleared the proposal to allow up to
51% FDI in multi-brand retail, which has been approved by the Union
Cabinet in November2011, albeit with a few riders to set up the supply
chain and reduce inflation.
The Union Cabinet has also approved increasing the FDI limit in single
brand retail to 100% with government approval. While no parliamentary
approval is needed for the decision, State Governments have the

prerogative to disallow the same in their respective states. As a part of the

economic liberalization process set in place by the Industrial Policy of
1991, the government of India opened up the retail sector to FDI through
a series of steps:
1995 World Trade Organizations (WTO)
General Agreement on Trade in Services (GATS) which
Included both wholesale and retail trade in services came into effect.
1997 FDI in cash and carry (wholesale) allowed up to 100%
Under the government approval route.
2006 -FDI in single brand retail was permitted to the extent of 51%; FDI
in cash and carry brought under automatic route.
2011 100% FDI in single-brand retail permitted with government
approval;
51% FDI in multi-brand retail with few conditions.
Retail industry has been on a growth trajectory over the past few years.
The industry is expected to be worth US$ 1.3 trillion by 2020. Of this,
organized retail is expected to grow at a rate of 25% p.a. A significant
new trend emerging in retail sector is the increase in sales during discount
seasons. It has been observed of late that sales numbers in discount
seasons are significantly higher than at other times. This is prompting
retailers to start discounts earlier and have longer than usual sale season.
Also, concepts such as online retailing and direct selling are becoming
increasingly popular in India thereby boosting growth of retail sector.
Another crucial structural change is expected to come in the form of
implementation of FDI in multi-brand retail. The industry players are
strongly in favour of entry of foreign retailers into the country. This will
help them in funding their operations and expansion plans. The expertise
and experience brought in by the foreign retailers will also improve the

way the Indian retailers operate. It is expected to bring in more efficiency

in the supply chain functions of retailers.
However, fear of loss of business for kiranawalas is still a cause of
concern and is posing hurdles in FDI implementation across country.
Ironically, even though it has been some time since the government
opened the door for FDI in multi-brand retail, international retailers have
not yet shown wholehearted interest in coming to India yet. Hurdles such
as requirement of clearance from individual states, mandate of 30% local
outsourcing of materials from micro and small enterprises are keeping the
investors away from India.
Retail is mainly a volume game, (especially value retailing). Going
forward, with the competition intensifying and the costs scaling up, the
players who are able to cater to the needs of the consumers and grow
volumes by ensuring footfalls will have a competitive advantage. At the
same time competition, high real estate cost, scarcity of skilled manpower
and lack of infrastructure are some of the hurdles yet to be tackled fully
by retailers.
Luxury retailing is gaining importance in India. This includes fragrances,
gourmet retailing, accessories, and jewellery among many others. The
Indian consumer is ready to splurge on luxury items and is increasingly
doing so. The Indian luxury market is expected to grow at a rate of 25%
per annum. This will make India the 12th largest luxury retail market in
the world.
Rural retailing is another area of prime focus for many retailers. Rural
India accounts for 2/5th of the total consumption in India. Thus, the
industry players do not want to be left out and are devising strategies
especially for the rural consumer. However, players should be ready to
face some imminent challenges in rural area. For instance, competition
from local mom and pop stores as they sell on credit, logistics hurdles due

to bad infrastructure in rural areas, higher inventory expenses and

different buying preferences amongst rural population.

Industry Structure
The Indian retail industry has primarily been dominated by the
unorganized segment. The primary reason for the higher share of
unorganized retail emanates from the fact that rural sales account for more
than one-half of the total industry sales. Even in urban areas, a significant
proportion of the retail revenue is generated by unorganized retailers such
as kirana stores, fruit & vegetable vendors, petty shops, hawkers, etc.
Retailing in India is highly fragmented, and is dominated by
independent owner-managed outlets commonly known as mom & pop

