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1 feature and challenges of global economics’ trends affecting
1 feature and challenges of global economics’ trends affecting
1 feature and challenges of global economics’ trends affecting
1 feature and challenges of global economics’ trends affecting
1 feature and challenges of global economics’ trends affecting
1 feature and challenges of global economics’ trends affecting
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1 feature and challenges of global economics’ trends affecting

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  • 1. Research Explorer January - June 20131 Vol . II : Issue. 6 ISSN:2250 - 1940 FEATURE AND CHALLENGES OF GLOBAL ECONOMICS’ TRENDS AFFECTING INDIAN RETAIL INDUSTRY Dr. C. Anbalagan, Professor of M. Sc., Accounting & Finance, School of Management & Accounting Hawassa University, Hawassa, Ethiopia,EastAfrica. Mrs. Fitsum Head of the Department, Dean In-Charge, School of Management & Accounting, Hawassa University, Hawassa, Ethiopia, East Africa Mr. Andinet Lecturer M. Sc., in Accounting and Finance, Coordinator of Masters Degree, School of Management & Accounting, Hawassa University, Hawassa, Ethiopia, East Africa, ABSTRACT In this attempt, Author would like to discuss the growth ness of global economy and retail industries in India. Retailing is the final step in the distribution of merchandise - the last link in the Supply Chain connecting the bulk producers of commodities to the final consumers. It covers diverse products such as food, apparels, consumer goods, financial services and leisure. Retailing is one of the pillars of the economy in India and accounts for 13% of GDP. The retail industry is divided into organised and unorganised sectors. Over 12 million outlets operate in the country and only 4% of them being larger than 500 sq ft (46 m2 ) in size. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. India’s economy witnessed a GDP growth rate of 7.4% during the fiscal year 2009- 10 and is further expected to grow at c. 8.5% in 2010-11. With the boom of the service sector and increased industrial output, the growth pace has spiralled in the last decade. According to the 8th Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach 22% by 2010. Key wards: Retailing, Globalisation, MNC, E-trailers, Supply Chain Introduction Retailing is the final step in the distribution of merchandise and the last link in the Supply Chain connecting the bulk producers of commodities to the final consumers. It covers diverse products such as food, apparels, consumer goods, financial services and leisure. Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers sell small quantities of those products to consumers. Retailing is one of the pillars of the economy in India and accounts for 13% of GDP. The retail industry is divided into organised and unorganised sectors. Over 12 million outlets operate in the country and only 4% of them being larger than 500 sq ft (46 m2 ) in size. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, pan / beedi shops, convenience stores, Available online at www.selptrust.org Research Explorer ISSN : 2250 - 1940 Vol II : Issue. 6 January - June 2013
  • 2. Research Explorer January - June 20132 Vol . II : Issue. 6 ISSN:2250 - 1940 hand cart and pavement vendors, etc. In India, a shopkeeper of such kind of shops is usually known as a dukandar. Retail Opportunity in India India’s economy witnessed a GDP growth rate of 7.4% during the fiscal year 2009-10 and is further expected to grow at c. 8.5% in 2010-11. With the boom of the service sector and increased industrial output, the growth pace has spiralled in the last decade. This has set a sustainable platform for consumerism and rising per capita spend leading to an inclusive growth. Growing disposable income has led to increasing consumer aspiration, with easy access to consumer finance lending a source to achieve these aspirations and desires. The middle class today accounts for c. 47 percent of the total households in the country, which has rapidly grown over the last decade and is expected to have a similar trend over the coming years. The Indian consumer today is exposed to a large variety of products from where they pick and choose till they get the right product at the right price. Retailing in India i. Total Consumer Spend in theYear 03-04 - INR 9300 billion (USD 375 billion) growing over 5% annually ii. Retail sales - 55% at INR 280 billion (USD 205 billion) iii. Organised Retail - Only 3% but growing at 30% iv. Organised retail to cross INR 1000 billion mark by 2010 v. INR 200 billion investment in the pipeline vi. Top 6 cities account for 66% of total organized retailing Growth of Indian Retail According to the 8th Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach 22% by 2010. According to a report by North bride Capita, the India retail industry is expected to grow to US$ 700 billion by 2010. By the same time, the organized sector will be 20% of the total market share. It can be mentioned here that, the share of organized sector in 2007 was 7.5% of the total retail market 1. An increasing number of people in India are turning to the services sector for employment due to the relative low compensation offered by the traditional agriculture and manufacturing sectors. The organized retail market is growing at 35 percent annually while growth of unorganized retail sector is pegged at 6 percent. 