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Retail: Challenges galore - Views on News from Equitymaster
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Retail: Challenges galore
Jul 4, 2007

The fast pace at which the Indian retail industry is growing poses a host of challenges to many companies. To maintain a competitive advantage in the face of increasing competition, retailers especially in India need to have an efficient supply chain to control inventory costs, meet escalating customer demands and all the while maintain operating margins. In this article, we shall take a look at the key challenges faced by the retailers across various segments. No industry status: Retailing does not come under the purview of any specific ministry. There is no single body responsible for this industry. As a result, the growth of this industry to that extent has been impacted.

Supply chain related issues: For a country having an area of 3.28 m sq. km and a population of 1.8 bn, the basic logistics infrastructure required in terms of roads, rail network, ports and airports is inadequate. Logistics play an important role in distributing products to all corners of the country. Due to its vast territory implementing a smooth supply chain model poses a challenge. In developed countries like the US, logistics costs comprising transportation costs account for 7% to 9% of the cost of the final product, warehousing cost accounts for about 1% to 2% and inventory holding costs account for about 3% to 5%. In developing countries, logistics costs are estimated to be higher at around 15% to 25% of the final cost of the product due to lack of adequate logistics system. In India, logistics cost is around 13%, comparatively higher than the developed countries (Source: Indo-Italian Chamber of Commerce).

The poor state of the infrastructure leads to pilferage on account of poor road transport, high cost of haulage per million tonne for railways, quality and productivity issues in cargo handling at ports and congestion, etc. To overcome these issues, the private sector is gearing up in terms of reducing transportation costs, increasing stake in the business of professional service providers, investing in logistics directly or through partnerships and investments in systems and technology.

Availability of requisite space: Despite the huge spurt in the construction activity in the country, the demand for mall space would remain unmet in the coming years. Availability of land at the right location and the price to build or lease retail space is a major concern. A right location that will provide high visibility and easy access, while possibly commanding higher land usage fees, may hold significantly more value than lower cost sites that yield fewer footfalls. The supply of quality retail space falls short of demand. Thus, lack of quality retail space adds on to costs and in turn impacts margins of the players.

Lack of trained human capital: Retailing is the largest employment generator world over and in India offers employment to almost 8% of the population directly and to a large number indirectly. With the growth in organised retail there is an increased need for talented people to plan for merchandise, logistics and to manage the supply chain, information and stores. Since Indian retailing is at a nascent stage of development, it has to contend with a shortage of trained manpower and a high attrition rate.

Capital-intensive industry: The industry requires huge capital for buying/leasing land, furniture and fixtures, IT systems, quality control systems, vendor development and infrastructure for warehousing, storage and transportation. Further, automatic approval is not allowed for foreign investment in retail, which in turn limits capital investments. Going forward, 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.

Regulatory issues: Reforms by India in opening up its economy have greatly improved trade prospects – but major barriers still exist, with tariff rates being the highest in the world. Under the provisions of various Government statutes, each of the department stores is required to obtain and regularly renew certain licenses/ registrations or permissions to operate department stores. Hence the companies are governed by the various Shops and Establishments Acts as applicable in the states where they have stores. Stringent labour laws and the disparate state-wise sales tax are further adding to the woes of organised retailers.

Summing it up…
Going forward, the factors that influence the success of a retailer will be the right location with trained manpower, efficient and proper technology, products with a distinct differentiation, a strong value proposition and an efficient supply chain management.

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