Investments plus planning spell success… - Views on News from Equitymaster

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Investments plus planning spell success…

Mar 3, 2001

In big cities and towns a quiet revolution is taking place in the mind of an average Indian consumer. With rising dual income nuclear families, economic prosperity is on the rise. But economic prosperity has its own pitfalls. This rising mass of professional population is hard pressed for time, and as such there is growing urge to spend ‘quality’ time. The weekends have become very crucial for them to spend time with their families, to relax and enjoy and also finish the weekly shopping. As a result, the concept of super malls and retail chains is getting a push, where the consumer can buy everything at one stop, relax with their families and get value out of every rupee spent.

The concept of super malls is not new to India. The Government run ‘Sahakari Bhandars’ and ‘Apna Bazaar’ have been part of the Indian consumption landscape for over four decades now, but the quality and variety available left much to be desired. Various business groups setting up shop to fill this gap. The last five years have seen a spurt in retail chains being opened in the 5 metros in India. But the fever is spreading to towns too.

Among the well known stores that have entered are the Tata promoted Westside chain, Ajay Piramal promoted super mall Crossroads, RPG Group’s ‘Musicworld’ music stores and ‘Foodworld’ (formerly Spencer) supermarket stores, and Shopper’s Stop. But the real question is, what has drawn these conglomerates into the humdrum business of retailing? How do the numbers look? Let’s take a look.

Retailing is the second largest employer in India after agriculture. But it is also the most fragmented industry (12 million retail outlets). Half of the retailers are unorganised low cost kiosks and as such the organised retail market in India is still at a nascent stage. The industry size is about US$ 1,075 million currently. But this is a miniscule 0.5 percent of the overall retail business in India of about US$ 200 billion.

If organised retailing captures even a modest 10 percent of the total existing market size, it will send organised retailers laughing all the way to the bank. But it is easier said that done. To achieve the 10 percent target, the industry players would need to invest an estimated US$ 2.2 billion over the next decade at the rate of US$ 215 million per year.

But organised retailing is not only about investments, but it also brings with it the headaches of efficient logistics management and keeping the franchisees together in difficult times. This is something, which the Indian retailers are finding out the hard way. The Piramal group promoted Crossroads super mall is one of the largest in India. But recently it found some of its franchisees leaving the mall, as they did not find the proposition too promising. Chain retailing is profitable only when you gain a critical mass. The larger you are, the more economies of scale. So sourcing gets cheaper, so do distribution costs and these benefits are passed on to the consumer. The Crossroads mall though large, has apparently not got the franchisees a critical mass.

But all this does not mean that organised retailing in India will turn out to be a losing proposition. What it really signifies is that the market is there for the taking but not blindly. Huge investments are essential but planning is the key to the retailing success in India.

The coming years are likely to see another round of entrants not only in the super malls and regular retail chains, but also in specialized products like music stores, greeting cards and gifts stores, food stores, eateries (pizza joints, McDonalds’) and apparels. This should be good news for the Indian shopping freaks. But this is the long-term scenario.

In the recent past, the slow pace of growth in India’s Index for Industrial production (IPP) has hampered the investments in all sectors. But the thrust of budget 2002 to kick start growth in the economy should improve consumer confidence and consequently improve the investment scenario for this industry.

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