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Impact of Organized Retailing on the Unorganized Sector

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Description

A DISSERTATION ON

Impact of Organized Retailing on the Unorganized Sector SUBMITTED BY:

KAMLESH KUMAR RATHORE PGDM (IB) ROLL NO: 06 UNDER GUIDANCE OF: DR

ADYASHA DAS

INDIAN INSTITUTE OF TOURISM AND TRAVEL MANAGEMENT (BHUBANESWAR) MAY 2009 ACKNOWLEDGEMENT

I owe my sincere gratitude to the Marketing Department of JINDAL STEEL & POWER LTD

& Indian Institute of Tourism and Travel Management,

Bhubaneswar for providing me an opportunity to do our project study for duration of 50 days

The project report entitled “Export Operations and Documentations Process for structural steel”

It is an outcome of constant encouragement & invaluable guidance of my internal project guide “Mr

Parida” Chairperson(International Business) and external project guide “Mr

Akhilesh Sharma” Asst

Manager (Marketing)

They made me realize the complexities of the subject,

the practical & theoretical aspects

Hence I pay my sincere gratitude to them,

who inspired me to undertake this work & guided me continuously

Without his valuable guidance,

this work could not have been completed

Special thanks to Mr

Praveen Kumar,

DGM (HRD) & Mr

Ujwal SinhaDGM (Marketing),

for their valuable support whenever needed

I are also thankful to all other department & staff member of JINDAL STEEL & POWER LTD

for their co-operation directly or indirectly

I am grateful to the Marketing department,

which had prepared a proper schedule to give a successful shape to the company project report

Kamlesh Kumar Rathore

Impact of Organized Retailing on the Unorganized Sector The retail sector is expanding and modernizing rapidly in line with India’s economic growth

It offers significant employment opportunities in all urban areas

This study,

the second undertaken by ICRIER on the retail industry,

attempts to rigorously analyse the impact of organized retailing on different segments of the economy

No distinction has been made between foreign and domestic players,

in analyzing the impact of the increasing trend of large corporate entering the retail trade in the country

The findings of this study are based on the largest ever survey of unorganized retailers (the so-called “mom and pop stores”),

In addition,

an extensive review of international experience,

particularly of emerging countries of relevance to India,

has also been carried out as part of the study

The study estimates that the total retail business in India will grow at 13 per cent annually from US$ 322 billion in 2006-07 to US$ 590 billion in 201112

The unorganized retail sector is expected to grow at approximately 10 per cent per annum with sales rising from US$ 309 billion in 2006-07 to US$ 496 billion

Organized retail,

which constituted a low four per cent of total retail in 2006-07,

is estimated to grow at 45-50 per cent per annum and attain a 16 per cent share of total retail by 2011-12

In short,

both unorganized and organized retail are bound not only to coexist but also achieve rapid and sustained growth in the coming years

This is clearly not a case of a zero sum game as both organized and unorganized retail will see a massive scaling up of their activities

In fact,

left entirely in the unorganized and informal segment of the economy,

could well emerge as a major bottleneck to raising productivity in both agriculture and industry

One of the rather surprising findings of the study is that low-income consumers save more than others through shopping at organized retail outlets

This is a result of targeted discount shopping

It is also seen that farmers gain considerably from direct sales to organized retailers,

with significant price and profit advantages as compared with selling either to intermediaries or to government regulated markets

Large manufacturers have also started feeling the competitive impact of organized

retail through both price and payment pressures

they see the advantages from a more efficient supply chain and logistics that accompany the growth of organized retail

The two most important recommendations in my view are: first,

for the government to facilitate the emergence of a “private code of conduct” for organized retailers in their transaction with small suppliers

a simplification of the licensing and permit regime to promote the expansion of organized retail

I would like to express my appreciation to the Department of Industrial Promotion and Policy (DIPP),

Ministry of Commerce & Industry,

Government of India,

for giving ICRIER the opportunity to undertake this important study

I trust the effort of the research team led by SACHIN and comprising of KAMLESH and SHARDUL will receive due recognition

Finally,

I hope that the study’s findings will help policymakers in their task of promoting modernization of the retail sector while maximizing its employment potential

(ARUN RATHORE) Director & Chief Executive September 1,

is estimated to grow at 13 per cent per annum from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12

The unorganized retail sector is expected to grow at about 10 per cent per annum from US$ 309 billion 2006-07 to US$ 496 billion in 2011-12

Organized retail which now constitutes a small four percent of retail sector in 2006-07 is likely to grow at 45-50 per cent per annum and quadruple its share of total retail trade to 16 per cent by 2011-12

