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INDIAN ORGANIZED RETAILING SECTOR: CHALLENGES AND OPPORTUNITIES PGDM (SEMESTER I) NDIM For class discussion INDIAN ORGANIZED RETAILING SECTOR: CHALLENGES AND OPPORTUNITIES PGDM (SEMESTER I) NDIM For class discussion at NDIM

FDI • Stands for “Foreign Direct Investment” “Interested Investors beyond the borders of a FDI • Stands for “Foreign Direct Investment” “Interested Investors beyond the borders of a country being allowed to invest in local economy either through participation or partnership with a local company or directly as per regulations in force” • India- 2 Routes ; Automatic & Government • The controversy mostly is on FDI in Retail

RETAILING BUSINES: CONCEPT • Retail is the sale of goods and services from individuals RETAILING BUSINES: CONCEPT • Retail is the sale of goods and services from individuals or businesses to the end-user. • Retailing is the last point of contact between sellers and buyers. • Retailers are part of an integrated system called the supply chain. • A retailer purchases goods or products in large quantities from manufacturers directly or through a wholesale, and then sells smaller quantities to the consumer for a profit.

INTERNATIONAL RETAIL One of the world’s largest industry exceeding US $ 9 trillion. Total INTERNATIONAL RETAIL One of the world’s largest industry exceeding US $ 9 trillion. Total retail contribution in World GDP is 27%. Organized retail in US accounts for 22% of GDP. The Share of organized retail in developing markets ranges between 20% to 55% Dominated by developed countries. US, EU & Japan constitutes 80% of world retail sales Market size: USA= US$ 2, 350 Bn, UK= US$ 406 Bn, China US$ 313 Bn Highly evolved US market has Wal-Mart taking only 8% market share UK market has Tesco with only 13. 4% market share China market still does not have a clear leader. For class discussion at NDIM

INTERNATIONAL RETAIL DATA : 2010 -2011 For class discussion at NDIM INTERNATIONAL RETAIL DATA : 2010 -2011 For class discussion at NDIM

RETAIL: ASIAN FALLOUT CASES THAILAND : Since entry of METRO, CARREFOUR, and METRO – RETAIL: ASIAN FALLOUT CASES THAILAND : Since entry of METRO, CARREFOUR, and METRO – they have captured 10% of market share. Predatory pricing leading to profit margins below 1%. Several local retailers shutting shops and about 60000 retailers unemployed and out of business CHINA: Carrefour and Wal-Mart making significant inroads to take charge of China Market. Small local retailers finding it difficult to survive and cope with competition, some forced to close shops For class discussion at NDIM

RETAIL: ASIAN FALLOUT CASES INDIA DEBACLE: LILLYPUT: Bankruptcy as it is saddled with huge RETAIL: ASIAN FALLOUT CASES INDIA DEBACLE: LILLYPUT: Bankruptcy as it is saddled with huge debt pile up Subhiksha: Improper business planning as they adopted aggressive expansion plans without stabilizing their cash flows Working capital problems mounted, resulting in delays of payments to vendors. Severe financial crunch and hence had to shut operations Pantaloons and Reliance: Saddled with huge debts, finding it difficult to fund their expansion programs, scouting for M&As options. For class discussion at NDIM

Indian Retail Poised For Significant Growth… *Projected Indian Retail expected to grow close to Indian Retail Poised For Significant Growth… *Projected Indian Retail expected to grow close to 12% p. a. in the next 10 years For class discussion at NDIM 8

Retail Business: Rapid Transformation Anticipated 2012 2007 Modern retail expected to gain 12 -14% Retail Business: Rapid Transformation Anticipated 2012 2007 Modern retail expected to gain 12 -14% additional share in 5 years For class discussion at NDIM 9

For class discussion at NDIM For class discussion at NDIM

Retail Business: Factors driving Growth 1. Healthy GDP growth rate and commitment to economic Retail Business: Factors driving Growth 1. Healthy GDP growth rate and commitment to economic reforms 2. Burgeoning Middle Class Population and rising disposable income 3. Entry of MNCs and availability of wider range of products for buyers 4. Younger minds and rising income levels. 5. Dramatic change in consumption habits and aspiration for better lifestyle For class discussion at NDIM 11

