Retail is the sale of goods and services from individuals or businesses to the end-user. Retailers are part of an integrated system called the supply chain. A retailer purchases goods or products in large quantities from manufacturers directly or through a wholesale, and then sells smaller quantities to the consumer for a profit.
source: Ernst &Young, The Great Indian Retail Story, 2006
2)Excess capacity is accompanied by two things: one is the ability to satisfy each customer and other is a bit negative which is to do a lot with the cost of holding the excess capacity. So a retail store has to make a balance between both and make correct decisions to make a profitable mix.
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will trend towards zero (perfect competition). In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies of scale
The emergence of Digital Channels (3 screens, that is, Laptop, Smartphone & Flat Panel Televisions) can augment a retailer’s physical stores to not only reach customers anywhere but also engage with customers across relevant channels. Unlike matured retail markets, where brick and mortar retailers feel the competition from pure click retailers, the scenario in India will be different. Lack of physical presence, low technology penetration and usage and imperfect payment mechanisms. 3. Sales through digital channels which is a miniscule percentage of modern retail today, will increase to 6 - 8 % of total modern retail amounting to about US$13.3 billion – US$17.6 billion by 2020
Permission from respective State governments would be necessary to open new stores • Minimum limit of USD100 million (about`450-460 Cr) for FDI in multi-brand retail • Half of the total investment must be allotted for the back-end infrastructure like cold storage, soil testing labs and seed farming • 30% manufactured products should be sourced from small and medium enterprises (SMEs).
Source: Deloitte Retail POV "Indian Retail Market: Changing with the changing times“
Although all the retail segments offer growth opportunities for foreign retailers, the largest opportunity in terms of potential market size and scalability is in grocery retailing, particularly for the supermarket and hypermarket formats. However, the large population of 'mom-n-pop'/'kirana' grocery stores is likely to be a force to reckon with for new foreign entrants. Liberalization of FDI in multi-brand retail is getting closer to reality. the liberalization is likely to be more phased and calibrated. Therefore, it is time for potential foreign entrants to make an earnest start with developing their plans, strategize their store locations and initiate discussions with their local partners. The limited foreign direct investment allowed by the government in the retail industry will not have much impact on the Big Bazaars and Shopper's Stops but it will allow luxury brands like Marks & Spencer, Louis Vuitton or Versace - which are currently taking the franchisee route - to open more stores in the country.
We all know that Customers are the most important components of any business, and it has been observed that “a factor which plays a key role in determining the power of buyers is the ratio of suppliers to buyers in the market. India has come under the limelight as one of the fastest growing economies, and hence, it may be comprehended that the purchasing as well as bargaining power of the Indian consumers is increasing pretty fast. Furthermore, retailers should also realize that “in an age of the informed consumer, meeting the buyers’ expectations in terms of product, price and service is increasingly becoming difficult
Buyers possess a credible backward integration threat, they can threaten to buy from rivals. If customers pose a threat of integrating backwards they will enjoy increased power
The price at which the product is available to the retailer for selling to the end consumer is very important in retail, as it plays a large role in the actual profitability.
Transcript of "Retail in India : Porter's 5 forces & SWOT"
Introduction• Retailing in India is one of the pillars of India’s economy and accounts for 14 to 15 percent of its GDP.• Organized retailing, in India, refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the publicly traded supermarkets, corporate- backed hypermarkets and retail chains, and also the privately owned large retail businesses. Organised retailing accounts for 4% of total retailing.• Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local corner shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
Retail Industry Evolution Established Emerging Traditional formats Formats Formats Kirana shops Exclusive retail outletsItinerant Salesman Convenience/ Hypermarket Haats department stores Internal retail Melas PDS/ Malls / Specialty Malls Mandis etc. fair price shops Multiplexes Pan/ Beedi shops Fast food outlets Service galleries
Trends in retailing• In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30% of its goods from India.• On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand retail in India.
Internal Rivalry• Rivalry refers to number of companies competing in the same markets.• If there is intense rivalry in an industry, it will encourage businesses to engage in:1) Price wars (competitive price reductions),2) Investment in innovation & new products Intensive promotion (sales promotion and higher spending on advertising)• All these activities are likely to increase costs and lower profits.
• The presence of different types of retailers in India , i.e, foreign retailers and domestic organized and unorganized retail , creates diversity in competition.• Foreign and domesic retailers in organized sector are competing on large size , broad assortment ,self service format and pleasant store environment.
• Product differentiation can increase profitibility by creating lesser rivalry in the market• Smaller retailers are moving towards organised formats by including branded merchandise in their offerings.• Presence of foreign retailers and increased competition create product diversity and innovation in the market.