The study,

which was based on the largest ever survey of all segments of the economy that could be affected by the entry of large corporate in the retail business,

has found that unorganized retailers in the vicinity of organized retailers experienced a decline in sales and profit in the initial years of the entry of organized retailers

The adverse impact,

The study has indicated how consumers and farmers benefit from organized retailers

The study has also examined the impact on intermediaries and manufacturers

The results are indicative of the mega-and-mini metro cities around a limited number of organized retail outlets

Based on the results of the surveys,

the study has made a number of specific policy recommendations for regulating the interaction of large retailers with small suppliers and for strengthening the competitive response of the unorganized retailers

Acknowledgements ICRIER has received considerable help from a number of organizations and individuals for completing this study

We would like to thank our various partners of the study: Mr

Narasimha Rao and his team at Development & Research Services Private Limited (DRS) for conducting the all-India surveys

Thomas Reardon and Dr

Ashok Gulati,

Co-Directors of the International Food Policy Research Institute (IFPRI)-Michigan State University (MSU) Joint Programme on Markets in Asia,

for the chapter on international retail experience and their help

with the survey and analysis of the impact of organized retail on farmers

Arvind Singhal,

Preeti Reddy,

Akshay Chaturvediand their team at Technopak Advisers Private Limited,

Besides the partners of the study,

we would like to thank the different organized retail companies,

Metro Cash & Carry India,

PricewaterhouseCoopers Private Limited,New Delhi,

and Retailers Association of India

We would also like to thank Mr

Ashish Sanyal,

Amp Retail Services

Jayant Kochar,

Go Fish Retail Solutions for their valuable help

Finally we also thank Ms

Sheela Bajaj for editing the report and Mr

Anil Kumar for formatting the report

Abbreviations APMC Agricultural Produce Marketing Committee B2B business-to-business C&C cash-and-carry C&F Agent carrying and forwarding agent CA commission agent CDIT consumer durables and information technology CII Confederation of Indian Industry

CRISIL Credit Rating Information Services of India Limited CSO Central Statistical Organization CST central sales tax CWS Co-operative Wholesale Society (UK) DC distribution centre DFI Dairy Farm International DRS Development & Research Services Private Limited EBO exclusive brand outlet EMI equated monthly installment EMS Environment Management System ERP enterprise resource planning ESIC Employees State Insurance Corporation FICCI Federation of Indian Chamber of Commerce and Industry F&V fruit and vegetables FAMA Federal Agricultural Marketing Authority (Malaysia) FDI foreign direct investment FIPB Foreign Investment Promotion Board FMCG fast moving consumer goods GDP gross domestic product GOI Government of India GRDI Global Retail Development Index HSBC Hongkong and Shanghai Banking Corporation HUL Hindustan Unilever Limited ICRIER Indian Council for Research on International Economic Relations ICT information and communication technology IFPRI International Food Policy Research Institute IGA Independent Grocers Alliance IPO initial public offering ISO International Organization For Standardization IT information technology ITC Indian Tobacco Company JV joint venture LILPL Littlewoods International Private Limited,

MBO multi-brand outlet MDFPL Mother Dairy Foods Processing Limited MDFVL Mother Dairy Fruit and Vegetable Limited MDIL Mother Dairy India Limited MISH Market Information Survey of Households MNC Multinational Corporation NABL National Accreditation Board for Testing and Calibration Laboratory NAFTA North American Free Trade Agreement NCAER National Council of Applied Economic Research NCR national capital region NDDB National Dairy Development Board NOC no objection certificate NSSO National Sample Survey Organization PACA Perishable Agricultural Commodities Act (US) PFA Prevention of Food Adulteration Act PPP Public-Private Partnership PRIL Pantaloon India Retail Limited RFID radio frequency identification device SABRAE Brazilian Department of Support for Small Enterprises SKU stock keeping unit SMI small and medium industry SPRING Standards,

Productivity,

and Innovation Board (Singapore) TOMCO Tata Mills Oils Company Limited VAT value added tax VSAT very small aperture terminals WM weights and measures WTO World Trade Organization

Executive Summary The real GDP is expected to grow at 8-10 per cent per annum in the next five years

As a result,

the consuming class with annual household incomes above Rs

Consequently,

the retail business in India is estimated to grow at 13 per cent annually from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12

The study shows: • The unorganized retail sector is expected to grow at about 10 per cent per annum with sales rising from US$ 309 billion in 2006-07 to US$ 496 billion in 2011-12

