Introduction to Retailing

Module: Branding and Retailing in changing Economic Environment

• Introduction to retailing and retail management function and overview of Indian retail
Industry

• Overview of Retailing in India and Globally

Marketing

Marketing is one of the many business functions it identifies the unfulfilled wants, needs
and desires of the people and organizations. It establishes a vital link between the public and
institutions of all kinds such as political, social and industrial etc.

American Marketing Association defines marketing as the “performance of business

activities that direct the flow of goods and services from producer to consumer or user”

Business activities that enable the producer to get in touch with the users, covers a host of
things. The products have to be developed, transported, stored and distributed to the traders
or retailers before the user/consumer is contacted. Human needs and wants give rise to the
concept of goods and services as products. Hence, marketing activities will have to include
the collection of information about the consumers’ wants, desires, incomes and sources of
influences over consumer’s mind.

Features of Marketing

a) Marketing is an exchange process

b) Covers a variety of functions to be carried out in an integrated manner and is

c) Directed to satisfy the needs/desires/wants of the consumers.

What is retailing?

Retailing is derived from the French word retailier, which means “to cut a piece off”, thus,
retailing can be defined as a set of business activities that adds value to the products and
services sold to the final consumers for their personal family or household use.

Retailing involves

Prepared by Prof. Mohd Nazeer Ahmed WLC College India, Hyderabad. Page 1
 • Understanding the needs of consumers

• Developing good assortment of merchandise ( goods/products)

• Displaying the merchandise in an effective manner so that consumers find it easy and
attractive to buy

A retailer in any business establishment directs its marketing efforts towards the end users
for the purpose of selling goods and services. Retailers comprise the following

• Street vendors

• Local Kirana stores

• Super markets

• Food joints

• Saloons

• Airlines

• Automobile showrooms

• Video kiosks

• Direct marketers

• Vending machine operators etc.

An organization qualifies to be retailer only when it derives a major chunk of its revenues
from its transactions with end users.

Retailers’ role in distribution channel

A retailer is the last entity in the distribution channel. Retailers include all businesses and
individuals who actively participate in the transfer of ownership of goods and services to
their end users.

A retailer usually plays the role of an intermediary, which links the producers, wholesalers
and other suppliers with consumers. Companies generally prefer to specialize in
manufacturing of products, leaving the task of selling the products to an outside party i.e.
wholesalers and retailers.
Introduction to Retailing

Benefits of Retailing

Retailers act as buying agents for consumers. They perform various business activities that
increase the value of the goods and services they sell to the end consumer. If there were no
retailers in the distribution system, consumers would have to personally visit the
manufacturers to procure the goods and services required by them. As a buying agent a
retailer performs various activities to satisfy the end consumers. The activities include

Breaking Bulk: Retailers buy goods in bulk from manufacturers and divide them into
smaller sellable unit according to consumption patterns of the end consumers. By buying in
bulk, the retailers gain two benefits- quantity discounts from manufacturers and lower
freight rates for large shipment of goods. Availability of products in smaller units enables
customers to buy products in quantities, which suit their consumption patterns.

Providing assortment: Retailers evaluate the products of various manufacturers and offer
the best collection of products from which the customer can select the product of his/her
choice. Retailers select the product assortment depending on the tastes and needs of their
target customers. The variety in assortment offered makes the buying process easier.

Holding Inventory: Retailers carry inventory and make the products available to consumers
at a convenient place and time. Retailers make it possible for consumers to make instant
purchases. This reduces the cost of storage and enables the consumer to invest his money
profitably.

Providing services: A part from selling goods, retailer also provides a variety of value
added services, which make it easier for customers to buy and use products. These services
include providing free home delivery, accepting credit cards, accepting payments on
installment basis, arranging loans etc.

Providing information: Retailers play major role in providing product related information
to their consumers. Retailers use advertising and in-store sales persons to provide product
information, which helps the consumer to simplify his purchasing process.