Characteriza Future tion Trend (current)Degree of seller High HighconcentrationExcess capacity Medium HighCost structure of firm High HighDegree of product Medium Highdifferentiation among sellerBuyer’s cost of switching Low Lowfrom one competitor toanotherStrength of exit barriers Low to Low to Medium Medium
1. ECONOMIES OF SCALE• Retailing- one of the business enterprises of economy.• Accounts for 14-15% of GDP as Aug,12.• Market share- US $450 billion.By 2020,• Expected to cross US $1.3 trillion.• Additional US $800 billion in next 8 years.• Modern retail will grow upto US $220 billion.
2. ACCESS TO DISTRIBUTIONCHANNELS• The emergence of Digital Channels- To augment customers’ reach and engage with them.• In India- Lack of physical presence, low technology penetration and usage and imperfect payment mechanisms.• Sales through digital marketing- Miniscule percentage today• By 2020, US $13.3-17.6 billion with 6-8% of modern retailing
3. GOVERNMENT PROTECTION OFINCUMBENTSConditions contemplated by government-• Requirement of State permission• Minimum FDI of `450Cr and maximum stake of 51%• Half of the total investment must be in the back-endinfrastructure.• 30% manufactured products should be sourced fromSME.
PERCEPTIONS OF ENTRANTS ABOUTEXPECTED RETALIATION OF INCUMBENTS
The Road Ahead for new entrants• Growth opportunities for foreign retailers.• Particularly, for supermarket and hypermarket.• Mom-n-pop/kirana grocery stores - force to reckon with for new foreign entrants.• Liberalization- phased and calibrated.• Time for potential foreign entrants to make earnest start with strategizing locations.• Luxury brands like Marks & Spencer, Louis Vuitton or Versace - to open more stores in the country.
Threat of substitute in the RetailIndustry• Availability of Substitutes: The tendency in retail is not to specialize in one good or service, but to deal in a wide range of products and services. This means that what one store offers you will likely find at another store. Retailers offering products that are unique have a distinct or absolute advantage over their competitors.
Threat of Substitute Products orServices• Threat of substitute products or services – high when there are many alternatives to a product or service, and low when there are few alternatives • If you’re a buyer, you want this to be high • If you’re a supplier, you want this to be low 5-16
Threat of Substitute Products Keys to evaluate substitute products:Products Products with improvingwith similar price/performance tradeoffsfunction relative to present industrylimit the productsprices firmscan charge Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery
Porter’s 5 Forces and ProfitForce Profitability will Profitability will be higher if: be lower if:Threat of Few possible Many possiblesubstitutes substitutes substitutes
Threat of Substitute Products orServices• As a supplier, you can use switching costs• Switching costs – costs that make customers reluctant to switch to another supplier • Can be monetary penalties for early termination • Can be like Amazon, which tracks information about you and tailors offerings 5-19
Examples• Products/services facing a strong threat of substitution:• Washing powder. A dozen of brands sitting on the shelves and waiting for consumers to pick them up. Consumer will often pick up the one that is on special on shopping day.• Retail Outlets. Dont like Dmart . Shop at Big Bazar• Products/services facing a weak threat of substitution:• Oil. Although alternative forms of energy are being studied and introduced, most engines today run on gasoline. Gasoline can not be replaced that quickly on a large scale.
• The threat of substitute product can be evaluated in the terms of the availability and performance of substitutes, switching cost incurred by the customers and propensity of the consumer to consume.• There is a high threat of substitution the Indian retail market due its unique market structure. Indian consumers have an array of options to choose ,including small unorganised retailers and large organised retailers for domestic and foreign brands.
Availability of close complement• A perfect complement is a good that has to be consumed with another good. Other examples include: Printers and ink cartridges DVD players and DVDs Computer hardware and computer software Torch and battery Car and petrol
23Substitutes and Complements• Although the five-forces analysis does not directly consider demand, it considers two important factors that influence demand- substitutes and complements.• Substitutes erode profits in the same way as entrants by stealing business and intensifying competition.• Complements boost the demand for the product in question, thereby enhancing profit opportunities for the industry.