• Given the relatively weak financial state of unorganized retailers,

and the physical space constraints on their expansion prospects,

this sector alone will not be able to meet the growing demand for retail

organized retail which now constitutes a small four per cent of total retail sector is likely to grow at a much faster pace of 45-50 per cent per annum and quadruple its share in total retail trade to 16 per cent by 2011-12

• This represents a positive sum game in which both unorganized and organized retail not only coexist but also grow substantially in size

• The majority of unorganized retailers surveyed in this study,

indicated their preference to continue in the business and compete rather than exit

The Empirical Basis The study comprises the largest ever survey of all segments of the economy that could be affected by the entry of large corporate in the retail business

The findings are based on a survey of 2020 unorganized small retailers across 10 major cities

In addition,

a “control sample” survey was done of 805 unorganized retailers who are not in the vicinity of organized retail outlets in four metro cities

Main Findings Impact on Unorganized Retailers

• Unorganized retailers in the vicinity of organized retailers experienced a decline in their volume of business and profit in the initial years after the entry of large organized retailers

• The adverse impact on sales and profit weakens over time

• There was no evidence of a decline in overall employment in the unorganized sector as a result of the entry of organized retailers

• There is some decline in employment in the North and West regions which,

• The rate of closure of unorganized retail shops in gross terms is found to be 4

• The rate of closure on account of competition from organized retail is lower still at 1

Impact on Consumers • Consumers have definitely gained from organized retail on multiple counts

• Overall consumer spending has increased with the entry of the organized retail

• While all income groups saved through organized retail purchases,

the survey revealed that lower income consumers saved more

organized retail is relatively more beneficial to the less well-off consumers

• Proximity is a major comparative advantage of unorganized outlets

• Unorganized retailers have significant competitive strengths that include consumer goodwill,

and amenability to bargaining,

Impact on Intermediaries • The study did not find any evidence so far of adverse impact of organized retail on intermediaries

some adverse impact on turnover and profit of intermediaries dealing in products such as,

• Over two-thirds of the intermediaries plan to expand their businesses in response to increased business opportunities opened by the expansion of retail

• Only 22 per cent do not want the next generation to enter the same business

Impact on Farmers • Farmers benefit significantly from the option of direct sales to organized retailers

• Average price realization for cauliflower farmers selling directly to organized retail is about 25 per cent higher than their proceeds from sale to regulated government mandi

• Profit realization for farmers selling directly to organized retailers is about 60 per cent higher than that received from selling in the mandi

• The difference is even larger when the amount charged by the commission agent (usually 10 per cent of sale price) in the mandi is taken into account

Impact on Manufacturers • Large manufacturers have started feeling the competitive impact of organized retail through price and payment pressures

• Manufacturers have responded through building and reinforcing their brand strength,

increasing their own retail presence,

‘adopting’ small retailers,

and setting up dedicated teams to deal with modern retailers

• Entry of organized retail is transforming the logistics industry

This will create significant positive externalities across the economy

• Small manufacturers did not report any significant impact of organized retail

Policy Recommendations On the basis of the results of the surveys and the review of international retail experience,

the study makes the following major recommendations: 1

Modernization of wet markets through public-private partnerships

Facilitate cash-and-carry outlets,

for sale to unorganized retail and procurement from farmers,

Encourage co-operatives and associations of unorganized retailers for direct procurement from suppliers and farmers

Ensure better credit availability to unorganized retailers from banks and micro-credit institutions through innovative banking solutions

Facilitate the formation of farmers’ co-operatives to directly sell to organized retailers

Contents Foreword

Introduction

1 Context

Current Retail Scene: An Overview

Domestic Organized Retailers: Case Studies

Impact of Organized Retailing

Unorganized Retailers

Organized vs

Unorganized Outlets

Impact of Organized Retailing on Producers

Future Scenario in Retailing

Policy Recommendations

Annex 3: Typical Clearances Required for Retail Store

Introduction 1

There has been considerable growth in organized retailing business in recent years and it is poised for much faster growth in the future

Major industrial houses have entered this area and have announced very ambitious future expansion plans

Transnational corporations are also seeking to come to India and set up retail chains in collaboration with big Indian companies

However,

opinions are divided on the impact of the growth of organized retail in the country

Concerns have been raised that the growth of organized retailing may have an adverse impact on retailers in the unorganized sector

It has also been argued that growth of organized retailing will yield efficiencies in the supply chain,

enabling better access to markets to producers (including farmers and small producers) and enabling higher prices,

In the context of divergent views on the impact of organized retail,

it is essential that an in-depth analytical study on the possible effects of organized retailing in India is conducted

In order to assess the impact of growing organized retail on different aspects of the economy,

the Indian Council for Research on International Economic Relations (ICRIER) was appointed by the Ministry of Commerce and Industry,