Benefits to Manufacturers and wholesalers

Manufacturers and wholesalers consider retailing as a channel for delivering their

products/services to the end customer. By selling products and services retailers provide the
manufacturer with greater revenues, which could be reinvested in production. Thus, retailers
play major role in smoothing out the variation between the production and sales of the
manufacturer’s products.

Benefits to economy

Prepared by Prof. Mohd Nazeer Ahmed WLC College India, Hyderabad. Page 3
The retailing business is the largest private industry in the world with a turnover of US $ 6.6
trillion. Retailing plays a crucial role in the management of the world economy and retailers
constitute a tenth of the Fortune 500 companies {what is Fortune 500? - For 45 years,
Fortune Magazine has been ranking the largest companies in the United States. The result
is their annual Fortune 500 list. Sometimes people will refer to the top 100 companies on
the list as the "Fortune 100." Essentially, the magazine lists the U.S.-based corporations
with the largest revenue in the past year. Fortune calculates revenue using publicly
available data, therefore private companies (those whose stock is not traded on a public
market) is excluded. U.S. subsidiaries of foreign companies are also excluded.}

In India retailing accounts for over 10% of the country’s GDP and around 8% of the
employment, only next to the agriculture industry. The value of the total retail trade in India
was at Rs. 4,00,000 crore in 1999 and analysis feel that this will increase at the rate of 20%
every year and touch Rs. 8,00,000 crore by the year 2005.

Evolution of Retailing

In the early eighties ‘retailing’ in India was synonymous with peddlers, vegetable vendors,
neighborhood Kirana stores (small grocery stores) or sole clothing and consumer durable
stores in a nearby town. These retailers operate in highly unstructured and fragmented
market; very few retailers operate in more than one city.

Before 1990, organized retailing in India was led by few manufacturers owned retail outlets,
mainly form the textile industry, for example, Bombay Dyeing, Raymond’s, S Kumar’s, and
Grasim. But the Indian retail scenario started changing in the nineties. Liberalization of
Indian economy led to the dilution of stringent restrictions. This paved the way for the entry
of few multi-national players like Nanz into the Indian market. This was further augmented
by the changing profile of the Indian consumers, who were being greatly influenced by
western lifestyles.

Moreover, the entry of multinational brands also generated considerable enthusiasm and
interest among domestic retailers. This encouraged setting up of the retail chains by
domestic retailers like cotton world (Mumbai), Nirula’s (Delhi) and Viveks and Nilgiris in
the south.
Introduction to Retailing

Factors behind the change of Indian Retailing Industry

Economic growth

India is one of the largest economies in the world. The gradual increase in Gross Domestic
Product (GDP) and the purchasing power of Indian provided excellent opportunities for
organized retailing. According to a International Monetary Fund Report (1998), private
consumption in India accounts for 61.4% of the GDP. India was ranked a the fourth largest
economy in the world in terms of Purchasing Power Parity (PPP)

Urbanization

The twentieth century witnessed a rapid growth of urban population in India. While the total
population of India grew 3.5 times from 1901 to 19991, its urban population increased nine
fold from 25 million to 217 million in the same period. The share of urban population in
class I cities (with population 1, 00,000 and above) in the total urban population has
increased from 26 % to 65% during this period.

The rising concentration of urban population with higher purchasing power has attracted big
players to venture into organized retailing in these cities. Time constraints and traffic
congestion in the cities has led to the increased popularity of one stop shopping among
urban customers.

Consumerism

The increasing influence of the western media has led to a considerable change in the life
style of the Indian consumers. The economic well being of the Indian middle class and their
growing aspirations for materials comforts has also been responsible for consumerism.
Today the Indian consumer is more inclined towards buying goods like cars, washing
machine, audio systems, designer dresses, cosmetics and other personal care products.

