Huge potential awaits retailing

The entry into retailing by MNC brands has driven the growth of specialty chains and upgraded the standards of existing multi- brand outlets. South India {frac12} most notably Chennai and, to a lesser extent, Bangalore and Hyderabad {frac12} has emerged as centre of organised retailing. One of the Foodworld outlets in BangaloreTHE $200 billion Indian retail market has been growing at 5 per cent annually in real terms. This growth is expected to continue, driven by increased rural consumption and a shift towards spending on higher value-added goods, according to a report on the economic performance of India, prepared by McKinsey Global Institute in collaboration with its local office.

The study has focused on food (excluding restaurants) and non- food retailing. In non-food retailing, it has concentrated on textiles and apparel, footware and consumer durables. The food and non-food retailing together account for 80 per cent of the total retail sales. Within the segments covered, food retailing accounts for the largest share, with 88 per cent of sales and 80 per cent of employment. With close to 12 million outlets, the country has the highest retail outlet density in the world. Only two per cent of retail sales in India flows through formats such as supermarkets and specialty chains.

Retailing is on the cusp of a transformation. A combination of increased consumer demand, improved sourcing options and larger availability of real estate are creating the foundation for a significant growth in the organised retail sector. On the supply front, a number of organised retailers have entered the trade in the last five years. These include large Indian business groups such as the Tatas, RPG, the Rahejas and Piramal, as well as MNC brands. The entry into retailing by MNC brands has driven the growth of specialty chains and upgraded the standards of existing multi-brand outlets. South India - most notably Chennai and, to a lesser extent, Bangalore and Hyderabad - has emerged as centre of organised retailing. If fact, in Chennai, nearly 20 per cent of food sales now flows through supermarkets and an equal share of durables is sold through specialty chains such as Viveks.

The study finds that grocery will be the largest of these opportunities and the organised sector could be as large as $ 18 billion in 2010, split across a variety of fomats. To capture this opportunity, a company will need to develop significant sourcing scale, build world-class customer management capabilities and make significant investments to extract value from the unprocessed agri-products (dry and fresh) chains.

Modern formats, such as supermarkets, department stores and specialty chains have begun to crop up over the past few years. These formats have high productivity potential and are found in most developing and many developing economies.

Growth of modern retailing will need rewriting the real estate laws, restructuring the tax regime and allowing FDI into retail business, accessing and developing new skills and investing significantly in infrastructure. The report has stated that Foreign Directive Investment (FDI) has played a key role in the rapid development of high quality retail in several other developing countries. Allowing global retailers to invest in this sector will attract the best practice players into India. Several retailers have already evinced interest in building businesses here.

FDI has been a key contributor to the rapid evolution of retail in other developing economies such as Thailand, Poland and China. Modern formats made their appearances in Poland and China in the 1990 primarily because of the entry of global chains. Global retailers, with the benefit of their experience, can rapidly expand operations and tailor successful formats to the local environment. In the last five years, a lot of foreign funds had flowed into the retail fied in spite of restriction of FDI. ``All these have in turn increased the number of jobs,'' says Mr. B. A. Srinivasa. Director (Operations), Vivek Limited.

Mr. Srinivasa feels that people in India are not quite appreciative of the benefits available from FDI. With the unrestricted flow of FDI, consumers will gain better awareness. Similarly, he expects the prices of the products to decline once FDI comes unhindered into the country. The quality of the service, too, will improve, he says. The McKinsey report has in fact attributes the low productivity in the retail sector to restrictions on FDI.

However, the report says that the counter stores are likely to be most threatened by the introduction of FDI. The small trader lobby has been vocal on the issue of not permitting FDI into retail, and has successfully ensured that policy on this front is unchanged. The lobby is based on the premise that modern retail will impact the livelihood of millions of small family-run businesses. Dairy Farm is the only foreign food retailer present in India and was permitted entry during a regulatory window (1993-95).

The report has suggested the removal of bottlenecks in the supply chain. Policymakers need to do away with the constraints on processing, manufacturing and distribution. The reservation of large sub-segments for the small-scale renders in the processing sector, particularly in food and apparel, is inefficient. Therefore, the first step should be to continue to relax restrictions and permit larger, more efficient players to enter these sectors.

Mr. R. Venkatesh, Senior Manager (Operations), Shoppers' Stop in Chennai, feels that removal of bottlenecks in the supply chain would improve the efficiency level in retailing. It will also increase the availability of products and the cost of products would also be reduced. He says by relaxing the SSI reservation, it will allow small-scale firms to increase scale and become far more productive and competitive.

The Government should ensure adoption of a uniform sales tax rate across states, and time, introduce Value-Added Taxation (VAT). It should also eliminate octroi wherever it is levied.

These policy changes are already being considered. The policy has also recommended that State governments should make all licences and permits for retail available through a single agency, at least at the city level. Providing one-time licences for multiple stores in a chain will ease the bureaucratic hurdle experienced by modern retailers.

The Government should also permit flexibility in the use of labour without doing away with the benefits accruing to them will permit retailers to better organise operators and improve capacity utilisation. It should also enforce tax collection from small retailers. These levels of change are unlikely to be successful if carried out by any one retailer.

Shanthi Kannan

in Chennai

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