Government of India to carry out a study on organized retail focusing on the following issues: • Effect on small retailers and vendors in the unorganized sector keeping in mind the likely growth in the overall market

• Impact on farmers and manufacturers

• Overall impact on economic growth

ICRIER has been asked by the Ministry to analyze the above issues in the context of a growth scenario of 7-10 per cent per annum in the next five years and in the light of practice in other fast- growing emerging market economies

• Questionnaire-based survey of unorganized retailers including fixed fruit and vegetable vendors and push-cart hawkers

• Questionnaire-based exit survey of consumers’ shopping at organized retail outlets and also consumers’ shopping at unorganized outlets

and • Questionnaire-based survey of farmers who are selling their produce directly to organized retailers and also farmers who are selling through the traditional mandi route

Introduction 2

Current Retail Scene: An Overview International Retail Indian Retail 3

Indian Organized Retailers: Case Studies Subhiksha Trent Limited Pantaloon Retail ITC Choupal Sagar and Choupal Fresh RPG Spencer’s Mother Dairy 4

Impact of Organized Retailing Advantages to the Indian Economy Unorganized Retail Sector: Survey Results Consumers: Survey Results Intermediaries: Survey Results 5

Impact of Organized Retailing on Producers Farmers : Value Chain and Survey Results Manufacturers : Interview Report 6

Future Scenario in Retailing Growth of Retail: Organized vs

Unorganized Investment and Employment Projections 7

Policy Recommendations

Current Retail Scene: An Overview 2

global retail sales grew strongly in the last five years (2001-06) at an average nominal growth of about 8 per cent per annum in dollar terms (Table 2

This is in contrast to near stagnant global retail sales during the previous five years,

1996-01

Grocery dominates retail sales with a share of approximately 40 per cent which varies from about 30 per cent in rich Japan to an average of 60 per cent in poor Africa

Retail sales through modern formats have been rising faster than total retail sales

the share of modern retail has risen from about 45 per cent in 1996 to over 52 per cent in 2006

Unorganized Retail In the developed economies,

organized retail is in the range of 75-80 per cent of total retail,

whereas in developing economies,

the unorganized sector dominates the retail business

The share of organized retail varies widely from just one per cent in Pakistan and 4 per cent in India to 36 per cent in Brazil and 55 per cent in Malaysia (Table 2

Modern retail formats,

discount and convenience stores are widely present in the developed world,

whereas such forms of retail outlets have only just begun to spread to developing countries in recent years

In developing countries,

the retailing business continues to be dominated by family-run neighbourhood shops and open markets

As a consequence,

wholesalers and distributors who carry products from industrial suppliers and agricultural producers to the independent family-owned shops and open markets remain a critical part of the supply chain in these countries

Reardon and Berdegue,

The first wave took place in the early to mid-1990s in South America (e

Argentina,

Brazil,

East Asia outside China (South Korea,

Malaysia,

Philippines,

Thailand,

North-Central Europe (e

Poland,

Hungary,

and Czech Republic) and South Africa

The second wave happened during the

Central America (e

Ecuador,

Colombia,

Southeast Asian countries (e

Indonesia),

Southern-Central Europe (e

Bulgaria)

The third wave has just begun in the late 1990s and early 2000s in parts of Africa (e

Kenya),

some countries in Central and South America (e

Nicaragua,

Southeast Asia (e

Vietnam),

As home markets have become crowded and with opportunities in emerging markets rising,

modern retailers from developed countries have been turning to new markets

On an average each of the top 250 retailers in the world have operated on an average in 5

Foreign business accounted for 14

The retail sales growth of companies which have ventured into foreign markets has been faster than those that have confined themselves to home markets

As far as the international expansion is concerned,

West European and South African retail companies are the most outward looking

The West European firms,

largely in Central and Eastern Europe

The US retailer Wal-Mart,

the world’s biggest retailer,

is a notable exception operating in 14 countries in 2007

Most of the Japanese retailers are insular operating only domestically

For example,

in most West European countries,

setting up of hypermarkets has become very difficult since the late 1990s and early 2000s as governments became alive to the demands of traditional small retailers and non-mobile consumers in these countries

Merger and acquisition plans are now looked at more critically by the national and European competition authorities

While in most countries opening hours are liberalized including holiday trading,

the very small number of countries where opening on Sundays are prohibited include developed countries such as Germany and Austria (Planet Retail)

As noted by Reardon and Hopkins (2006),

there are four types of policy regulations that can be seen in countries which have experienced advanced retail expansion