Brand Profusion

Consumerism and increased brand consciousness of Indian consumers has led to increased
number of brands, Today every product is branded. Even products like salt, oil and flour etc
were sold as commodities a decade ago are now branded. Although there are no
international retail stores in India, almost every international brand is available to the Indian
consumers. India also has its share of strong domestic brands like Titan watches, Asian
paints, Thumps up (now owned by Coke), McDowell’s whisky, Kingfisher beer etc. Thus,
the demand of maore and more brands into the markets increased the demand for shelf space
and hence the demand for more retail outlets.

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Availability of real estate

The cost of real estate forms a major part of the fixed investment for a retailer. In the last
few years, real estate prices have hit the lowest and encouraged many entrepreneurs to set
up retail stores in different parts of the country. A part form the decrease in real estate costs,
availability of ample retail space also has led to the proliferation of retail stores in India.

Theories of Institutional change

Retailing is a dynamic marketing activity, which evolves from time to time to cope with
competition, changing consumer demand and other environmental factors. Various studies
have been carried out to understand the changes taking place in the retail industry. Some of
the most accepted and well known theories of retail institution change are

• Wheel of retailing

• Dialectic process

• Retail accordion

• Natural selection

Wheel of retailing

Malcolm. P. Mc Nair’s ‘Wheel of Retailing’ is one of the well accepted theories regarding
institutional changes in retailing

This theory states that in a retail institution changes takes place in a cyclical manner. The
cycle is: the new retailer often enters the market with a low-status, low-profit margin, and
low-price store formats. Later, they move to up market locations and stock premiums
products to differentiate themselves from imitators.

Eventually, they mature as high-cost, high-price, and vulnerable to new retailers who come-
up with some other novel retailing format/concept, according to this theory the three phases
are

1. Entry Phases

2. Trading-up Phase

3. Vulnerability Phase
Introduction to Retailing

In India, the wheel of retailing can be seen with changes taking place in retail formats. For
example, Kirana stores were replaced by chain stores like Apna Bazaar, and Food world
( new entrant) which in turn, faced severe competition from supermarkets and hypermarkets
like Big Bazaar and Giant.

Dialectic Process

According to this theory, two institutional forms with different advantages modify their
formats till they develop a format that combines the advantages of both formats. Thomas J.
Maronick and Bruce J. Walker in the “The Dialectic Evolution of Retailing” explain the
dynamic of the dialectic process as follows;

In terms of retail institutions the dialectic model implies that retailers mutually adapt in the
face of competition form “opposites”. Thus, when challenged by a competitor with a
differential advantage, an established institution will adopt strategies and tactics in the
direction of that advantage, thereby negating some of the innovator’s attraction.

Retail Accordion

According to this theory, the merchandise mix strategies of retailers change, while the retail
prices and margins remain the same. Retail institutions can choose from a number of
different strategies. These strategies range from those that offer multiple merchandise
categories with a shallow assortment of goods and service to others that offer limited
merchandise with a deep assortment of goods and services. Firms can choose any strategy
between the two extremes. They can offer either a wide variety or limited variety of goods
with deep or shallow assortment. For example a retail institution may start as a small
independent store, but as sales increase, it may grow into a department store or even a
supermarket.

Natural Selection

This Theory is based on Darwin’s Theory of evolution. According to this theory, a firm or retail
institution should be flexible enough to adapt to the changing environment and should adapt its
behavior (to changes in the environment) to survive in the market. Thus, according to the natural
selection theory, a retail institution will survive in a competitive market only if it is willing to
change its product line, price location and promotional strategies according to changes taking
place in the retail environment. These changes can be social, economic, political, legal, or
technological in nature.

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RETAIL INDUSTRY IN INDIA:

Retail is India largest industry, accounting for over 10 percent of the country’s GDP and around 8
percent of employment. Retail in India is at the crossroads. It has emerged as one of the most
dynamic and fast paced industries with several players entering the market. That said, the heavy
initial investments required make break even hard to achieve and many players have not tasted
success to date. However, the future is promising; the market is growing, government policies are
becoming more favorable and emerging technologies are facilitating operations.

Retailing in India is gradually inching its way to becoming the next boom industry. The whole
concept of shopping has altered in terms of format and consumer buying behavior, ushering in a
revolution in shopping.

