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Retail: Huge scope ahead... - Views on News from Equitymaster
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  • Jun 20, 2007

    Retail: Huge scope ahead...

    Retailing has played a major role the world over in increasing productivity across a wide range of consumer goods and services. In the developed countries, the retail industry has developed into a full-fledged industry where the organised sector accounts for almost 80% of the total retail trade.

    In contrast to this, in India organised retail trade accounts for merely 3% of the total retail trade. The retail sector is very fragmented in India, with over 12 m outlets operating in the country and only 4% of them being larger than 500 square feet in size. This is in comparison to 0.9 m outlets in the US, catering to more than 13 times India's total retail market size and thus further highlights the high degree of fragmentation of the retail sector within India. However, post liberalisation, favourable economic reforms and the recent changes in the country's economic fundamentals have driven the growth of the retail sector. In India, organised retail is now picking up momentum.

    Organised retail penetration
    Country %
    USA 80
    West Europe 70
    Brazil 40
    Thailand 40
    Korea 35
    Taiwan 35
    China 20
    Malaysia 20
    Poland 20
    India 3
    Source: Arvind Mills, company presentation
    As mentioned earlier, the penetration of organised retail in India at 3% is very low when compared to developed countries where organised trade makes up for over 70-80% of total trade. It is also lower when compared to other emerging markets or developing economies like China, Thailand, South Korea and Philippines, all of whom have organised retail accounting for around 20% to 40% of the total trade. Even amongst the BRIC countries, India fares poorly on this parameter. As per the AT Kearney report 2007, the top five grocery retailers have 21% market share in Brazil, 10% in Russia, 3% in China, 50% in developed countries and in India they account for less than 1%. These figures reveal the relative underdevelopment of the retail industry in India and huge opportunities that can be capitalised upon.

    Though the low penetration level indicates tremendous scope for growth of the retail sector in India, it also raises the question as to what has led to the slow development of organised retailing in the country. The economy as a whole started growing post liberalisation and has picked up momentum in the recent past with growth having been fuelled by the expansion of the service sector. India is dispersed, widespread and labour intensive country with a population of 1 bn. To cater to the needs of such a densely populated country, having an efficient supply chain management is critical. Even today the sector does not enjoy industry status, automatic approval is not allowed for foreign investment in retail, which in turn limits capital investments in the supply chain infrastructure and many other activities such as manufacturing, food processing, packaging and logistic services. Also, consumer credit penetration at 12% to GDP is very low in India, as compared to 50%+ in South East Asian countries and above 100% in the US.

    However, with the boom in financing one can see a radical change in the Indian consumers' mindset regarding credit, which has resulted in an increase in spends on housing and consumer durables such as two-wheelers and cars. The use of plastic money (credit and debit cards) has increased significantly in the last 3-4 years. The ease of payments (ability to spend without cash) has also led to an increase in total spending on shopping and eating out. Increasing credit friendliness and a changing consumer mindset will increase penetration of consumer credit, which in turn will augur well for the growth of the retail sector. Further fillip is likely to come with foreign investment, which will not only bring the required capital but also better technology and industry best practices. Currently, 51% of foreign investment through the automatic route in a single brand is allowed. However, foreign players are now taking the joint venture and the franchise route to mark an entry into India. The Government also proposes to further liberalise the retail sector by allowing 51% FDI in consumer electronics and sports goods.

    A healthy economic growth, increasing disposable incomes among the middle class, changing consumer tastes and preferences and a young population with a propensity to spend are some of the key factors are driving and will continue to drive growth in the organised retail market in India. Besides this, as the retail services improve, easy financing options and changing consumers' mindset regarding credit will give further fillip to organised retail going forward.



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