Retail Business: Factors driving Growth 4. Rising awareness due to sophisticated market communication pattern Retail Business: Factors driving Growth 4. Rising awareness due to sophisticated market communication pattern 5. Changing role of women and children in decision making process 6. The media revolution and the publicity and brand promotion measures 7. Consumers desire for having access to better ambience and diversity of choice under one roof For class discussion at NDIM 12

Retail Business: Factors driving Growth Plastic Revolution: Increasing use of credit cards for categories Retail Business: Factors driving Growth Plastic Revolution: Increasing use of credit cards for categories relating to Apparel, Consumer Durable Goods, Food and Grocery etc. Urbanization: Increased urbanization has led to higher customer density areas thus enabling retailers to use lesser number of stores to target the same number of customers. Distance Coverage easier: With increased automobile penetration and an overall improvement in the transportation infrastructure, covering distances has become easier than before. For class discussion at NDIM 13

OPTIONS FOR RETAILING Retailing can be undertaken from • • Fixed Locations Door 2 OPTIONS FOR RETAILING Retailing can be undertaken from • • Fixed Locations Door 2 Door Online Portals Through Net Working Other Supporting Services • Delivery • Short Term Credits • Service Supports

INDIAN RETAIL: TYPES OF RETAILING Organized Retailing: Refers to trading activities undertaken by licensed INDIAN RETAIL: TYPES OF RETAILING Organized Retailing: Refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include, hypermarkets and retail chains, and the privately owned large retail businesses. Organized Retailing offers a different experience and ambience under one roof under organized framework starting from entry into shop till exit after billing and delivery Unorganized Retailing, Refers to traditional formats of low-cost retailing. For example: - the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, pavement vendors, etc. Share of organized sector in total retailing business is expected to touch around 13% depending on the pace of reforms and interests of foreign/ private investors to diversify in this field For class discussion at NDIM

INDIAN RETAIL: FORMATS OF RETAILING Independent Retail Shops/ Own Retail Showrooms – SONY, LG, INDIAN RETAIL: FORMATS OF RETAILING Independent Retail Shops/ Own Retail Showrooms – SONY, LG, Walt Disney, HITACHI Corporate Retail/ Supermarket Chain – Food Bazaar, Big Bazaar, SPENCERS, etc International Franchising system – Mc. Donalds, Pizza Hut, KFC Hyper Markets like Westside, Ebony: The preferred format for international retailers entering India. Convenience Stores like Mother Dairy, 24 x 7, Departmental Stores: BENZER, SHOPPERS STOP For class discussion at NDIM

Retail : Contemporary Trade Formats * Other formats include specialty stores in Apparel, Footwear, Retail : Contemporary Trade Formats * Other formats include specialty stores in Apparel, Footwear, Watches, Furniture & Furnishing, Toys, Convenience formats etc. Multiple formats would be introduced in a simultaneous rather than a sequential manner in India For class discussion at NDIM 17

INDIAN RETAIL : TYPES OF PLAYERS BIG PLAYERS • FUTURE GROUP: FOOD BAZAAR, BIG INDIAN RETAIL : TYPES OF PLAYERS BIG PLAYERS • FUTURE GROUP: FOOD BAZAAR, BIG BAZAAR, PANTALOONS • RELIANCE AND RPG GROUP – INCLUDING SPENCERS, MUSIC WORLD RELIANCE DIGITAL, AND RELIANCE FRESH • TATAS: WESTSIDE AND CROMA SMALL PLAYERS : • VISHAL MEGA MART • CANTARBIL • SHOPPERS STOP • EBONY • NATURES ESSENCE For class discussion at NDIM

