Retailing in India: A brief overview


By
Rajul Bhardwaj
Asst. H.R. Manager
Abbscissa H.R. Services
New Delhi
E-mail:
rajul_bhardwaj@rediffmail.com
 


India has sometimes been called a nation of shopkeepers. This epithet has its roots in the huge number of retail enterprises in India, which totalled over 12 million in 2003. About 78% of these are small family businesses utilising only household labour. Even among retail enterprises that employ hired workers, the bulk of them use less than three workers.

India's retail sector appears underdeveloped not only by the standards of industrialised countries but also in comparison with several other emerging markets in Asia and elsewhere. There are only 14 companies that run department stores and two with hypermarkets. While the number of businesses operating supermarkets is higher (385 in 2003), most of these had only one outlet. The number of companies with supermarket chains was less than 10.

Retail sales

Retail sales, which amounted to about Rs7,400 billion in 2002, expanded at an average annual rate of 7% during 1999-2002. With the upturn in economic growth during 2003, retail sales are also expected to expand at a higher pace of nearly 10%.

In a developing country like India, a large chunk of consumer expenditure is on basic necessities, especially food related items. Hence, it is not surprising that food, beverages and tobacco accounted for as much as 71% of retail sales in 2002. The remaining 29% of retail sales are non-food items. The share of food related items fell over the review period, down from 73% in 1999. This is to be expected as, with income growth, Indians, like consumers elsewhere, spent more on non-food items compared with food products.

Sales through supermarkets and department stores are small compared with overall retail sales. However, their sales grew much more rapidly (about 30% per year during the review period). As a result, their sales almost tripled during this time. This high acceleration in sales through modern retail formats is expected to continue during the next few years with the rapid growth in numbers of such outlets in response to consumer demand and business potential.

Government policy

There has been vigorous opposition to foreign direct investment (FDI) in retailing from small traders who fear that foreign retailing companies would take away their business, lead to the closure of many small trading businesses and result in considerable unemployment. Given the political clout of the small trading community, because of their enormous numbers, the government has barred FDI in retailing since 1997. Hence, at present, foreign retailers can only enter the retailing sector through franchising agreements.

Organisational characteristics

Given the traditional and underdeveloped state of the Indian retail sector, the organisational characteristics of retail enterprises are rudimentary. Most of them belong to independent enterprises in the form of small family businesses.

Cooperatives have been present in India for several decades, spurred by the encouragement given by the Indian Government, which viewed the cooperative movement as an integral component of its erstwhile socialist policies. However, since the 1990s, there has been a reduction in government support for cooperatives. In 2002, there were about 35,000 outlets run by cooperatives.

Economic liberalisation, competition and foreign investment since the 1990s led to a proliferation of brands with both foreign and Indian companies acquiring a strong brand equity for their products. Hence, franchising emerged as a popular mode of retailing. Sales of franchises grew at a rapid pace of 14% per annum over the review period. In 2002, there were over 5,000 franchised outlets.

The other major retailing organisation format is multiples, better known as "chain stores" in India. In 2002, there were about 1,800 chain stores. Among the various organisational formats, sales of chain stores grew at the fastest pace, with sales growth during the review period averaging 24% per year.

Food retailers

There are a large variety of retailers operating in the food retailing sector. This is not surprising considering the enormous size of the market for food. However, traditional types of retailers, who operate small single outlet businesses mainly using family labour, dominate this sector. In comparison, supermarkets account for a minuscule proportion of food sales. This is because of the strong competitive strengths that traditional retailers possess. These include low operating costs and overheads, low margins, proximity to customers, long opening hours, and additional services to customers (such as home delivery). Nevertheless, supermarket sales expanded at a much higher rate than other retailers. This is because greater numbers of higher income Indians prefer to shop at supermarkets because of convenience, higher standards of hygiene and the attractive ambience.

Health and beauty products retailers

With growth in incomes, Indians have been spending more on health and beauty products. As in the case of other retailing sectors, small single-outlet retailers also dominate sales of health and beauty products. However, in recent years, a couple of retail chains specialising in health & beauty products have sprung up. At present, they account for only a tiny share of sales of these products. However, as Indians spend more on such products in future, their business will undoubtedly expand substantially. There is also scope for entry of more such chains.

Clothing and footwear retailers

Numerous clothing and footwear shops are to be found in Indian cities and towns, especially in shopping centres and markets. These are a mix of traditional and modern stores. Traditional outlets are small and cramped with little emphasis on alluring displays. They basically stock a limited range of cheap and popular items. In contrast, modern clothing and footwear stores are spacious with sample products attractively displayed in windows, sometimes with mannequins. Just as in the case of food retailing, there are also a huge number of retailers selling clothing and footwear in makeshift stalls or on footpaths. Because of their rock-bottom prices, which are much lower than prices of branded products, they attract a large number of customers.

Home furniture and household goods retailers

The home furniture and household goods retailing sector in India is dominated by small retailers. Despite the large size of this market, very few modern and large retailers have established specialised stores for these products. However, there is considerable potential for the entry or expansion of specialised retail chains and it is likely that this will happen during the next few years.

Durable goods retailers

The entry of a large number of foreign consumer durable companies into the Indian market during the 1990s after the government liberalised its foreign investment and import policies transformed this sector dramatically. A much larger variety of consumer electronic items and household appliances became available to the Indian customer. Competition among companies to sell their brands provided a strong impetus to the growth for retailers operating in this sector.

Leisure and personal goods retailers

Rising household incomes due to economic growth spurred consumer expenditure on leisure and personal goods in India. There are specialised retailers for each category of products in this sector. A few retail chains also emerged particularly in the retailing of books and music products. Another key feature of this sector is the popularity of franchising arrangements between established manufacturers and retailers. Alternative selling channels

Sales through most alternative selling channels are tiny or non-existent. The only exception was direct selling, which grew rapidly over the review period. The main reason for this was that direct selling companies could easily attract a huge number of "distributors", who constitute the key element for the success of any direct selling company. Many of these are unemployed Indian housewives who welcomed this opportunity to earn additional income for their households. The low start-up costs meant that they could easily start this business.

Forecast total retail sales

Retail sales (in real terms) are predicted to rise more rapidly than consumer expenditure during 2003-2008. The forecast growth in real retail sales during 2003-2008 is 8.3% per year (compared with 7.1% for consumer expenditure). Inevitably, modernisation of the Indian retail sector will be reflected in rapid growth in sales of supermarkets, department stores and hypermarkets. This is because of the growing preference of the affluent and upper middle classes for shopping at these types of retail stores, given the conveniences they offer such as shopping ambience, variety and a single-point source for purchases. Hence, sales from these large format stores are predicted to expand at growth rates ranging from 24% to 49% per year during 2003-2008. However, such rapid growth is from a small base. Hence, they will continue to account for only a small share of total retail sales in 2008.
 


Rajul Bhardwaj
Asst. H.R. Manager
Abbscissa H.R. Services
New Delhi
E-mail:
rajul_bhardwaj@rediffmail.com
 

Source : E-mail January 27, 2006

 

  

Articles on Management Main Page

Important Note :
Site Best Viewed in Internet
Explorer in 1024x768 pixels
Browser text size: Medium