How to Beat the Global Meltdown? : Alternative Strategy for the Indian Retail Sector

In recent times, India is consid ered to be one of the fastest grow ing economies in the world. The surging economic growth has brought increased momentum and great buoyancy instilling into the economy a desire to be a dominant player on the global stage. Though agriculture, automotive, pharmaceuticals, manufacturing, information technology and service-based industry, as well as the export industry are considered to be the major sectors, the Indian retail sector forms a significant 13% of GDP. (Retail & Consumer Industry by PricewaterhouseCoop ers, 2008)

Retail is taken from the French word `retailer' which means to break up or to `cut a piece off'.

A retailer may be defined as a `dealer or trader who sells goods in small quantities' or `one who repeats'.

Oxford Dictionary explains `Retail' as the sale of goods to the general public.

Retail is any business that directs its marketing efforts towards satisfying the final consumer, based upon the organization of selling goods and services, as a means of distribution. (David Gilbert)

Retailer acts as the most important link in the distribution channel, as the actual sales takes place.

Specialty Stores: These stores offer a wide selection of specially chosen goods pertaining to a single product line. These are marked by narrow product line but a wide assortment of choice within this product line.

Department Stores: They are general merchandise retailers with considerably large retail space. Separate sections are allocated for toiletries, food stuff, body care products and so on.

Discount Stores: The discount stores are also stores with large area and many products are similar to those in the department stores, except that these stores offer products at less than the normal retail price.

Supermarkets: These are much larger (size in the range of 50,000 sq ft and above) than departmental stores and discount stores. They are based on the concept of self-service. The customers can pick up a product of their choice from the multiple brands displayed on the shelves.

Hypermarkets: These are larger supermarkets housed in areas ranging from 200,000 to 300,000 sq ft, stocking goods of a wide range to meet even the smallest of home needs.

To the external world, this harmonious coexistence of seeming contradictions is one of the most confusing aspects of the Indian consumer market. But to me, it signifies our country's openness to change and its ability to add new dimensions to its social structure without losing the old ones. This opens up new and unique opportunities as well as brings forth challenges for marketers and retailers.

The Indian retailing story is much similar to that of many other sectors where the full growth potential remains underutilized. The reasons are not too difficult to seek! The size of the Indian retail sector is shown in Chart 1.

India's sunrise retail sector is witnessing a major transformation as traditional markets make way for modern and indigenously developed retail formats. According to the Indian Retail Report findings, the organized retail sector, which was a miniscule 3% of the overall domestic retail market in 2004, has been growing at over 36% per annum during the last couple of years and is now valued at Rs. 48,500 cr, that is 4.7% of the estimated $230 bn Indian retail market in 2006. There is, thus, a vast market yet to be tapped.

The government has to come out with a clear-cut vision for the sector yet. The debate of whether or not to allow Foreign Direct Investment (FDI) in the sector continues without any immediate hope. What should any CEO do in such a situation?

The list of major hurdles must be reviewed first before attempting to find the possible solutions:

FDI Debate - To Allow or Not?

FDI upto 51% is currently allowed in the single product retail chain, cash carry format. The issue of relaxing the above limit in selective areas is under debate.

No industry status to retailing. While this is a well-known fact, the fear factor in the minds of the small and medium-sized shopkeepers about the threat of big business driving them out from business is retarding the progress in this issue. The recognition of retail marketing as an industry is bound to benefit the big and the small alike, through regular flow of bank credit, availability of cheap land, etc.

Multiple taxes - state and central.

Multi-level taxes in India like central levies and state levies make organized retail expensive.

Availability of land, rent control, and pro-tenant laws.

The tenancy law in India protects the tenants' interests more than that of the landlords. In India, therefore, many landlords are reluctant to let out their properties for commercial establishments as eviciting them legally is a long-drawn process and hence availability of rented premises on a long lease is very rare.

Non-availability of skilled/trained staff, training facilities.

The complexity in the retail operation, especially those of organized retail chain with stores across different and varied geographical and culturally different locations requires trained personnel with very high adaptability to effectively handle customers at the front end and vendors at the supply end. Inadequacy of trained staff is a major challenge.