Specialty Retailing gathering prominence Specialty Retail is Emerging in the following fields: n n Specialty Retailing gathering prominence Specialty Retail is Emerging in the following fields: n n n n Food and Grocery – MOTHER DIARY, RELIANCE Apparels – SEVERAL SUCH IN INDIA Entertainment – MUSIC WORLD Health Care - APOLLO Travel & Tourism Telecom & IT Office supplies and Stationery - W H SMITH For class discussion at NDIM 19

INDIAN RETAIL : CHALLENGES • Lack of right formats • No investment in supply INDIAN RETAIL : CHALLENGES • Lack of right formats • No investment in supply chain infrastructure • • Sole focus on front end and reduced focus on back end linkages like cold storage, warehousing facilities, logistics, farmer development, etc Minimal focus on prudent customer service over the fast life cycle Lack of trained and competent manpower and ground staff - critical constraint indeed Non availability of credit at competitive rates – leading to high capital costs For class discussion at NDIM

INDIAN RETAIL : CHALLENGES • • Inconsistent availability, quality, and pricing Spending by consumers INDIAN RETAIL : CHALLENGES • • Inconsistent availability, quality, and pricing Spending by consumers visiting malls, retail shops not encouraging and promising as expected – mainly window shopping High Real Estate Prices and rising Rentals Industry margins very thin as low as 5 -6% and therefore volume growth to support generation of positive cash flows • Taxation structure skewed: e. g. sales tax, VAT, Import duties, etc • FDI policy announced – but still some ambiguity pending For class discussion at NDIM

RETAIL: CRITICAL SUCCESS FACTORS • • The differentiating factor - Product decisions should be RETAIL: CRITICAL SUCCESS FACTORS • • The differentiating factor - Product decisions should be based on local market dynamics such as customer diversity, account needs, competition, etc Location of stores: Cluster Approach, proximity to areas where potential customers reside, and centralized warehousing Convenience: ambience Approach, Parking, Flexible Timings, Amenities, Creating tangible/ Intagible assets: outputs, goodwill, technology, brand equity, For class discussion at NDIM

RETAIL: CRITICAL SUCCESS FACTORS • • • Building the right workforce: Ability to deliver RETAIL: CRITICAL SUCCESS FACTORS • • • Building the right workforce: Ability to deliver positive experience for consumers, product knowledge, communication, etiquettes, personality, etc Aggressive Customer Relationship Management: Loyalty Programs, Customer experience to be enriching, Response to customer feedback, sound customer interaction, resolving queries Redesigning supply chain framework: Better inventory control mechanism, availability of appropriate storage facilities, and replenishment of shelves with products preferred by customers. Stabilizing procurement and replenishments cycle, mimize logistics costs, prefer direct sourcing, etc For class discussion at NDIM

INDIAN RETAIL : SOME PROGRESS • • Quality of merchandising and packaging improving and INDIAN RETAIL : SOME PROGRESS • • Quality of merchandising and packaging improving and visible Firms investing in staff and sponsoring people for training and development workshops • Ambience and facilities in malls – a distinct improvement • Multi Brand Stores offering a plethora of choice for customers • Availability enhanced for domestic and foreign brands For class discussion at NDIM

INDIAN RETAIL : SOME PROGRESS • • • Organized retailing stores like Big Bazaar, INDIAN RETAIL : SOME PROGRESS • • • Organized retailing stores like Big Bazaar, Shoppers Stop expanding into tier II and tier II cities Metro, Star. Bucks – TATA, Marks and Spencers are already here Big players like Walmart, Carrefour, IKEA, TESCO planning to enter India in a big way either independently or through Joint venture • Some have set up back end office centres e. g. TESCO, WAL-MART • Rural Opportunity interesting for organized retailers For class discussion at NDIM

FDI: WHAT IT IMPLIES “ Foreign Direct Investment “ Allowing Interested Investors from Abroad FDI: WHAT IT IMPLIES “ Foreign Direct Investment “ Allowing Interested Investors from Abroad to Invest either directly or through participation with Local Players in Various Sectors of Economy i. e. Joint venture or 100% wholly owned subsidiary

India & FDI 1. Automatic Route • FDI is allowed under the automatic route India & FDI 1. Automatic Route • FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. • Policy allows FDI in retail under above

