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Retailing Sector Analysis Report 

[Key Points | Financial Year '16 | Prospects | Sector Do's and dont's]

  • India is the 5th largest retail market in the world. Retailing in India accounts for over 10% of the country‚Äôs Gross Domestic Product (GDP) and around 8% of the employment (Source: IBEF). From US$ 600 billion in 2015, the Indian retail market is expected to nearly double to US$1 trillion by 2020. Retailing has played a major role over the world in increasing productivity across a wide range of consumer goods and services. The retail sector in India is dominated by the unorganized retail trade. This is in contrast with the developed countries where the organised retail industry accounts for almost an average of 80% plus of the total retail trade. This highlights a lot of scope for further penetration of organized retail in India.
  • The sector can be broadly divided into two segments: Value retailing, which is typically a low margin-high volume business (primarily food and groceries) and Lifestyle retailing, a high margin-low volume business (apparel, footwear, etc). The sector is further divided into various categories, depending on the types of products offered.
  • Transition from traditional retail to organised retail is taking place due to changing consumer expectations, growing middle class, higher disposable income, preference for luxury goods, change in the demographic mix, etc. The convenience of shopping with online stores (online shopping), multiplicity of choice under one roof (Shop-in-Shop), and the increase of mall culture, etc. are factors appreciated by the new generation. These factors are expected to drive organized retail growth in India over the long run. The online retail is growing at a fast pace. Online retail in India is expected to be at par with the physical stores in the upcoming few years, driven by robust investment and rapid increase in the number of internet users.
  • The overall retail market in India is expected to grow at 12% growth rate per annum, driven by growing urbanization, rising income, younger demographics and rising aspirations of the middle class. Modern trade is going to expand as twice as fast at 20% per annum and traditional trade is expected to grow at 10% (Source: IBEF).

How to Research the Retailing Sector (Key Points)

  • Supply
  • The retail industry is now leveraging the digital retail channels (e-commerce), which allows them to spend less on real estate while reaching out to more customers in Tier II and Tier III cities. Supply is also influenced by some international players entering domestic markets.
  • Demand
  • Growing urbanization, increasing disposable incomes, changing demographic profile, changing consumer tastes and preferences are some of the factors that are driving demand in retail market in India.
  • Barriers to entry
  • Lack of quality, retail real estate supply, non-supportive FDI policy, economic backdrop, regulatory issues are some of the factors acting as an impediment to the spread of organised retail in India. Since it is a capital intensive industry, access to capital also plays an important part for expansion in the space.
  • Bargaining power of suppliers
  • The bargaining power of suppliers varies depending upon the target segment, the format followed, and products on offer. The unorganised sector has a dominant position in the total retail market in India. There are few players who enjoy an edge over others on account of being established players and enjoying brand distinction.
  • Bargaining power of customers
  • High due to wide availability of choice and cheaper options available across various channels. Also, low switching costs, price sensitiveness, and easily accessible information of a product and its price gives customers high bargaining power.
  • Competition
  • With India being an attractive retail market, there is a high level of competition. Competition is characterised by many factors, including assortment, products, price, quality, service, location, reputation, credit, convenience offered, etc. Aggressive e-commerce and digital retailing coupled with new entrants such as business houses and international players are intensifying the competition at a rapid pace.
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    Financial Year '16

    • The financial year 2015-16 stood as another year of mixed trends. With economic growth gaining momentum in 2016, retail sector in India witnessed some improvement in consumer sentiments and business confidence. The growth during the year came on the back of decreasing inflationary pressures, the easing of monetary stance by the Reserve Bank of India (RBI) and a more stable policy environment. However, the year also saw challenges with subdued exports on account of lower global demand, fluctuating rupee against the US dollar, weak rural economy on the back of poor monsoons and drought and the resultant tepid demand conditions in the economy.
    • On the consumption side, several consumer facing industries witnessed single digit growth rate in FY16. However, there is optimism that consumption will be on a rising trend ahead on the back of various developments such as the Seventh Pay Commission, good monsoons, the passage of GST, etc.
    • The year saw emergence of online market places across a whole range of categories with aggressive discounting strategies funded by overseas investors.
    • Cumulative Foreign Direct Investment (FDI) inflow in retail for March 2016 stood at around US$ 537 million. The same is expected to increase with 51% FDI in multi-brand retail being approved. Furthermore, one shall also note that FDI limit in single-brand retail is raised to 100%.
    • With investment of around US$ 511.7 billion, the first half of 2016 witnessed the highest annual private equity (PE) in the retail sector, since 2008 (Source: IBEF).

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    Prospects

    • Retail industry has been on a growth trajectory over the past few years. As per BCG Retail 2020 report, Indian retail market industry is expected to be worth US$ 1 trillion by 2020 (from US$ 600 billion in 2015).
    • A significant new trend emerging in retail sector is the increase in sales during discount seasons. It has been observed of late that sales numbers in discount seasons are significantly higher than at other times. This is prompting retailers to start discounts earlier and have longer than usual sale season. Also, concepts such as online retailing and direct selling are becoming increasingly popular in India thereby boosting growth of retail sector.
    • E-commerce is probably said to create a revolution in the retail industry in the years to come. With the rapid expansion of e-commerce, there can be seen a trend of ever increasing choice of products at lowest rates. All of this will also lead to a further competition in the industry.
    • One of the major areas supporting the retail growth in India is the E-commerce industry. The industry is projected to touch US$ 100 billion by 2020 growing from US$ 30 billion in 2016. With growth in the e-commerce industry, online retail is estimated to reach US$ 70 billion by 2020 from US$ 3 billion in 2014. Wide assortment, attractive pricing, cash-on-delivery, hassle-free returns, etc., have been the key enablers for e-commerce in India so far.
    • There is also an upward trend seen in modern retailing. Driven by western culture and urbanisation, it has become a part of day to day lifestyle. There are more than 500 operational shopping malls in India having thousands of brands across food, fashion and lifestyle which are offering best of national & international brands to better educated consumers. Modern trade is expected to grow from US$60 billion at present to US$180 billion by 2020 growing at twice the pace of the overall retail market.
    • The new buzz word in retail is omni-channel. Omni-channel offers a seamless experience to the customers across various channels, whether brick & mortar, online stores, etc. The strategic objective here is to merge various channels (departmental stores, online stores) and link them to a multichannel retailer. This strategy makes a brand always available to the customer and gives an impetus to sales by increasing visibility, consumer base across various geographies. It also optimises inventory holding costs, operating costs and real estate cost. With modern retail gaining ground in India, there remains a lot of scope for omni-channel to expand.
    • With rising incomes, favorable demographics, entry of foreign players and increasing urbanisation, the long-term outlook for the retail industry in India is positive.
    • Goods and Services Tax (GST) is expected to come into force during the course of coming year. This legislation is likely to simplify the distribution structure and reduce the operational complexities of overall supply chain in the retail business. The passage of GST will also come out as a positive development for the retail Industry in India.

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