MS 612 IGNOU MBA Solved Assignment - Enumerate and discuss the various issues that impact retail business in India.

Enumerate and discuss the various issues that impact retail business in India. 

Ans

retail sector is in a very nascent stage in India, it provides ample opportunities for retailers, and mitigation of a few challenges will help the sector attain higher economies of scale and growth. Elucidated below are the challenges and risks that the sector faces:

• Global economic slowdown

• Competition from the unorganised sector

• Retail sector has no recognition as an industry

• High real-estate costs

• Lack of basic infrastructure

• Supply-chain inefficiencies

• Challenges with respect to human resources

• Margin Pressure

• Due to the lack of established lending norms and consequent delay in financing activity, the existing and new players have lesser access to credit, which affects their growth and expansion plans

• The absence of a single nodal agency leads to chaos, as retailers have to oblige to multiple authorities to get clearances and for regular operations

Global economic slowdown impacting consumer demand

The current contraction in overall growth has not been so severe ever since the one witnessed during World War II. The sub prime-triggered crisis in the US during end of 2007 gradually spread across other parts of the world; as a the fallout of this crisis, credit availability dropped sharply in advanced economies and their GDP growth contracted incessantly during the last quarter of 2008. The financial crisis continued to trouble advanced and developing economies in spite of policymakers’ attempts to replenish liquidity in these markets. Many financial institutions collapsed and filed for bankruptcy, as the situation got from bad to worse. Many banks/institutions made massive write-downs following this turn of events. During 2007-10, the write-downs on global exposures are expected to be worth US$ 4 trillion while the write downs on the US-originated assets alone are likely to be worth US$ 2.7 trillion11. Such massive write-down will affect the financial system to a grave extent, as it is likely to further strain banks’ funding capabilities. Already these write-downs are turning into a major challenge for banks/financial institutions because of solvency issues, and deepening risk of failure of banks/ financial institutions. Failure of the US investment bank Lehman Brothers, for instance, has had an enormous impact on the overall global financial system, and has consequently shaken the confidence of banks, investors, households etc.

Consumption declines in the advanced economies

Private consumption expenditure is an important indicator of overall economic growth. In the last couple of quarters, the decline in consumption has further affected the global economic downturn. Moreover, widespread financial crisis severely hit credit availability and household disposable income. For instance, US households lost 20% (US$ 13 trillion)14 of their net worth as a percentage of disposable income from the second quarter of 2007 to the fourth quarter of 2008. The stock prices across the world started falling during the second quarter of 2007 and continued its losses throughout 2008; the global stock markets lost between 40-60% in dollar terms that translated to a huge loss of global wealth in 2008. The personal disposable income (at current prices) in the US registered negative growth (3.9% and 2.1%) during the last two quarters of 2008, respectively. The consumer demand situation was aggravated further by reduced capital availability and consequent fall in investments.

The personal consumption expenditure in the US registered merely 0.2% y-o-y growth in 2008, down from 2.8% growth in 2007. Further, the personal consumption expenditure growth turned negative during the second half of 2008 and first quarter of 2009. The personal consumption expenditure in the US contributes over 70% of its GDP at constant prices. The severity of the current recession (slowdown) can also further be measured from previous recessions in 1975, 1982 and 199116. For example, the average per capita consumption in the previous three recessions (1975, 1982 and 1991) grew by 0.28%, while in 2009, it is estimated that the per capita consumption will contract by 1.1% as compared with the previous year. India is not entirely insulated from this weakening demand. For example, during the first half (H1) of FY09, PFCE (at constant prices) grew by 3.3%, which was less than half (7.9%) of that witnessed in the corresponding period of previous year. During the second half (H2 FY09), the trend continued as PFCE further slowed down to 2.5% as compared with 9.0% in the corresponding period in the previous year. An interesting observation on the economic slowdown and its effects on consumption in India can be made from the volume of credit card transactions growth, which declined from 34.6% in FY08 to 13.7% in FY09.