Bargaining Power of Customers The power of the buyer is the impact that the customers has on a producing industry. In general, when the buyers power is strong, the relationship to the producing industry is near to market in which there are many supplier and only one buyer. Under such conditions the buyer sets the price. In reality there are few such markets. However the Indian retail sectors are characterized by high buyer-to- supplier ratio with highest density of retail outlets in the world ,making India a supplier’s market. The Retail sector can be broadly divided into two segments: Value Retailing- which is typically a low margin-high volume business Lifestyle Retailing-which is a high margin-low volume
Factors determining the bargaining powerof customers. Number of Customers Their size of their orders Number of firms supplying the product The threat of integrating backward The cost of switching
Future Trend In the retail Industry food dominates market consumption followed by fashion. The relatively low contribution of other categories indicates opportunity for organized retail growth in these segments, especially with India being one of the world’s youngest markets. Historically, Indians have been conservative spenders ,thus food forms a huge chunk of India’s consumption needs. Transition from traditional retail to organized retailing is taking place due to changing consumer expectations, demographic mix etc. With the revival in consumer spending, expansion plans of retailers are back in full swing. Many International brands have entered the market. With FDI coming in the bargaining power of the customers will increase further.
Bargaining Power of suppliers• Bargaining power of suppliers is the ability of a supplier to control the cost and supply of the inputs in the market.• The supplier power of an industry can be altered in many ways, which can includeI. Differentiation of inputs.II.Switching costs for transferring to other suppliers.
Bargaining power of suppliers• The number of buyers and the existence of a few dominant suppliers influence the bargaining power of suppliers.• Brand manufacturers can set up their own retail outlets which can be seen as a threat.• The suppliers to the retail sector are the companies who actually provide the finished products that can be sold in a retail store.
Power of suppliers : Retail industry• The bargaining power of suppliers varies from product to product, however, at an overall level one can say that the bargaining power of suppliers in India is low because there are a large number of potential suppliers in the market.• Supplier can exert power by threatening to raise prices or reduce the quality of purchased goods.• Large no of suppliers and product differentiation is low.
Power of Suppliers : Retail Industry• Varies depending upon the target segment, the format followed, and products on offer.• The unorganised sector has a dominant position, still contributing 95% of the total retail market.• There are few players who have a slight edge over others on account of being established players and enjoying brand distinction.• Since it is a capital intensive industry, access to capital also plays an important part for expansion in the space.
Factors affecting power of suppliers Current Future trendDo supplier pose credible Less only a few Can be a option forThreat of forward integration main suppliers many well known brandsinto the product market ? have started to control direct distribution.Do firms in industry purchase Most of the firms Firms will purchase inin small volumes relative to are still local bulk as organised retailother customers of supplier? retailers who is set to grow in India in purchase in the coming years. relatively small volume.Are suppliers able to price They are able to They may have adiscriminate among discriminate problem as there wouldprospective customers customers based be many new players inaccording to ability to pay for on their the retail market.
Strengths• High brand equity .• State of the art infrastructure.• A vast variety of products under one roof.• Maximum percent of footfalls converted in sales.• It offers a family shopping experience, where entire family can visit together.• Benefit of early entry into the retail industry.• Huge investment capacity.• Biggest value retail chain in India .• Available facilities such as online booking & delivery of goods.
Weakness• Long lines at billing counters which are time consuming.• High cost of operations due to large fixed costs.• Unable to meet store opening targets on time.• Falling revenue per sq ft.• Overcrowded during offers and peak seasons.• Many branded products are are still missing from Big Bazaar’s line of products.• High attrition rate of employees.
Opportunities• Lot of potential in the rural market and can also expand the business in smaller towns .• They can enter into production of various products due to their understanding of customer’s taste and preferences.• Organised retail is expected to garner about 16- 18 % of the total retail market in the next 5 years.• Increasing mall culture in India.• Improving in store experiences according to evolving customer preferences.• FDI in retail.
Threats Competition from other value retail chains such as Shoprite, Reliance (Fresh and trends), Hypercity and D mart. Unorganized retail also appears to be a threat to Big Bazaar’s business. Changing Government policies. International players looking to foray into the market. High business risk involved and margin of business reducing all the time. Increasing number of Online retail sites.
SWOT matrixStrength – Opportunity Strength- Threat•High brand equity and huge investment •Selling goods at a lesser price willcapacity can help them to enter rural markets help them to overcome the threat ofand smaller towns. local retailers where the goods are priced higher.•Private labels offering good value will havehuge scope given the escalating prices of •Brand awareness and loyalty is highconventional branded offerings. Big Bazaar will due to which many people buy goodshave an advantage due to their scale. from Big Bazaar in the supermarket category this may suppress the threat•As a biggest retail value chain in India it should of other competitors.try to establish partnerships with foreign playersafter FDI in retail announcement.Weakness- Opportunity Weakness- Threat•It can reduce the waiting time of customers at •High attrition rate will lead to morebilling counters and improve the in store untrained staff, lack of knowlegde andcustomer experience by opening more may decrease service quality affectingcounters and keeping them always functional sales.with adequate staff. • Absence of many branded products may give the competitors a huge edge .