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Retail sector: SWOT analysis - Part II - Views on News from Equitymaster

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Retail sector: SWOT analysis - Part II

Oct 8, 2008

In our previous article, we discussed about the strengths of the retail sector. The current boom in the retail sector has been the result of domestic retailers lining up huge expansion plans and international players eyeing India’s organised retail sector, the changing attitude of consumers and demographics that have raised the growth potential of the sector. However, if the sector has to maintain its shimmer, it will have to address few of the following issues.

  • Read – Retail sector: SWOT analysis - Part I

    Lack of industry status and regulatory issues: The sector does not come under any specific ministry or no single body is responsible for the growth of the sector and tackle the issues regarding tax structures and operational issues. Owing to the lack of industry status the sector cannot avail of organsied financing and fiscal benefits. Lack of industry status has trapped the sector in a tangle of regulatory issues such as varied sales tax structure. The companies are governed by the various Shops and Establishments Acts as applicable in the states where they have set up stores. Moreover, they need to obtain and regularly renew certain licenses/ registrations or permissions to operate department stores. This tedious process has a cost attached to it, which eats into the thin margins of the retailers.

    Inefficient infrastructure and supply chain issues: Logistics play an important role in distributing products to all corners of the country. Retailer is the final link in the supply chain. However, before the finished goods reach the end consumer they need to be stocked, sourced from the producer or distributor. The movement as well as stocking of raw materials, inventory and finished goods from the point of origin to the end consumer necessitates efficient supply chain system. Moreover, retailers, to be competitive, need to ensure that the goods reach the consumer when desired and in proper condition, which again calls for effective and efficient SCM. However, in India the players are largely dependant on traditional supply chain network that has host of intermediaries. On the other hand, in developed countries players rely on third party logistics providers. However, the same is lacking in India on account of poor state of the infrastructure such as road transport, electricity, a well connected cold chain and warehousing infrastructure, ports etc. The poor state of the infrastructure leads to pilferage during transportation. The physical wastage occurs because of multiple points of manual handling, inadequate packaging and cold storage facilities. The deterioration of quality and cost of intermediation on account of issues in cargo handling are the other issues that also need to be tackled.

    Lack of trained human source: With the orgainsed retail sector coming up, there will a need of a large skilled workforce in various specialised areas at varied levels in the industry. The players are facing the problem of availability of trained human capital and this challenge is expected to amplify going forward as there not many institutes that offer comprehensive courses on retail. While retailers are facing problems in finding trained manpower, they will also have to shell out more to retain the ones on the payroll.

    Capital intensive, fixed as well as working: Retail is considered as a working capital intensive industry on account of huge funds required for the movement of goods from the producers’ point to the end consumer. Moreover, there is a lag time between payments made to the suppliers and receivables on purchases. Depending upon efficiency, brand, relationship with suppliers and the phase of growth, working capital days differ. It also depends upon the type of model such as direct selling or franchisee model. While considerable funds are blocked on account of stocking goods, huge amount of funds need to be deployed in leasing or acquiring space, developing it, and the ambience.

    It has been observed in this industry that successful retailers have been able to keep their inventory levels as low as a month’s inventory, while those in the growth phase have witnessed the need to maintain inventory levels over three months.

    At the mercy of developers: Though the success of a retailer is backed by its ability to satisfy consumer needs while being cost effective, the availability of land at a right location and price to build or lease retail space is also of a prime requirement. The right location enables the retailer to attract more walk-ins or increase footfalls. The recent boom in the real estate and construction activity is bridging the shortage of quality real estate. However, delay in land acquisitions and clearances, and delivery of the agreed retail space by builders has deferred the store roll out plans of the retailers thereby impacting their growth. Moreover, the increase in demand for retail space and higher construction costs have inflated the rental rates that exert further pressure on margins.

    The expected correction in real estate prices, which seem to have started taking place, would enable few retailers to maintain the high lease contracts and enter or renew for a better price. Those, who have been taking cautious steps and sitting on a huge cash balance may also buy out properties. However, economic slowdown is impacting discretionary spending. While revenue per sq feet is not picking up, escalating costs and high interest expenses on account of huge capex incurred to expand retail space is exerting pressure on margins. Though, most of these retailers have signed up considerable retail space at lower than the current market rates, delay in execution from the developers’ side is impacting their growth.

    To conclude…
    While retailers are investing or tying with the suppliers of back end activities to ensure smooth functioning, the success of the retailers will depend upon how efficiently they are able to source and put in place proper technology apart from the above-mentioned issues. The sector has adopted IT solutions such as enterprise resource planning. However, it further needs to expand the usage for IT products and solutions such as RFID (radio-frequency-identification) and warehouse management systems to ensure better supply chain management and improve the overall business model by improving productivity levels.

  • Also, read - " All the world’s a stage"

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