Competition from the unorganised sector

Organised retailers face immense competition from the unorganised retailers or kirana stores (mom-and-pop stores) that generally cater to the customers within their neighbourhood. The unorganised retail sector constitutes over 94% of India’s total retail sector and thus, poses a serious hurdle for organised retailers. If put numerically, the organised retailers are facing stiff competition from over 13 million kirana stores that offer personalised services such as direct credit to customers, free home delivery services, apart from the loyalty benefits. During the current economic slowdown, the traditional kirana stores adopted various measures to retain their customers, which directly affected organised retailers. Generally, it has been observed that customers shop impulsively and end up spending more than what they need at organised retail outlets; however, in kirana stores, they stick to their needs because of the limited variety. During a downturn, many customers may not like to spend more as is evident from the past few months’ trend that shoppers are increasingly switching from organised retail stores to kiranas.

Retail sector yet to be recognised as an industry

The retail sector is not recognised as an industry by the government even though it is the second-largest employer after agriculture. Lack of recognition as an industry affects the retail sector in the following ways:

High real estate costs

Even though the real estate prices have subsided recently due to the slowdown in economies and the financial crises, these prices are expected to go up again in the near future. Presently the sector faces high stamp duties, pro-tenancy acts, the rigid Urban Land Ceiling Act and the Rent Control Act and time-consuming legal processes, which causes delays in opening stores.

Earlier on the lease or rents on properties were very high (among the highest in the world) at some prominent locations in major cities. The profitability of retail companies were affected severely because real estate costs constituted a major part of their operating expenses. Now companies are moving out from prominent malls of tier I cities and are re-negotiating the rental agreements with landlords to reduce costs. Some are even focussing on setting up shops in tier II and tier III cities.

Lack of basic infrastructure

Poor roads and lack of cold chain infrastructure hampers the development of food retail in India. The existing players have to invest substantial amounts of money and time in building a cold-chain network.

Supply-chain inefficiencies

Supply chain needs to be efficiently-managed because it has a direct impact on the company’s bottomlines. Presently the Indian organised retail has an efficient supply chain but it appears efficient only when compared with the unorganised sector. On an international level the Indian organised retailers fall short of international retailers like Wal-Mart and Carrefour in terms of efficiencies in supply chain. In the following paragraphs some key challenges that the retailers face during procuring goods from suppliers to delivering the same to end-customers are discussed.

Inventory management is the first challenge that retailers face at the local store level as well as at the warehouse level. Excess inventory often leads to an increase in inventory costs, and then to lower profits, so retailers like Pantaloons and Shoppers Stop have IT systems in place for inventory management. SCM-IT has helped retailers to plan their stock outs, replenish their stock on time, move stock from warehouse to stores, maintain adequate stock at a store to match consumer preferences etc. However, the retailer may still face a big challenge in terms of efficiently implementing the supply-chain software across stores and integrating it with the central warehouse, which can be a time-consuming process, requiring trained personnel.

Logistics is another challenge related to the supply chain. It is imperative for any organised food and grocery retailer to establish a robust cold chain. Amul is the best example of this scenario, as it has developed a cold storage chain across India. Until and unless organised retailers like Reliance and Food Bazaar fully develop integrated-cold chains, they would continue to incur loss of considerable amount of money through wastages of perishable items while moving huge quantities from one place to another.

The third challenge related to the supply chain is procurement. Big organised retailers enjoy economies of scale based on their size and expansion plans. The economical benefits of scale in procurement are achieved when procurement is made in thousands or millions of units; however, the main challenge here is to procure adequate amount of stock according to customer requirements, failing which the resultant rise in inventory can affect bottomlines.

Challenges with respect to human resources

The Indian organised retail players shell out more than 7% of sales towards personnel costs. The high HR costs are essentially the costs incurred on training employees as there is a severe scarcity for skilled labour in India. The retail industry faces attrition rates as high as 50%, which is high when compared to other sectors also. Changes in career path, employee benefits offered by competitors of similar industries, flexible and better working hours and conditions contribute to the high attrition.

Shrinkage

Retail shrinkage is the difference between the book value of stock and the actual stock or the unaccounted loss of retail goods. These losses include theft by employees, administrative errors, shoplifting by customers or vendor fraud. According to industry estimates, nearly 3-4% of the Indian chain’s turnover is lost on account of shrinkage. The organised industry players have invested IT, CCTV and antennas to overcome the problem of shrinkage.