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A tale of retailing - Views on News from Equitymaster
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  • Sep 8, 2004

    A tale of retailing

    The Indian retailing sector seems to be at an inflexion point where the growth of organized retailing and growth in the consumption by the Indian population is going to take a higher growth trajectory. The Indian population is witnessing a significant change in its demographics. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector is going to be key growth driver of the organized retail sector in the country.

    As far as the structure of the sector is concerned, the Indian retail sector is highly fragmented as compared to the developed as well as the other developing economies. The chart below shows the share of organized retail in the Indian economy and other economies in the world. This shows a great potential for the organized retail industry to prosper in India, as the market for the final consumption in India is very large. According to various research agencies, the total private consumption market in India is about Rs 15 trillion out of which about Rs 8.5 trillion is towards retail consumption. While food and grocery represents about 6.5 trillion of this consumption clothing comes second with consumption of about Rs 600 bn.

    Source: Draft Prospectus of Shopper's Stop IPO

    From the chart above it can be inferred that the retail industry can be divided into organized and unorganized sectors with different characteristics. Next door shops, Kiosks, street markets and vendors can be classified as the traditional and unorganized part of the industry while, organized retail can be the large shopping malls with ample space for the shoppers and variety of products, which aim at providing a unique shopping experience to the shoppers. While the unorganized sector is highly competitive with low rental and property costs and cheap labour, organized retail has to cope up with costly property and relatively skilled and costly labour. The requirement for technology is also essential for an organized shopping mall, which further increases costs. However, due to its sheer size, organized retail derives operational efficiencies while simultaneously catering to rising consumer aspirations.

    The basic advantage of a organized retail sector is the size of the players which leads to economies of scale on procurement and lower logistics and marketing costs while delivering better value to the customer in terms of lower price, better quality greater selection, improved service and in-store ambience.

    Evolution of Indian Retail Industry

    The Indian retail sector has been evolving in line with changing customer aspirations across product groups at the same time adopting a modern format of retailing. Organized retail sector goes through four stages of evolution. In first stage new entrants create awareness about the modern form of shopping and raise consumer expectations. In the second stage new players come into industry and the industry changes its growth trajectory accelerating the speed of growth. In the third phase operational efficiency and synergies matter to the retailers and in fourth stage consolidation of the industry takes place.

    Currently, the Indian retail sector is going through the second phase when the growth of the industry is going to be rapid. The changing aspirations of the Indian population with their increasing pocket size has led to more demand and the latent aspirations of these consumers will drive the growth of the sector. In the first stage of evolution the sector has grown very fast and the floor area under retailing space has grown at a rate more than 100% per year in last five years.

    Source: Draft Prospectus of Shopper's Stop IPO

    With rapid expansion plans, companies operating in the retailing business are likely to tap the equity market for funds to expand operations. While the retailing sector is poised for rapid growth in terms of revenues, it must be noted that the players in the sector, who have experience in terms of catering to the market and who have high brand recall, have better chances of succeeding. While Shopper's Stop has already filed for an IPO, we may see other players tapping the equity markets in the near future. Since success in this sector is based on fulfilling consumer aspirations and since investors have a chance to experience organized retailing first hand, they are in a better position to take an informed decision not just as a consumer but also as an investor.



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