They are: • Competition policy that limits concentration and collusion

• Zoning and hours regulations to limit the diffusion,

and convenience of organized retail

• Pricing regulations that prevent modern retail companies from pricing below cost and promptpayment regulations to secure speedy payment to suppliers

while it would grow strongly in developing countries

This is based on a projection of three significant changes that will occur

the population in the age-group 50-70 years and above in the developed world will explode,

shifting the share of consumer spending further away from goods towards services,

healthcare and maintenance of the elderly

Second,

the population growth in the age-group 20-35 years in these countries will be relatively modest making the hiring of entry-level workers difficult,

while the population in the age-group 35-50 years will decline leading to acute shortage of middle and upper management positions

there will be plentiful supply of workforce and consumers in the younger age groups

Besides,

this demographic shift will make the developing countries more dynamic and risk-taking enabling them to grow much faster than the developed world

Driven by these trends,

it is expected that retailers in developed countries will increasingly move to the markets of developing countries for growth

Gross domestic product (GDP) grew by an annual rate of 6

This meant a substantial rise in disposable income of Indian households since the mid-1990s

Based on the Market Information Survey of Households (MISH) of the National Council of Applied Economic Research (NCAER),

the number of people in the income groups of “aspirers” and the middle class with annual income ranging from Rs

more than doubled from 157 million to 327 million during the last decade 1995-96 to 2005-06

Statistical Organization (CSO) indicate that the growth of real private final consumption expenditure,

which dipped from an average of 5

Retail sales (in nominal terms) in the country also followed a similar pattern: a high annual growth of 13

The international consulting firm,

Kearney,

annually ranks emerging market economies based on more than 25 macroeconomic and retail-specific variables through their Global Retail Development Index (GRDI)

For the last three years (2005,

and 2007) India has been ranked as number one indicating that the country is the most attractive market for global retailers to enter

The high economic growth during the last few years raising disposable incomes rapidly,

favourable demographics placing incomes on younger population with less dependency,

and urbanization are some of the major factors fueling the Indian retail market

According to the Economic Census carried out by the CSO in 1998,

The total employment in these enterprises in 1998 was 18

Indian retail is dominated by a large number of small retailers consisting of the local kirana shops,

which together make up the so-called “unorganized retail” or traditional retail

the overall share of organized retailing in total retail business has remained low

Table 2

total as well as the organized sector,

While total retail sales have grown from Rs

which is at an annual compound growth rate of about 11 per cent,

the organized retail sales grew much more at about 20 per cent per annum from Rs

As a result,

the share of organized retail in total

Food and grocery constitutes the bulk of Indian retailing and its share was about two thirds in 2003-04 gradually falling to about 60 per cent in 2006-07 (Table 2

The next in importance is clothing and footwear,

the share of which has been about 7 per cent in 2003-04 and rose to 9 per cent in 2006-07

The third biggest category is no institutional healthcare whose share has slowly reduced

2003-04

2006-07

While the overall share of organized retailing remains low,

its share in certain categories are relatively high and in certain other categories quite low

the share is already in the range of 19-22 per cent,

for the category of sports goods,

equipment and books the share is 12-16 per cent,

The total number of organized retail outlets rose from 3,125 covering an area of 3

in 2001 to 27,076 with an area of 31 million sq

Small-sized single-category speciality stores dominated the organized retail in the beginning with almost two-thirds of total space in 2001

Departmental stores came next with nearly a quarter of total space and supermarkets accounting for the balance of about 12 per cent of organized retail space

There were no hypermarkets in India in 2001

Speciality stores are still the most common modern retail format with over a half of total modern retail space in 2006

Supermarkets and department stores occupied nearly an equal space of 15-16 per cent each in 2006

In 2006,

India had about 75 large-sized hypermarkets carrying a tenth of the total modern retail space in the country

This format is expected to gain more prominence in the future

A few foreign players were granted permission for retailing under this earlier regime

However,

in 1997 it was decided to prohibit FDI in retailing intothe country

In January 2006,

a partial liberalization took place in policy in which foreign companies are allowed to own up to 51 per cent in single-brand retail JVs as approved by the Foreign Investment Promotion Board (FIPB)

Besides this,

foreign companies are allowed in wholesale cash-andcarry business and export trading with 100 per cent equity through the automatic route

Foreign companies with 100 per cent equity can also carry out trading of items sourced from the smallscale sector and do test marketing of products for which the company has a manufacturing approval under the FIPB route