Modern retail has entered India as seen in sprawling shopping centers, multi-storeyed malls and
huge complexes offer shopping, entertainment and food all under one roof.

The Indian retailing sector is at an inflexion point where the growth of organized retail and growth
in the consumption by Indians is going to adopt a higher growth trajectory. The Indian population is
witnessing a significant change in its demographics.

A large young working population with median age of 24 years, nuclear families in urban areas,
along with increasing working-women population and emerging opportunities in the services sector
are going to be the key growth drivers of the organized retail sector. Big in size and turnover, Indian
retailing industry is characterized by certain attributes. The network of retailers reaches every nook
and corner of the country.

So any product produced anywhere in the country can be easily accessed by the buyers from any
location thus, the spatial convenience of Indian retailers is vary high.

Secondly, in India the retailing industry is an unorganized lot consisting of, in most of the cases,
small entrepreneurs. And the virtual omnipresence of the Indian retailer can be attributed to these
small entrepreneurs only. The second attribute gives rise to the following characteristics

Power of the retailers, as such is very less, and in many cases it is negligible. This weakness has
been exploited by the manufacturers and the stronger partners of the marketing channel. The
retailers, in general, abide by the terms and conditions set by the manufacturers..

The manufacturers cannot directly reach all retailers in a particular geographical area. Therefore,
the manufacturers cannot maintain the desired relationship with the retailers, which in turn, make
Introduction to Retailing

management of the channel complicated. This also makes the possibility of a direct feedback loop
from the retailers almost remote.

Therefore, the member operating between the manufacturers and retailers become more powerful
as they can block the channel of communication between the two. So the dependence of retailers
on other channel members increases to a high extent. Thus the participation of retailers in the
flows of marketing mix becomes lower than desired.

The financial strength of the Indian retailers, in general, is very low and hence the investment
capabilities. This makes the retailers more dependent on the other channel members. However,
these characteristics are peculiar to the small retail outlets and may not be present at every kind of
retail level.

Retail Shopkeepers:

India has sometimes been called a nation of shopkeepers. This epithet has its roots in the huge
number of retail enterprises in India, which totaled over 12 million in 2003. About 78% of these are
small family businesses utilizing only household labor. Even among retail enterprises that employ
hired workers, the bulk of them use less than three workers.

India's retail sector appears underdeveloped not only by the standards of industrialized
countries but also in comparison with several other emerging markets in Asia and elsewhere.

Retail sales:

Retail sales which amounted to about Rs7,400 billion in 2002, expanded at an average
annual rate of 7% during 1999-2002. With the upturn in economic growth during 2003,
retail sales are also expected to expand at a higher pace of nearly 10%.

In a developing country like India, a large chunk of consumer expenditure is on basic

necessities, especially food related items. Hence, it is not surprising that food, beverages and
tobacco accounted for as much as 71% of retail sales in 2002. The remaining 29% of retail
sales are non-food items. The share of food related items fell over the review period, down
from 73% in 1999. This is to be expected as, with income growth, Indians, like consumers
elsewhere, spent more on non-food items compared with food products.

Sales through supermarkets and department stores are small compared with overall retail
sales. However, their sales grew much more rapidly (about 30% per year). As a result, their

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sales almost tripled during this time. This high acceleration in sales through modern retail
formats is expected to continue during the next few years with the rapid growth in numbers
of such outlets in response to consumer demand and business potential.

Government Policy:

There has been vigorous opposition to foreign direct investment (FDI) in retailing from
small traders who fear that foreign retailing companies would take away their business, lead
to the closure of many small trading businesses and result in considerable unemployment.
Given the political clout of the small trading community, because of their enormous
numbers, the government has barred FDI in retailing since 1997. Hence, at present, foreign
retailers can only enter the retailing sector through franchising agreements.

Growth of Retailing in India:

Indian retailing industry has seen phenomenal growth in the last five years (2001-2006).
Organized retailing has finally emerged from the shadows of unorganized retailing and is
contributing significantly to the growth of Indian retail sector.