Infrastructure inadequacies and bottlenecks like absence of motorable roads, refrigerated containers, and carriers pose serious problems limiting the quality standards.

Unorganized vs. Organized - conflicts, fear of labor displacement. Opposition from the unorganized retail sector against the development of the organized retail for fear of their livelihood being jeopardized. Political opinion is divided on this issue.

The current global meltdown has provided a good opportunity to the Indian CEOs to look afresh at the above issues and chalk out alternative growth strategies. The encouraging factor, however, has been the relatively superior performance of the retail sector over many others in the last one year. While the output of major industries has declined considerably, the retail sector seems to have shown a contrary trend. The CEO can now focus on taking the retail sector to the rural markets to capture the untapped domestic consumer demand. Of course, the western model needs to be adapted to suit the Indian markets. For example, the organized retailer could forge a `buy-sell' relationship with the local farmers to source their farm output to meet the requirements of the national markets and sell branded/private label products to the rural markets in exchange. By adopting this approach, the economy will benefit by generating income for the rural India, which forms the backbone of the Indian economy. The artisans living in remote rural areas are gradually fading away for want of an assured market for their skills. The Indian traditional skills are world renowned but not properly marketed. If rural artisans could be gainfully employed by the organized retailers, the benefit will be mutual. First, with the creation of a market for the traditional rural products, income can be generated for the rural India. Such income would automatically provide a ready market for selling the consumer products.

- Indian Retail Report 2007

The prices of land for setting up hypermarkets or huge malls near big towns have risen phenomenally since 2004 to discourage new investments. The escalating rentals increase fixed cost element in the organized retail format. The solution perhaps lies in working out profit-sharing arrangements to overcome this problem. Under this arrangement, the retailer pays a mutually agreed minimum fixed rent and agrees to share the profits based on the business achieved. Thus, the landowner is roped in as a business partner so that he enjoys a long-term relationship. Such an arrangement can take care of any temporary ups and downs in the economy. Several malls in Kolkata showed the way by replacing pure lease agreements with rent-cum-profit- sharing arrangements during the slowdown. This is a win-win situation for both the parties - the landowner and the retailer.

The modern organized retailer is viewed with a lot of suspicion by the small traders from fear of unfair competition. The solution perhaps lies in the small traders relying on more personalized services to retain their customer base rather than matching the offering of Organized Retail Marketing (ORM). These two can coexist if they focus on their respective areas of strength rather than fighting each other. For example, the small traders can extend the reach of the organized retail by becoming channel partners in areas otherwise not easily accessible to ORM. The small stores or kirana stores can work together with the organized retail to blend their strengths and complement each other in catering to different segments of the customers. This process can result in upgrading the next door kirana stores to the level of `super kirana stores'.

Lack of trained or skilled manpower is a serious problem faced by the ORM. This, however, needs a long-term solution. ORM has to develop the facilities to generate the required resources over a period of three to five years. Private-public initiatives to set up training facilities can solve the problem effectively.

Further, ORM has to convince the governments to recognize the retail sector as an industry by highlighting the economic and social benefits that are possible by the expansion of ORM to smaller towns in the country. The major benefits accruing to the states and the center will be by way of higher realization of indirect taxes as the small traders often may not record their sales or even if they do, the incomes are so small to be of any significance to the revenue. By encouraging organized retail, state revenues are certain to improve. The availability of bank credit will become a reality with the grant of industry status to the retail sector. Allotment of government land at reasonable prices will make ORM to set up hypermarkets in the vicinity of major towns. In places like Mumbai, many sick industrial units have vast unused lands for several years. ORM can possibly attempt to set up hypermarkets in such lands and bring idle land to productive use.

The inadequacy of facilities, such as containers with cold storage facility, warehousing facilities at the railheads and on highways has to be addressed before the retail can really take off to the rural towns. In this area also, if the ORM can raise cheap venture capital, the long-term benefits are bound to be realized. Private-public partnership participation can solve such problems. If these problems could be addressed on a war footing, the retail can cash in on the growing demand for ready-to-eat food items and value-added products by the growing urban and semi-urban middle class.