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Retail: The evolution...

Jun 6, 2007

There are four different phases in the evolution cycle namely (1) the new entrant phase leading to the introduction of products and services (2) the strong growth phase led by consumer demand (3) the mature stage, and (4) the saturation to decline stage that leads to the search of new avenues to explore. We shall take a look at this evolution cycle in context of the retail sector. The first stage - Introductory stage: The new entrants create awareness about products manufactured, sold and services rendered by them and raise consumer expectations. In this stage, consumers are typically introduced to new products developed and services offered, which triggers consumption. During the introductory stage the primary goal is to establish markets and build up demand. Hence, during this stage firms incur higher set up costs, which coupled with low sales volume, makes it a period of negative profits.

The second phase - Growth stage: This is the period of rapid revenue growth as customers become aware of products. This leads to strong growth led by strong demand by the consumers. During the growth stage, the goal is to increase consumer base, cater to customer preferences and increase sales and profitability.

The third phase - Mature stage: This is the most profitable stage. While sales continue to increase there is a slowdown in the growth rate. At times, the competition is immense at this point due to which product differentiation becomes a problem. Competition may lead to a decrease in market share or stable to low prices. Intense competition also forces suppliers to invest in back-end operating efficiencies. Thus, during this stage the primary goal is to maintain market share and extend the life cycle.

The fourth phase - Saturation to decline: This is the stage where sales decline as the markets become saturated, customer preferences change and technology becomes obsolete. This is a stage where profitability is generally impacted on account of declining sales or no growth and high costs. Firms who have achieved strong brand loyalty may be able to maintain profitability or at least are not affected as compared to their peers. Thus, this is the stage where firms generally discontinue the products or explore new markets by way of inorganic growth opportunities.

In the same way organised retailing in most economies especially the developed economies have passed through these 4 different phases and have reached a saturation point. This has led them to scout for new opportunities in the developing economies where organised retailing is at a burgeoning stage.

Although retailing has been around for millennia, the organised retailing concept evolved in India when the country began opening up its economy. Organised retailing in India entered the first phase of evolution during the 1980s as awareness among consumers was created by the textile sector with the set up of retail chains e.g. Bombay Dyeing, Raymond. However, they were not the pure form of retailers as they engaged in manufacturing and retail sales. But in the latter half of the 1990s, the pure retailers, who were not interested in manufacturing, entered the markets introducing the concept of discount stores in India. Organised retailing in India is developing with the emergence of modern formats such as department stores, discount stores, supermarkets, convenience stores, fast food outlets, speciality stores, warehouse retailers and hypermarkets. The organised retailing gained momentum as retail stores or retail chains were built such as Crossroads, Food World, Planet M and the like.

Currently, in India, the organised sector is entering the second phase of evolution as customers have been introduced to the concept of increased availability of shopping opportunities provided by the retailers. Indian consumers are becoming more demanding with rising income levels, changing lifestyle, increasing population of working women, new job opportunities in emerging services sector such as IT enabled services and shift in the composition of the Indian population (the age group of 20-49 i.e. the working population with high purchasing power).

As the sector enters the third phase namely the mature stage, players will have to strengthen the supply chain management, as quick response to changing customer preferences will be the key growth driver. Excellent retail supply chain management revolves around understanding and balancing three key dimensions of availability, inventory and cost, while reaching out to end users. Managing these trade-offs efficiently can result in supply chains that will improve business performance. Apart from this, retailers may also need to resort to cost cutting on account of fierce competition, maintain supplier relations, provide value added services, maintain brand image, retain customer base and attract more customers. Going forward, retailers will need to concentrate more on supply chain management while expanding reach, as it will be a strategic differentiator that will provide a competitive edge.

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