2. The Retail Business in India is currently at the point of inflection. Rapid change with investments to the tune of US $ 25 billion is being planned by several Indian and multinational companies in the next 5 years. It is a huge industry in terms of size and according to management consulting firm Techno park Advisors Pvt. Ltd., it is valued at about US $ 350 billion. Organised retail is expected to garner about 16-18 percent of the total retail market (US $ 65-75 billion) in the next 5 years. 3. India has topped the A.T. Kearney’s annual Global Retail Development Index (GRDI) for the third consecutive year, maintaining its position as the most attractive market for retail investment. The Indian economy has registered a growth of 8% for 2007. The predictions for 2008 is 7.9%. The enormous growth of the retail industry has created a huge demand for real estate. Property developers are creating retail real estate at an aggressive pace and by 2010, 300 malls are estimated to be operational in the country. 4. With over 1,000 hypermarkets and 3,000 supermarkets projected to come up by 2011, India will need additional retail space of 700,000,000 sq ft (65,000,000 m2 ) as compared to today. Current projections on construction point to a supply of just 200,000,000 sq ft (19,000,000 5. m2 ), leaving a gap of 500,000,000 sq ft (46,000,000 m2 ) that needs to be filled, at a cost of US$15–18 billion. 6. According to the ICRIER report, the retail business in India is estimated to grow at 13% from $322 billion in 2006-07 to $590 billion in 2011-12. The unorganized retail sector is expected to grow at about 10% per annum with sales expected to rise from $ 309 billion in 2006-07 to $ 496 billion in 2011-12.
  • 3. Research Explorer January - June 20133 Vol . II : Issue. 6 ISSN:2250 - 1940 Major Indian Retailers Pantaloon: Pantaloon is one of the biggest retailers in India with more than 450 stores across the country. Headquartered in Mumbai, it has more than 5 million sq. ft retail space located across the country. It’s growing at an enviable pace and is expected to reach 30 million sq. ft by the year 2010. In 2001, Pantaloon launched country’s first hypermarket ‘Big Bazaar’. It has the following retail segments: i. Food & Grocery: Big Bazaar, Food Bazaar ii. Home Solutions: Hometown, Furniture Bazaar, Collection-i iii. Consumer Electronics: e-zone iv. Shoes: Shoe Factory v. Books, Music & Gifts: Depot vi. Health & Beauty Care: Star, Sitara vii. E-tailing: Futurebazaar.com viii. Entertainment: Bowling Co. Tata Group: Tata group is another major player in Indian retail industry with its subsidiary Trent, which operates Westside and Star India Bazaar. Established in 1998, it also acquired the largest book and music retailer in India ‘Landmark’ in 2005. Trent owns over 4 lakh sq. ft retail space across the country. RPG Group: RPG Group is one of the earlier entrants in the Indian retail market, when it came into food & grocery retailing in 1996 with its retail Foodworld stores. Later it also opened the pharmacy and beauty care outlets ‘Health & Glow’. Reliance: Reliance is one of the biggest players in Indian retail industry. More than 300 Reliance Fresh stores and Reliance Mart are quite popular in the Indian retail market. It’s expecting its sales to reach Rs. 90,000 crores by 2010. AV Birla Group: AV Birla Group has a strong presence in Indian apparel retailing. The brands like Louis Phillipe, Allen Solly, Van Heusen, Peter England are quite popular. It’s also investing in other segments of retail. It will invest Rs. 8000-9000 crores by 2010. Indian apparel retailers are increasing their brand presence overseas, particularly in developed markets. While most have identified a gap in countries in West Asia and Africa, some majors are also looking at the US and Europe. Arvind Brands, Madura Garments, Spykar Lifestyle and Royal Classic Polo are busy chalking out foreign expansion plans through the distribution route and standalone stores as well. Another denim wear brand, Spykar, which is now moving towards becoming a casualwear lifestyle brand, has