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:
- Competition
from the unorganised sector
- Retail
sector has no recognition as an industry
- Lack of
basic infrastructure
- Supply-chain
inefficiencies
- Challenges
with respect to human resources
- 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.