Domestic Organized Retailers: Case Studies 3

consisting predominantly of small,

The domestic organized retail industry is at a nascent stage

At the macro level factors such as rising disposable income,

dominance of the younger population in spending,

shift of the traditional family structure towards the nuclear family are

buttressing the organized retail growth in India

Being considered as a sunrise sector of the economy,

several large business houses are entering the retail industry under multiple modern retail formats

On the one hand,

the advancement of information technology is improving endto-end business processing by integrating the entire value chain,

On the other hand,

and expensive technology are making the retail industry capital intensive

The current regulatory environment is not very conducive to the growth of modern retail in India

The Government of India (GOI) prohibits FDI in retail except for single-brand JVs with up to 51 per cent equity share

The recent growth of the retail industry is already impacting the commercial real estate sector

As a result of shortage of land and rising property prices,

finding property in commercial markets is becoming difficult

Further,

the land conversion process is complex

The licensing process for organized retail is cumbersome requiring as many as 33 licensing protocols

Taxes differ from state to state on the movement of goods: for instance,

the local municipal government also levies octroi

Presently,

there is the central sales tax (CST) of 3 per cent on inter-state sales and value added tax (VAT) of 4-12

Besides,

the lobby against modern retail is mounting in recent months from traditional retailers

Nevertheless,

the macroeconomic landscape indicates that the domestic retail industry has immense scope for the modern as well as traditional retailers to co-exist

Through a balanced regulatory framework and competition policy,

both the traditional format and the modern format can continue to grow,

eventually closing the gap between the organized and unorganized sectors

Organized retailing will: (i) promote quality employment

(ii) improve business process practices

(iii) spur investments in support industries

and (iv) enable the modernization of the fragmented traditional retail industry

Modern retail business focuses on maximizing customer footfalls and capturing rising volume and share of the customer wallet

While the competition strategy is largely price focused,

the model works by: (i) improving sourcing efficiencies

(ii) expanding product assortment

and (iv) enhancing the store ambience

there are four drivers of modern retail’s “one-stop shopping model”: price,

This chapter attempts to summarize the business models of key six established organized retail players in the country

These are: (a) Subhiksha

(c) Future Group: Pantaloon India Retail Limited (PRIL)

(e) ITC: Choupal Sagar and Choupal Fresh

The sixth case study is the first co-operative retail model in India

The main objective of these case studies is to understand how these firms are: (i) penetrating markets

(ii) introducing formats and product categories

(iii) operating the end-to-end value chain

(iv) pricing different products

and (v) capturing customer footfalls

Nationwide,

the retail penetration has been the highest in the South in Tamil Nadu,

Kerala,

Karnataka,

moving towards the West along Maharashtra and Gujarat and now penetrating the North,

in Delhi’s National Capital Region (NCR),

Punjab,

The fresh crop of modern retail in the late 1990s started in the southern region as South India has clusters of metro cities and tier-1 towns

In addition,

less complicated licensing regulations by the state and local authorities have played an important role in the spatial penetration along the regions

In Andhra Pradesh,

the licensing process is now online,

Broadly,

retail firms are following three routes for their market entry: (a) the acquisition route which gives a jump-start to take advantage of the already experienced manpower,

front-end property of the acquired firm

a preferred route for firms seeking foreign collaboration for technical know-how and assistance in the back-end operations as well as future export opportunities

and (c) the green-field investment route for market entry

Typically,

firms are positioning themselves in one or both of the segments: lifestyle7 and value retailing8 under multiple retail formats

Retail firms are adopting a combination of formats including,

medium (department and/or speciality),

and small size (convenience and/or discount) for expansion

This strategy benefits firms in several ways

It helps to: (i) attain critical mass

(ii) economies of scope in sourcing by accruing costs across stores

and (iii) reach out to consumers in the local neighbourhood locations

Table summarizes

In the organized retail one-stop shopping model,

Subhiksha distinguishes itself as the “no fancy frills” store working on mass consumers’ daily needs

The company’s business model focuses on high volume and low margin by: (i) keeping small-sizedfunctional stores within the range of 1,000-1,500 sq

(ii) clustering in close proximity to each other

and (iii) locating in high population density residential area

The company concentrates on daily-need essentials and repeat buying nature of its product categories in fruit and vegetables,

fast moving consumer goods (FMCG),

Trent differentiates itself by building its own-label route

This strategy allows Trent a better control over the product range,

design (value-added portion of the supply chain),

The company’s business proposition in building customer relationship through membership programmes and liberal exchange policy has helped Trent in strengthening the Westside brand

The Star India Bazaar caters to the mass-market segments in meeting their regular needs

Although,

the footfalls differ from store to store,

the average customer footfalls range between 800 and 3,000 a day at a given store