launched its store in Melbourne recently. It plans to open three stores in London by 2008. The low-intensity entry of the diversified Mahindra Group into retail is unique because it plans to focus on lifestyle products. The Mahindra Group is the fourth large Indian business group to enter the business of retail after Reliance Industries Ltd, the Aditya Birla Group, and Bharti Enterprises Ltd. Retail Formats in India Hyper marts / supermarkets: large self- servicing outlets offering products from a variety of categories. Mom-and-pop stores: they are family owned business catering to small sections; they are individually handled retail outlets and have a personal touch. Departmental stores: are general retail merchandisers offering quality products and services. Convenience stores: are located in residential areas with slightly higher prices goods due to the convenience offered. Shopping malls: the biggest form of retail in India, malls offers customers a mix of all types of products and services including entertainment and food under a single roof. E-trailers: are retailers providing online buying and selling of products and services. Discount stores: these are factory outlets that give discount on the MRP. Vending: it is a relatively new entry, in the retail sector. Here beverages, snacks and other small items can be bought via vending machine. Category killers: small specialty stores that offer a variety of categories. They are known as category killers as they focus on specific categories, such as electronics and sporting goods. This is also known as Multi Brand Outlets or MBO’s. Specialty stores: are retail chains dealing in specific categories and provide deep assortment. Mumbai’s Crossword Book Store and RPG’s Music World is a couple of examples.
  • 4. Research Explorer January - June 20134 Vol . II : Issue. 6 ISSN:2250 - 1940 Indian retail formats can be classified into two distinct categories: traditional and modern. Traditional Formats include: - i. Kiranas: Traditional Mom and Pop Stores ii. Kiosks iii. Street Markets iv. Exclusive / Multiple Brand Outlets Modern Formats include: - i. Supermarkets such as Food world ii. Hypermarkets such as Big Bazar, Giant, Shoprite, Star iii. Department Stores such as Shoppers Stop, Lifestyle, Pantaloons, Pyramids, Trent iv. Speciality Chains such as Ikea v. Company Owned / Operated such as Bata, Sony Regulations in Retail Industry The policy environment is currently seen to be unfavourable to organised retailing. Some of the impediments to growth of retail include the following: Restrictions on FDI: Recent indications that the government is considering foreign direct investment in retail trade have sparked off a debate on the advisability and consequence of this policy. At present, foreign direct investment (FDI) in pure retailing is not permitted under Indian law. Some of the areas in retailing that will be affected by FDI are as follows: - i. Creating Additional Jobs ii. Diminution of Kirana Shops and Retail Stores iii. Access to Larger Financial Resources iv. Benefit to Consumers v. Supplier Quality Enhancements vi. Enhanced Supply Chain vii. Increased Exports viii. WTOs Cross Retaliation Entry of MNCs The world’s largest retailer by sales, Wal-Mart Stores Inc and Sunil Mittal’s Bharti Enterprises have entered into a joint venture agreement and they are planning to open 10 to 15 cash-and-carry facilities over seven years. The first of the stores, which will sell groceries, consumer appliances and fruits and vegetables to retailers and small businesses, is slated to open in north India by the end of 2008. Carrefour, the world’s second largest retailer by sales, is planning to setup two business entities in the country one for its cash-and-carry business and the other a master franchisee which will lend its banner, technical services and know how to an Indian company for direct-to-consumer retail. The world’s fifth largest retailer by sales, Costco Wholesale Corp (Costco) known for its warehouse club model is also interested in coming to India and waiting for the right opportunity. Opposition to the retailers’ plans have argued that livelihoods of small scale and rural vendors would be threatened. However, studies have found that only a limited number of small vendors will be affected and that the benefits of market expansion far outweigh the impact of the new stores. Tesco Plc., plans to set up shop in India with a wholesale cash-and-carry business and will help Indian conglomerate Tata group to grow its hypermarket business. The Revolution Ahead The last few years have seen rapid transformation in many areas like: - Scalable and profitable retail models are well established for most of the categories. Indian consumers are rapidly evolving and