Technology Impact:

The other important aspect of retailing relates to technology. It is widely felt that the key
differentiator between the successful and not so successful retailers is primarily in the area of
technology. Simultaneously, it will be technology that will help the organized retailer score over
the unorganized players, giving both cost and service advantages.

Retailing is a `technology-intensive' industry. It is quoted that everyday at least 500

gigabytes of data are transmitted via satellite from the 1,200 point-of-sales counters of JC
Penney to its corporate headquarters. Successful retailers today work closely with their
vendors to predict consumer demand, shorten lead times, reduce inventory holding and
thereby, save cost. Wal-Mart pioneered the concept of building a competitive advantage
through distribution and information systems in the retailing industry. They introduced two
innovative logistics techniques - cross-docking and electronic data interchange.

Today, online systems link point-of-sales terminals to the main office where detailed
analyses on sales by item, classification, stores or vendor are carried out online. Besides
Introduction to Retailing

vendors, the focus of the retailing sector is to develop the link with the consumer. `Data
Warehousing' is an established concept in the advanced nations.

With the help of `database retailing', information on existing and potential customers is
tracked besides, knowing what was purchased and by whom, information on softer issues
such as such as demographics and psychographics is captured. Retailing, as discussed
before, is at a nascent stage in our country. Most organized players have managed to put the
front ends in place, but these are relatively easy to copy. The relatively complicated
information systems and underlying technologies are in the process of being established.
Most grocery retailers such as Food World have started tracking consumer purchases
through CRM. The lifestyle retailers through their `affinity clubs' and `reward clubs' are
establishing their processes. The traditional retailers will always continue to exist but
organized retailers are working towards revamping their business to obtain strategic
advantages at various levels - market, cost, knowledge and customer.

With differentiating strategies - value for money, shopping experience, variety, quality,
discounts and advanced systems and technology in the back-end, change in the equilibrium
with manufacturers and a thorough understanding of the consumer behavior, the ground is
all set for the organized retailers.

It would be important to note, however, that the retailing industry in India is still a
`protected industry'. It is one of the few sectors which still have restrictions on FDI. Given
the current trend in liberalization, it will not be long before the retailing sector is also
thrown open to international competition. This will see a further segregation of the
international retailing brands and the domestic retailers, thereby injecting much greater
dynamism into the market. That will be when the real action will begin.

Major Retailers in India

1. Indian top retailers are largely lifestyle, clothing and apparel stores.

2. This is followed by grocery stores

Following the past trends and business models in the west retail giants such as pantaloon,
shoppers stop and lifestyle are likely to target metros and small cities almost doubling their
current number of stores.

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RETAILING SCENARIO- GLOBAL VIEW:

Retailing in more developed countries is a big business and better organized than what in India.
According to a report published by McKinsey & Co. along with the Confederation of the Indian
Industry the global retail business is a worth a staggering US$ 6.6 trillion. In the developed
world, most of it is accounted for by the organized retail sector.

The service sector accounts for a large share of GDP in most developed economies. And the retail
sector forms a very strong component of the service sector. In short, as long as people need to
buy, retail will generate employment. Globally, retailing is a customer-centric with a emphasis on
innovation in products, processes and services.

With total sales of US$ 6.6 trillion, retailing is the world largest private industry, ahead of finance
and engineering. Some of the world largest companies are in this sector: over 50 Fortune, 500
companies and around 25 of the Asian Top 200 firms and retailers. Wal-Mart, the world
second largest retailer, has a turnover of US$ 260 billion, almost one-third of India’s GDP.

As many as 10% of the worlds billionaires are retailers. The industry accounts for over 8% of GDP
in western countries, and is one of the largest employers. According to the U.S.Department of
Labor, more than 22 million Americans are employed in the retailing industry in over 2 million
retail stores.
Introduction to Retailing

Prepared by Prof. Mohd Nazeer Ahmed WLC College India, Hyderabad. Page 13