India & FDI 2. Government Route • FDI in activities not covered under the India & FDI 2. Government Route • FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. • Most Oppositions revolve around FDI in Retail

INDIAN RETAIL : FDI STATUS In 2006, 51 percent investment in a single brand INDIAN RETAIL : FDI STATUS In 2006, 51 percent investment in a single brand retail outlet was permitted. FDI in Multi-Brand retailing was prohibited in India. Recent Reforms Proposed: 51% FDI in Multi-brand outlets, and 100% FDI in single branded stores allowed. FDI in Multi Brand Retail is opened up to 51%, with the following conditions: 1. Minimum investment of US$ 100 million 2. 50% of US$ 100 million to be invested in the back-end infrastructure 3. Also, 30% of sourcing to be done from small scale industries 4. Stores can be opened only in cities with a minimum population of 1 million 5. States will have freedom to decide entry of international retailer with 51% FDI For class discussion at NDIM

INDIAN RETAIL : BENEFITS OF FDI Competition - Catalysts to spur competition & innovation INDIAN RETAIL : BENEFITS OF FDI Competition - Catalysts to spur competition & innovation in retail industry. Consumers - Improved product availability, wide choice, better quality & reduce wastages , and Consumers to get best products and services at reasonable price. Back End & Supply Chain Improvement : Inadequate storage facilities cause heavy losses to farmers – so entry of foreign firms to bring in best supply chain practices and efficiency in back end operations Capital and Tax contribution: Foreign firms infuse capital, and also spur investment and capital formation. Also, business activity earnings are subject to tax resulting in additional income for the government. For class discussion at NDIM

INDIAN RETAIL : BENEFITS OF FDI Food inflation and fluctuation in food prices can INDIAN RETAIL : BENEFITS OF FDI Food inflation and fluctuation in food prices can be controlled. Better Realization for Farmers : FDI to ensure better realization for farmers & producers, due to direct procurement from farmers. Absence of complex chain of distributors leads to reduced inefficiency in terms of cost disadvantages , non timely delivery, etc Economic Growth : Sourcing from India will increase & Exports to get significant boost. India can also become a shopping destination for the world. Certain sectors like textiles, handicrafts, etc would stand to gain Employment Will Increase - Government says lot many jobs will be created for people - In India, where unemployment is a major problem, foreign companies that come to India, will offer jobs to Indians. For class discussion at NDIM

INDIAN RETAIL : DISADVANTAGES OF FDI Job Losses: Retail industry in India is the INDIAN RETAIL : DISADVANTAGES OF FDI Job Losses: Retail industry in India is the second largest employer after agriculture, Any game changing situation can lead to heavy job losses particularly in rural areas and small cities Power of Scale: Unfair competition and abilities of big retailers to sustain losses can lead to large scale exit of domestic retailers, especially the small family managed outlets. Prefer Localization: Indian retail sector including organized sector is still at an infancy and nascent stage. It is critical that the retail sector is allowed to grow and consolidate first, before opening to foreign investors The fallout in Thailand China: Government, opened its door to invite the large retailers. Government now forced to give financial assistance as local entities forced to lay off staff because Wal-Mart and others has been ruthlessly pressing down on the supplier’s margin. Market Power: Market dominance by foreign players may exert severe competition for domestic retail outlets. For class discussion at NDIM

INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST STARBUCKS – TATA: Already commenced operations in INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST STARBUCKS – TATA: Already commenced operations in India in Tier I cities and select outlets have opened up, and based on the success propose to open more outlets. BURGER KING: Huge expansion plans across India, China, and Indonesia as the management perceives that prospects are highly encouraging in emerging nations. BHARTI – WALMART: Currently, the Joint venture terms have not been finalized and the exit of top management on account of bribery charges has affected the brand identity of WALMART. The Cash and Carry Model continues to exist for the time being. For class discussion at NDIM

INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST IKEA: Swedish Furniture Chain – Unique retail INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST IKEA: Swedish Furniture Chain – Unique retail model – proposes to invest sizeable capital and operate independently. The business model is zero inventory carrying costs, DO IT YOURSELF APPROACH TESCO: One of UKs biggest supermarket chain and operates In various European Countries – Proposes to commence operations once policy guidelines are clearer and political uncertainties are diluted. RELIANCE – HAMLEY: An innovative super specialty retail venture between Reliance Group and HAMLEY’s of UK for setting up a retail venture in sports goods, toys, etc DECATHLON – One of the largest French Sport Retailer had shown interest in opening up stores in India, but have deferred their immediate plans due to policy uncertainties and high inflation trends For class discussion at NDIM

INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST UNIQLO and H & M: Japan’s Uniqlo INDIAN RETAIL : FOREIGN PLAYERS EVINCING INTEREST UNIQLO and H & M: Japan’s Uniqlo and Sweden’s Hennes and Mauritz (H&M) are set to be among the next global apparel labels that will have their own stores in India, although they are wary about high real estate prices and other constraints. COSTCO – Fifth Largest retailer and wholesale warehouse Chain displaying national and regional brands at affordable wholesale prices below traditional wholesale or retail outlets. Other firms like CARREFOUR, LOTUS ARTS (THAILAND) are planning to enter India. Some have expressed interest in operating in Tier II and Tier III cities for scalability and economies of scale advantages. Many organizations may look at city outskirts or even micro markets as their next big bet. For class discussion at NDIM

FOREIGN PLAYERS: GOING SLOW Finding quality retail space and affordable rentals may prove to FOREIGN PLAYERS: GOING SLOW Finding quality retail space and affordable rentals may prove to be a problem. However, Mumbai and Delhi are popular destinations due to relatively better business prospects. The rental cost/ revenue ration could provide to be unviable, especially when real estate costs are high and pay offs occur much later. Impending elections for 2 -14 induced Political uncertainties and lack of regulatory reforms leading to delays. India has not been able to attract sizeable foreign investments in comparison with countries like China and Malaysia within the region. Issues such as high inflation, large budget deficit and the slow pace of regulatory reforms are weighing down on business sentiment. For class discussion at NDIM

Oppositions (Critics) 1. Critics are vocal that it will bring in the demise of Oppositions (Critics) 1. Critics are vocal that it will bring in the demise of many small shops leading to massive unemployment & they command substantial following particularly amongst wide spread illiterate population 2. Big Giants will soon take over the control of the economy with superior powers & resources at their command

Oppositions 3. Local economy & suppliers will not benefit but will be pressurized to Oppositions 3. Local economy & suppliers will not benefit but will be pressurized to drop prices by Giants 4. India does not require foreign retailers but home grown companies & traditional markets can serve the purpose 5. Work will be done by locals, but profits will go to foreign companies

Benefits (Experts Opinion) • Benefits, if India is able to succeed in attracting organized Benefits (Experts Opinion) • Benefits, if India is able to succeed in attracting organized retail industry with required supports, is also significant as per opinion of experts • Will bring in massive employment in organized sector with benefits to locals (China experienced employment growth rates of 9 m over 3 yrs) albeit with changed skill sets

Benefits • Massive Infrastructure up-gradation will come in increasing the overall efficiency in the Benefits • Massive Infrastructure up-gradation will come in increasing the overall efficiency in the economy, which will reduce the current huge amounts of wastage occurring to the economy • Increased tax revenues and profits retained within the country for local portion. History in other countries negates critics • Multi brand stipulation requires 30% local sourcing which will benefit the local industry • Will benefit end consumers in the area of price, convenience & quality of products & packaging

FDI in Retail (Summary) • Take Aways • In India currently FDI in Retail FDI in Retail (Summary) • Take Aways • In India currently FDI in Retail is far below International Scene • GOI has announced policies to Invite FDI interests in this sector • There are lot of oppositions & pro’s as well in the opinion of Experts on either side

For the class • What is your opinion & What should be the future For the class • What is your opinion & What should be the future direction to maximize benefits to the country & minimize opposition fears? Thank You