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

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Retail sector: SWOT analysis Part III
Oct 15, 2008

In our earlier articles, we saw why everyone is eyeing Indian organsied retail market and what are the problems that need to be tackled before one takes up expansion plans. Despite hurdles, business houses and corporates have not shown signs of lesser aggression on the expansion front. Probably, the opportunity in the long-term is too enticing for them to not miss it. Let us see why.

  • Read - Retail sector: SWOT analysis - Part II

    Low penetration: India is currently the fifth largest retail market in the world and the market size in 2007 was estimated at US$ 330 bn. In the developed countries, organsied retail, which has developed into a full-fledged industry, accounts for more than 80% of the total retail trade. On the other hand, in India, organised retail accounts for 8% of the total retail trade. The organized retail penetration has increased from merely 3% in 2004 to 8% in 2007. Still it is very low compared to other nations. As seen in the adjacent table, even among the developing nations or BRIC countries, India fares poorly in terms of penetration of organised retail. This, more than anything underlines the tremendous scope for growth in organised retailing in the years to come.

    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

    Untapped urban aspirations: 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. Moreover, over 80% of the organised retail trade takes place in the urban areas, which further highlights the high degree of concentration of the retail sector within India. This indicates huge scope to tap the potential in other unexplored cities such as Tier II and Tier III. The existing as well as new entrants can venture into Tier II and Tier III cities to cover the prospective markets.

    The concentration of retail in Tier I cities may be the result of urban population, comparatively better infrastructural facilities, availability of funds etc. However, on account of media proliferation, there is an increased awareness in Tier II and Tier III cities and the same is eroding the difference between the metros and other cities as the consumers are also becoming selective with regards to the quality of the products and services. Moreover, infrastructural conditions in other towns and cities are developing along with real estate development, which has supplemented retail space expansion. Infact, availability of quality retail space in metros has been a problem. Considering these factors, few retailers have moved to Tier II and Tier III cities, while few retailers especially in the luxury segment are conducting feasibility study to take their businesses to the next frontier.

    Changing attitude: Historically, Indians have not been the ones to splurge on luxury items. However, with rising income levels, media exposure and willingness to experiment new things shopping habits have been inculcated. With the changing lifestyle, consumer needs change. The attitude of consumers has changed with the fast moving lifestyle and with increased instances of working population. People’s acceptance of concept of shopping under one roof has provided an opportunity for organsied retailers to expand and penetrate. On the other hand, willingness to try new things and look differently has increased spending on health and beauty products apart from apparels, food and grocery items. Thus, opportunity exits for all types of retail segments. Further, the increasing consumerism in India has also paved way for private labels as affluent consumers are showcasing preference for branded products.

    Sourcing, entry ticket of global retailers : While the front end provides enormous opportunities to retailers across formats and verticals, backend activities such as sourcing are also not lagging behind. Even though government has increased spending on infrastructural activities, the higher cost of logistics has discouraged retailers to develop their own sourcing business. As a result, retailers have invested or tied up with regional players for sourcing activities.

    Sourcing activity is the backbone of the retail sector, as retailer is the link between manufacturer and end consumer. Effective sourcing is also one of the factors that decide success of the retail business. On account of growing retail segment (front end activities), lack of sourcing infrastructure such as cold storage facilities and policy issues, (FDI limit of 51% in single brand retailing) global players eyeing Indian markets have opted to enter Indian orgainsed retail through cash and carry business. Thus, backend activities, acting as an entry pass, are providing a window of opportunity to global retailers to tap India’s organsied retail sector indirectly.

    To conclude... Retailing in India has witnessed tremendous growth in the last few years. Organised retail that touched US$ 25.4 bn in size in 2007 ((Source: IBEF) is on a high growth path and is expected to continue to grow at the rate of 40% over the next few years. As far as modern retail trade is concerned, the customer is far more ready than what the companies and industry has to offer, with signals emerging from both metros and non-metros. There is immense opportunity, as consumption levels are extremely low and aspiration levels high.

  • Also read - Are speculators to blame?

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