stores. These stores number nearly 12 million, and more than 80% are
small family businesses utilizing household labor. One-half (50%) of
these retail outlets specialize in the food & grocery.
Food and groceries has the biggest share in the overall retail pie,
accounting for the around 76%. However, it has the lowest organized
retail penetration. Within the organized retail sector, apparel constitutes
the largest segment. Food and Grocery and Mobile and telecom are
the other major contributors to this segment. The consumer is more brand
conscious in Consumer Electronics, Footwear and to some extent in
Apparels. For Food and Grocery, the expenditure is predominantly on
non-branded products.
Despite the rapid growth of the industry, both organized and unorganized
retailers are expected to coexist as each offers different value propositions
to customers. Organized retailers provide discount on bulk purchase and
on ambience, whereas, traditional retailers provide convenience and topup shopping. Flexible credit options and convenient shopping locations
will help traditional retail outlets to continue their dominance in retail
sector.

Retailing Sector Analysis Report

India is the 5th largest retail market in the world. The country ranks
fourth among the surveyed 30 countries in terms of global retail
development. The current market size of Indian retail industry is about
US$ 520 bn (Source: IBEF). Retail growth of 14% to 15% per year is
expected through 2015. By 2018, the Indian retail sector is likely to
grow at a CAGR of 13% to reach a size of US$ 950 bn. Retailing has
played a major role the world over in increasing productivity across a
wide range of consumer goods and services. In the developed countries,
the organized retail industry accounts for almost 80% of the total retail

trade. In contrast, in India organized retail trade accounts for merely 810% of the total retail trade. This highlights a lot of scope for further
penetration of organized retail in India.
The sector can be broadly divided into two segments: Value retailing,
which is typically a low margin-high volume business (primarily food
and groceries) and Lifestyle retailing, a high margin-low volume
business (apparel, footwear, etc). The sector is further divided into
various categories, depending on the types of products offered. Food
dominates market consumption with 60% share followed by fashion.
The relatively low contribution of other categories indicates opportunity
for organised retail growth in these segments, especially with India
being one of the world's youngest markets.
Transition from traditional retail to organised retail is taking place due
to changing consumer expectations, growing middle class, higher
disposable income, preference for luxury goods, and change in the
demographic mix, etc. The convenience of shopping with multiplicity
of choice under one roof (Shop-in-Shop), and the increase of mall
culture etc. are factors appreciated by the new generation. These factors
are expected to drive organized retail growth in India over the long run.
During FY14, the economic backdrop was a key factor impacting the
performance of retail companies across various sub sectors, including
that of organized retail. Consumer sentiment and business confidence
continued to be subdued during the year with economic growth
decelerating further. This is attributable mainly to weakening industrial
growth in the context of tight monetary policy followed by the RBI
through most of the year, political & policy stability related concerns
and uncertainty in the global economy.

Inflation also was an important concern area. Persistent high inflation

and inflation expectations meant that the RBI was compelled to
maintain the benchmark interest rates at a much higher level than what
would be needed to encourage business and economic sentiment. In the
recent quarters consumer sentiment has been varied-with apparel
retailers reporting an improving trend but most other retail formats still
witnessing muted off take.

Challenges facing the Indian Organized Retail sector

The challenges facing the Indian organized retail sector are various and
these are stopping the Indian retail industry from reaching its full
potential. The behavior pattern of the Indian consumer have undergone
a major change. This have happened for the Indian consumer is earning
more now, western influences, women working force is increasing,
desire for luxury items and better quality. He now wants to eat, shop,
and get entertained under the same roof. All these have lead the Indian
organized retail sector to give more in order to satisfy the Indian
customer.
The biggest challenge facing the Indian organized retail sector is the
lack of retail space. With real estate prices escalating due to increase in
demand from the Indian organized retail sector, it is posing a challenge
to its growth. With Indian retailers having to shell out more for retail
space it is effecting there overall profitability in retail.
Trained manpower shortage is a challenge facing the organized retail
sector in India. The Indian retailers have difficultly in finding trained
person and also have to pay more in order to retain them. This again
brings down the Indian retailers profit levels.
The Indian government have allowed 51% foreign direct investment
(FDI) in the India retail sector to one brand shops only. This have made
the entry of global retail giants to organized retail sector in India
difficult. This is a challenge being faced by the Indian organized retail