However,

Trent claims that their conversion rates are higher by 10-15 per cent per day than other stores

Pantaloon India Retail Limited is the pioneer of India’s modern retail in the hypermarket format and is recognized as an organized multi-format retailer across value and lifestyle segments

The firm’s business strategy is to capture a greater share of the consumer wallet by covering all customer segments in all age-groups,

in all product categories through multiple retail formats nationwide

The company’s Big Bazaar (hypermarket chain) cuts across entire customer segments

In a lifestyle store,

the average customer footfalls are around 1,000 of which 350 convert into sales transactions

In the value segment,

the company attracts an average of approximately 3,000 customer footfalls,

of which the sales conversion is between 220 and 250

India Tobacco Company (ITC),

leveraged on information-technology,

enabled a unique business platform to directly integrate backwards with the source of supply,

The company not only optimized efficiencies in the procurement chain for export markets but also created a market place for rural retailing in the domestic market

Choupal Fresh is a fresh produce wholesale C&C format catering to organized retailers,

These are in operation now only in three cities,

They have parallel retail outlets for regular customers

ITC leverages in backward linkages through its expertise in agricultural extension services and strategic

partnerships for handling temperature-control technologies and logistics support

By extending agricultural services at the farm level,

ITC is managing the quality of the produce and building an ITC brand in fresh fruit and vegetables

Spencer’s differentiates itself on product quality,

assortment of imported food products,

Leveraging on the perception of high-quality imported goods that was attached to the old Spencer’s & Co

Spencer’s business strategy focuses on an array of food-related products and activities spanning across intercontinental and domestic culinary,

Spencer’s follows the “duck and duckling” (pyramidal) strategy for its retail expansion and costbenefits in back-end procurement

it has a small set of destination stores (Spencer’s hyper),

followed by the supermarket format (Spencer’s Daily),

and a larger set of convenient store format (Spencer’s Express and Fresh) located close to the local neighbourhood

Mother Dairy in Delhi was set up by the National Dairy Development Board (NDDB) under the first phase of Operation Flood Programme in 1974 with the objective of making available liquid milk to city consumers

Following the success of its dairy industry,

NDDB established the Mother Dairy Fruit and Vegetable Project in Delhi in 1988

In addition,

Mother Dairy also markets dairy products,

Dhara range of edible oils and the Safal range of fresh fruit and vegetables,

frozen vegetables and fruit juices at a national level

Mother Dairy sources its entire requirement of liquid milk from dairy co-operatives and sources almost 75-80 per cent of fruit and vegetables from farmers and growers’ associations at the village level

For distributing milk,

Mother Dairy has opened its booths and shops mainly near residential areas of the Delhi NCR region

In 2006-07,

the retail firms mentioned above generated a total sales’ turnover of Rs

In addition,

these firms’ array of private labels across several product categories has supported sourcing tieups with more than 4,124 large and

In 2006,

the firms covered in the case studies (excluding Mother Dairy) consisted of a total of 1,070 stores encompassing nearly 5

These firms have projected a cumulative increase to over 6,600 stores by 2010

and in India typically the cluster approach is more popular

In the cluster approach,

the firm initially launches in an urban city and then expands towards surrounding tier-1 towns belonging to the same cluster catchment area

Each cluster covers its own region for direct sourcing,

and logistics like a separate business unit

This approach is favourable for retailers because they can build a more efficient logistics network and take advantage of cultural similarities among consumers in the same region in order to develop their product offerings

The real estate co strain however is restricting the retailers’ expansion plans in large formats

The new crop of retailers across the country are acquiring or leasing mega sized store spaces in newly constructed malls in an approved market space

the share of product category in modern retail formats is driven by the level of profit margin retailers make and the consumer adoption rate

Modern retail penetration and consumer adoption in the apparel and clothing category is the highest

The firms’ competition strategy is

differentiated in the lifestyle segment and cost focused in the value segment

An organized retailer gets an average of 30 per cent gross margin or above on MRP across women’s wear,

and kids’ wear on branded labels

In the case of private labels of store brands,

clothing margins are higher than 60 per cent typically

In the food and grocery section across hypermarket,

grocery covers around 45 per cent of store space in FMCG and staple food products

The profit margin in FMCG products is tight because large suppliers control the brand power and store shelf space at local neighbourhood stores

In staples and lesser- known FMCG products,

retailers gain 13 per cent profit margin on the cost price (Table 3

In the absence of national brands in staple food products,

store branded private labels are becoming popular and fetch up to 12 per cent average margin

As regards fresh fruit and vegetables,

however the store level penetration low compared to other categories for various reasons: (i) high wastage