accepting modern formats overwhelmingly. Retail space is no more a constraint for growth. Challenges Facing Indian Retail Industry i. The tax structure in India favours small retail business ii. Lack of adequate infrastructure facilities iii. High cost of real estate iv. Dissimilarity in consumer groups v. Restrictions in Foreign Direct Investment vi. Shortage of retail study options vii. Shortage of trained manpower viii. Low retail management skill Verdict on FDI: Market is an important asset. It needs to be protected the way other assets are protected. However, it is clear that FDI in retail trade will lead to incremental economic benefits and not substitute on-going activities. Any strategy in the direction of FDI should ensure that domestic players
  • 5. Research Explorer January - June 20135 Vol . II : Issue. 6 ISSN:2250 - 1940 are not unduly displaced and sufficient opportunities are available for the growth of domestic players. Therefore, the strategy should be controlled release of restrictions on FDI. Percentage of FDI allowed should be increased in small amounts and for specific commodities at every step. Constructive suggestions and inputs from all stakeholders should be taken in shaping the policy. Land and property Laws: There is a shortage of good quality retail space, and rents are high for what is available. Compounding these shortages are the following problems: - i. Only Indians can own property in India, which complimenting the restrictions placed on FDI, restrict the entry of foreign players. ii. Stamp duties on property deals are significant. The lease alone can cost up to 6-10 per cent of sales while it’s just 3-5 per cent globally. iii. The initial urban planning of cities was done with smaller plots in mind which along with rigid building and zoning laws make it difficult for procurement of retail space. iv. The urban land ceiling act and rent control acts have distorted property markets in cities, leading to exceptionally high property prices. Labour Laws: The labour laws instituted to protect store workers are not flexible enough to support the modern formats of retailing. These rigidities in the law constrain the operations of modern retail outlets. Working hours are restricted, with shops required to close one day of the week and the hiring of part-time employees is difficult. Taxes: Effective corporate tax rate is 36.59% for a local company and 41.82% for a foreign company. Even essential basic foodstuffs are taxed. The varying sales tax rate across states makes supply chain management an even more difficult task for retailers. However, with the introduction of Value Added Tax (VAT) across all states, some of the sales tax anomalies in the supply chain could get correct over a period of time. Supply chain: Finance Minister Pranab Mukherjee had in his 2010-11 budget speech said “... the second element of the strategy relates to reduction of significant wastages in storage as well as in the operations of the existing food supply chains in the country. This needs to be addressed.” India is the seventh largest country (land mass: 3.2 million sq. Kms.) with varying climatic conditions over the country. Taste and preferences of people vary strongly all across the country. Catering to people in 35 states and union territories is equivalent to catering to people in 35 countries, leading to complexities in merchandise/ inventory management. Infrastructure has been developing at a rapid pace over the past decade but has still a significant ground to cover the planned expenditure of c. US$ 1 trillion in the 12th five year plan will help bridging this gap. There exists a need for retail to concentrate on developing a strong back-end support especially for perishable products to help reduce wastages which is estimated to be at 40 percent of national produce. Channel conflicts: Globally, retailers maintain a direct relationship with their suppliers. Due to the complex taxation structure and geographic spread of the country, most FMCG companies have developed regional distribution and re-distribution network. Cutting out the distribution network will hurt operating structures of distributors, who as an industry body in the past have opposed FMCG companies selling directly to retailers. There exists a need for a retailer to work closely with the suppliers in an attempt to shorten the supply chain network resulting in saving time and money. Location and rental: Finding the right location with the right rental for stores has been a challenge for all retailers. Rent forms a large portion of the total expenditure (c. 6 to 11 percent of the revenue) in retailer’s income statement and can more often than not convert a profitable store into loss making. The challenge for a retailer would be to find the right location for their stores either in malls or as a standalone store to be able to generate enough footfalls. A retailer could evaluate option of setting up a property development/ management arm that would be able to source/ develop stores at lower rentals. Unique Indian customer: The Indian consumer experiencing modern retail has now warmed up to this idea. Buying habits have still not changed, where people prefer to buy most of the fruits and vegetables on a daily basis. The Indian consumers have a strong preference for freshly cooked food over packaged food mainly attributed to dietary patterns, poor electricity supply, low penetration of refrigerators and