sector. But the global retail giants like Tesco, Wal-Mart, and Metro AG
are entering the organized retail sector in India indirectly through
franchisee agreement and cash and carry wholesale trading. Many
Indian companies are also entering the Indian organized retail sector like
Reliance Industries Limited, Pantaloons, and Bharti Telecoms. But they
are facing stiff competition from these global retail giants. As a result
discounting is becoming an accepted practice. This too bring down the
profit of the Indian retailers. All these are posing as challenges facing
the
Indian
organized
retail
sector.
E-commerce in Retailing
Indias online retail industry has grown at a swift pace in the last
5 years on the back of increasing Internet penetration and use of cheaper
smart phones. While early growth came from books, electronics and
apparel, CRISIL expects new segments like grocery, jewelry and
furniture to add to the momentum.
Most of the existing retailers in mass grocery and multi-brand
apparel do not use e-commerce to sell their products. Even for specialty
retailers, e-commerce does not form a significant part of their sales.
However, growing competition from online retailers and marketplaces
is starting to eat into the revenues of physical retailers, compelling them
to go onlineand slow additions of new stores. The impact is highest
in segments like books, music and electronics where product
specifications are standard and differentiation is low. More recently, the
competition has increased in apparel and footwear too.

Conclusion
The sector is expected to see an investment of over $30billion within next
5 years and putting modern retail in the country to $175-200 billion,
according to Techno park estimates. International retailers see India as the
last retailing frontier left as the Chinas retail sector is becoming as

saturated. Domestic players are selectively growing in India-postponing

aggressive expansion plans, adding stores judiciously and shifting gears
to tier 2 and 3 cities. E-commerce is rapidly expanding in Indian market.
Government can regulate it, but it cannot put restrictions on it as
demanded by many offline traders. Also, the future belongs to E
commerce as internet penetration is increasing in India. Offline stores
have to come to online platform in long run to save themselves from
extinction. The most important aspect in this scenario is that customers
have an upper hand in choosing their shopping option and they have
emerged as the true winner. Rising lease/rental costs affecting project
viability. Poor monsoons and low GDP Growth could affect consumer
spending drastically. Archaic labor laws are a hindrance to providing 24/7
shopping experience. Personalized service offered by Kirana stores.
Unavailability of qualified personnel to support exponential growth in
retail. Differentiate taxation laws hindering, these are major threads faced
by Indian retail market.

Findings
The behavior pattern of the Indian consumer have undergone a
major change. This have happened for the Indian consumer is
earning more now, western influences ,women working force is
increasing, desire for luxury items and better quality.
The lack of retail space is the biggest challenge facing the Indian
organized retail sector.to meet retail demand there is a huge need of
ecommerce sites.
The offline retailers are fail to compete with the online retailers.
Either they have to open there own ecommerce sites nor they have
to make a deal with ecommerce sites for more cooperation.

 Indian consumers are protected under the Consumer Protection Act,

1986, and the Consumer Protection (Amendment) Act 2002. This
Act is outdated. The retail sector is evolving and many new retail
formats have developed. These are not explicitly covered under the
present Act. The process of registering a complaint and handling of
legal cases in India is lengthy. In addition, there is no provision for
protecting consumers against predatory pricing. Hence, the Act
needs to be modified to ensure consumer protection and welfare.
In order to prevent the development of big private monopolies it is
also important for the Government to ensure its presence in the
market. Several Government marketing agencies exist, both at the
Central as well as State levels, which need to be revived and made
to reinvest in modernizing infrastructure. Partnerships between
existing Government marketing agencies and cooperatives can also
be considered, especially in food retail where synergies exist.

Source

http://shodhganga.inflibnet.ac.in.
http://www.ibef.org/industry/retail-india.aspx
business.mapsofindia.com/india-retail-industry
brand
retail
trading
discussion
paper
available
at
http://www.dipp.nic.in.
McKinsey & Company (2007): The Bird of Gold: The Rise of
Indias Consumer Market, McKinsey Global Institute, 2007.
Neumark, David, Junfu Zhang, and Stephen Ciccarella, 2008. The
Effects of Wal-Mart on Local