(ii) lack of temperature-controlled isles

The centralized distribution centre is typically located in one central location surrounded with several collection centres and/or re-packaging centres spread across the region near the supply source

The hub distribution centre is the key stock-holding point

Collection centres are warehouses for temporary holding of fruit and vegetable stocks up to 48 hours or so

The repackaging centres are usually used for packaging the private label

In countries where organized retail is at an advanced level,

the common practice is to have one central distribution hub supplying to several spokes across the country

However,

due to the inadequate infrastructure and CST regulations in India,

the “hub and spoke” model for supply chain distribution is restricted to its respective catchment area

The abolition of CST may streamline the nationwide distribution of warehouses and allow linear logistics and flow of supply

Firms are increasingly disintermediating the traditional supply chain of procurement for operational efficiency gains

They are attempting to reconstruct their own supply chain by forging direct ties with the original source of supply or using a service provider between them and suppliers

At present,

the supply chain is a combination of: (i) direct procurement from farmers,

and (iii) consolidators or distributors as a single intermediary point

The distributor channel is used only if the volume scale is low

Gradually,

the organized retail value chain would prefer to lean towards the direct procurement approach in order to reduce the cost of the middleman

The direct procurement model benefits modern retailers for the following reasons: (i)Maxim zing its gains on large volume transactions

(ii) implementing store brand promotional schemes

and (iii) minimizing the operational cost

the employment generated by organized retail is building a quality labour class that is gaining vocational training in skilled and unskilled jobs at the graduate and tenth class level

Foreseeing the demand for trained staff,

leading organized retailers are creating their captive human resources pool through internal training and programmes and tie-ups with retail management schools

The case studies represented here directly accounted for employment of nearly 28,320 people in 2006-07 (Table 3

The induced impact of the payroll spending of the organized retail employment is also hard to ignore

Retail industry is attracting inward investment both at the domestic and global level in several support industries: IT industries,

and logistics and warehouse distribution services in order to strengthen the supply chain

The surge of private labels have generated demand and sourcing tie-ups with manufacturers across product categories

In the case of fruit and vegetables,

the direct procurement is bringing quantitative benefits from higher price realization and qualitative benefits in improvements of agro-processing services

Finally,

organized retail is creating quality labour class that is gaining vocational training in skilled and unskilled jobs at graduate and tenth plus levels

Nevertheless,

there is a timely need for a fresh regulatory framework and competition policy so that both traditional retail and modern retail can continue to grow in harmony eventually closing the gap between the organized and unorganized sector

Impact of Organized Retailing 4

Organized retailing has begun to tap the enormous market but its share indeed is small

A number of large business houses have entered the retail business with very ambitious expansion plans

Big foreign retailers are also keen to invest in India but their entry depends on changes in the government’s FDI policy regarding retailing

Organized retailing played a significant role in the present-day developed countries during their period of high growth

Since the early 1990s,

also contributing substantially to the growth of developing countries

In India,

organized retail is poised to make a mark in the near future

This chapter deals with some of the major implications of modern retailing for the country

It also presents the results of the all-India survey of unorganized retailers,

and intermediaries on the impact of modern retailing

in its Approach Paper for the Eleventh Five Year Plan,

while also providing employment of a higher quality

Organized retailing in agricultural produce can set up supply chains,

give better prices to farmers for their produce and facilitate agroprocessing industries

Modern retailing can bring in new technology and reduce consumer prices,

thus stimulating demand and thereby providing more employment in production

as against an annual growth rate of 4

Among the reasons for the secular downtrend of this sector are: (a) low level of investment in the sector of just below 2 per cent of GDP (Economic Survey 2006-07,

(b) inability to bring a larger share of land under irrigation in the past

(c) lack of any significant breakthrough in yields for the last few decades

and (d) the dismal state of rural infrastructure,

2007-12

They are: (i) foodprocessing industry

Of these sectors,

all except tourism are getting a fillip with the growth of organized retail

Currently,

both the food-processing and textile industries are lagging behind (Table 4

International retailers look for sources around the world and a country in which they operate becomes a source for their global sales

Some of the international retailers that have plans for India in the future have already developed suppliers in the country and have started exporting from India

For example,

Wal-Mart exported an equivalent of US$ 600 million,

and IKEA about 380 million euros from India in 2006-07

In the context of the United States,

a McKinsey Global Institute study11 indicated a contribution by the retail sector of nearly one-fourth of the rise in productivity growth from 1987-95 to 1995-99

It is interesting to note that construction has been one of the fastestgrowing segments of India’s GDP in recent years,

recording an average annual real growth of about 13 per cent durin