  • 6. Research Explorer January - June 20136 Vol . II : Issue. 6 ISSN:2250 - 1940 a family structure where one of the primary roles of the housewife is feeding the family. There is also an impact on the basket size because of non-availability of personal transport facilities, due to which the consumers prefer to buy smaller quantities from stores conveniently located near their homes. Regulatory: Currently, indirect taxation structure is complex in India with varying tax rates, multiplicity of taxes and multiple tax enforcement authorities. Goods and Service Tax likely to be implemented in 2011 will replace a host of levies like excise, sales tax, value-added tax, entertainment tax and luxury tax. This is likely to have an impact on the supply chain model and cost structure of distributive trade, followed by consumer packaged goods companies. Opening a new store requires a lot of licences, which have to be obtained from different government departments leading to considerable lead time in opening up of the stores. A push has been made by existing retailers to get the government to have a single window clearance for getting all the licences at one place to speed up the process. Private Labels: Private labels enable retailers to offer products at a better price point attracting footfalls to the store. This in turn not only translates to better margins by cutting out middlemen but also enhances retailers bargaining power with supplier. Penetration of private labels in emerging markets is expected to be about 6% of retail sales (Source: India Retail Report) which in India is estimated to be about 10 – 12%. The concept is still at a very nascent stage in India given the age of modern retail in India. Few players have introduced private labels in the category of Food & Grocery, Apparels, Consumer Durables etc. but reservations still exists towards acceptance of these products with the Indian consumer. Private labels offering competitive pricing proposition has helped to generate interest and a slow but steady acceptance from the Indian consumer. Conclusion According to Authors point of view to overcome some of the challenges faced by modern retail, the following steps should be taken Retailers should create a calendar for customers with shop’s name and address on it and distribute to the customers and Print the products or services offered on the back of the business cards and always carry business cards and give them freely and ask permission to leave them in places at target market and Join a trade association or organization or Chamber of Commerce related to the industry. Conduct monthly clinics about a product or service you offer or schedule semi-annual seminars on related “how-to” information about the industry and Print a tagline for the business on letterhead, fax cover sheets, e-mails and invoices and Develop a website to showcase the products, services and location. Use a memorable URL and include it on all marketing materials. Reference 1. ICRIER Begins Survey of Indian Retail Sector. - 2007. 2. “Retailing in India Unshackling the chain stores”. The Economist. 29 May 2008.. 3. “India again tops global retail index.” 22 /6/ 2007. 4. “Economic and financial indicators” 3 July 2008. 5. “Indian Retail story from Myths to Mall.” 11 August 2007. 6. Charles, W. L. (2003) International Business – Competing in the Global Marketplace, 4th Edition, New York: Tata Mc Graw Hill 7. Davies, B. and Wards, P. (2002) Managing Retail Consumption, Chichester: John Wiley & Sons Ltd. 8. Kotler, P and Amstrong G. (2004) Principal of Marketing 10th Edition, PHI 9. Mooij, M. (1998) Global Marketing and Advertising, “Understanding Cultural Paradox”, California: Sage Publication, Inc. 10. Keegan, W. J. (2002) Global Marketing Management 7th Edition, PHI 11. Murdock P. G. (1945) The Science of Man in the World Crisis, “The Common Denominator of Culture”, New York: Columbia University Press. 12. Penar, K. (1999) “Is the Nation State Obsolete in a Global Economy?” in Business Week, 17 July 1995, p80.

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