The Hindu : Opinion / News Analysis : Will these Goliaths oust the Davids?

Online edition of India's National Newspaper
Friday, Jul 15, 2005

Opinion

Opinion - News Analysis

Will these Goliaths oust the Davids?

N.N. Sachitanand

Foreign retail giants are unlikely to sweep out the domestic small retailer. However, they could pose a threat to the Indian retail majors.

ON THE face of it, the popular 1998 Hollywood film You've Got Mail, starring Tom Hanks and Meg Ryan, is a cloying romance. But below the surface, it carries a more fundamental message — the unfortunate demise in the United States of the small, family-owned shops due to the onslaught of corporate retail juggernauts.

It is the fear of just such a development that is colouring the debate in India these days about the advisability of allowing foreign retail giants to set up shop in the country. The worry is not without foundation. Retailing is the most widespread occupation in the country, next to agriculture. Britain has been incorrectly labelled a nation of shopkeepers. That appellation fits India better. Even when they migrate abroad, the less qualified Indians tend to gravitate towards small time retailing for a living. The major Indian presence among the small convenience stores and news stands in the U.S. and the U.K. is proof of this.

Retailing is not just an occupation in India. It is a lifeline for the unemployed and underemployed, the majority of India's labour force.

According to a Confederation of Indian Industry-McKinsey report, India has the highest number of retail outlets per capita in the world at 5.5 per 1,000 people. It is through this multitude of small retailers that India's fast moving consumer goods (FMCG) giants built up their empires.

The last decade has seen a remarkable change in the eco-demographic profile of the Indian consumer base, as a result of the entrepreneurial energies unleashed after the reforms of the early 1990s. According to the Marketing Whitebook (2003-04), the number of households in the Rs.22,000-Rs.215,000 per annum income bracket went up from 78 million in 1994-95 to 124 million in 1990-2000 and is projected to touch 159 million in 2005-06. Calculations by KSA Technopak reveal that the composition of the Indian population is shifting towards a larger proportion of people in the 20-49 age group. So what we have here is a younger population of consumers with more disposable income, which translates into higher shopping aspirations that cannot be met by the traditional one-man kirana store.

Enter the big companies with their grand shopping malls, department stores, hypermarkets, supermarkets, discount stores, speciality stores, etc. The last five years have seen a sudden spurt of investment in the organised retail sector.

As per a Pricewaterhouse Coopers report, the organised retail industry will represent six per cent of the total market in 2005 against one per cent in 1999. KSA Technopak expects the share of organised retail in India to grow from two per cent in 2002 to 10-12 per cent in 2010. From 25 operational malls in 2003, the country is expected to have over 220 malls by 2006 with a total estimated space of 40 million sq.ft., and over 600 malls by 2010 with a total space of as much as 100 million sq.ft.

These organised outlets are offering a totally different experience to the Indian shopper in terms of ambience, décor, display, facilities, packaging, service, etc. The lifting of restrictions on the import of consumer goods and the drastic reduction in import tariffs have enabled these organised outlets to offer shoppers a variety of international fare they would not even have dreamed of in the past. The owner-managed small outlets, with their limited financial capacity, are not able to match this.

The other crucial advantage organised retail has is its direct access to manufacturers. This means an avoidance of all the margins to the middle trade layers that a traditional outlet has to dish out. This enables the organised retailer to offer lower prices to the customer.

Prashant Singh, the author of an AC Nielsen report quoted in Business Today, reveals that the monthly turnover of FMCG for traditional outlets remained constant between 1998 and 2004, which means in real terms (minus inflation), the average store turnover for this category has got eroded by 20 per cent.

Does this mean that India's "mom and pop" stores are on their way out? Far from it, if analysts' figures are any guide. According to KSA Technopak, the share of traditional outlets will still be around 90 per cent of the retail trade in 2010. There has been no letup in the addition to the number of traditional outlets; last year alone, says Prashant Singh, five lakh outlets opened to sell FMCG.

The fact is that although the Indian consumer has more purchasing power today, buying habits remain conventional. This favours the traditional outlet. A significant strength of the traditional outlet is the giving of credit to the small purchaser; eco-demographics show that 65 per cent of the country's households belong to this category.

The experience so far with modern outlets has shown that while they get a lot of footfalls per day, the conversion rate (percentage of those entering who actually purchase) is as low as five per cent. Since these malls have to charge sky-high rents to make up for the high costs of real estate, such low conversion rates are leading to a high rate of closure among the lessees.

Our neighbours in the Asia-Pacific region are far ahead of us in the organised retailing game with the percentage of retail trade from organised outlets ranging from 84 per cent in Hong Kong to 33 per cent in China. Even Vietnam at 11 per cent is way ahead of the 2 per cent in India.

A.T. Kearney in its recent 2005 Global Retail Development Index has put India in the top spot among attractive investment destinations for global mass merchant and food retailers, provided the Government allows FDI in retailing. Will the entry of foreign retail giants sweep out the domestic small retailer? Not likely, considering the different clientele of the two sectors. However, foreign giants, with their well-established supply chains spanning the globe, could pose a threat to the Indian retail giants who have just started getting their act together.

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