In the second half of our profile of the Indian retail sector, offers further insight into store formats, trends and merchandising, as well as government intervention. Given the potential of the market and its current fragmentation, it is hardly surprising foreign retailers are seizing the opportunity to get selling in India, says Debasish Ganguly.

This is the second part of a two-part feature. To read part one please click here.

Basic Facts

  • Around 96% of retail outlets in India have an area of less than 500 sq ft.
  • Most retail stores in India are mom and pop stores selling dry groceries and other daily use products.
  • Average per capita retail space in India is 2 sq ft while that in the USA is 16-18 sq ft.
  • Retailing provides employment to 12% of India’s total work force compared with 20% in the USA, 4% in Poland and 18% in China.
  • The store of new age-branded retailing is expected to grow from its present level of 1% to 6% of total retail sales.
  • Organised food retailing is estimated at around Rs6bn (US$127.6m) and forecast to reach Rs60bn by 2005. This represents a ten-fold growth whereas growth in non-food retailing is estimated to be around five times the present size.
  • Of total organised retail sales, 60% comes from the top six urban centres (Delhi, Chennai, Mumbai, Calcutta, Bangalore and Hyderabad).
  • Branded retail chain concepts for foods boast greater awareness and presence in southern parts of India such as Chennai, Bangalore and Hyderabad.
  • Food retailing sector is going to directly compete with the foodservice sector (food catering, restaurants chains etc.)

Branded retailing

These are the retail chains that have managed to establish outlets in relatively prosperous parts of the country. These chains are primarily concentrated in three areas, namely groceries (Food World [RPG Group], Nanz, Nilgiris, Subhiska) consumer durables/ good (Vivek’s, Shopper’s Stop, Ebony, Spencer) and fastfood services (Nirula’s, Pizza Hut, Dominos, McDonald’s).
Typical characteristics of these stores (not to be confused with exclusive retail outlets for a company) in India are:

  • Sale of similar merchandise in more than one outlet
  • Common ownership
  • Similar architectural formats
  • Centralised buying
  • Besides stocking domestic brands they stock large amount of imported brands mainly confectionery, bakery, and juice and beverage products.

Barriers to development

Branded retailing has been held back by the size of the country, its regional diversity and the lack of modern infrastructure and transportation. Some of the key factors which are responsible for the development are:

  • Price of land, property
  • Number of intermediaries in entire chain resulting in heavy margins as high as 50%

Current strategy

Also to cut across the intermediaries, the modern retail chains are reducing procurement in efficiencies through backward integration. They buy food products directly from manufacturers and farmers instead of relying on intermediaries. By doing so, they are able to reduce distribution costs and can better control the availability of food products in their retail outlets. Food World for example sets up a central warehouse system before entering any city. All suppliers therein supply directly to these warehouse. Retailers like Nilgiris also source directly from producers and sell food products as their store brands. Niligiris own branded bakery, confectionery and dairy products account for 35% of their total sales.

Future scenario

The kind of retail outlets that are expected to survive and thrive in India include:

  • Small stores, with complex but efficient supply chains
  • Small supermarkets running on brand variety and tight inventory control
  • Stores offering a mix of food and general merchandise
  • Out-of-town/edge-of-town ‘shoppatainment’ complexes (hypermarkets)
  • Mid-sized retail propositions within town limits
  • Small corner outlets with integrated home delivery (phone ordering and free home delivery)

Government’s role

After years of dilly-dallying, the government has decided to consider partial relaxation of the ban on foreign investment in retail trade. The group of ministers is set to discuss a proposal in this regard at its next meeting sometime in August 2001.

According to government sources, foreign investors may be allowed to take a 20-25% stake in retail trade ventures. They may also be asked to bring in a certain minimum amount of capital upfront as is prescribed for non-banking financial companies.

It is understood that minimum investment norms are prescribed to provide some comfort to the domestic retail traders who fear that they will go out of business if multinational retail chains such as Wal-Mart, K-Mart and Sainsbury are allowed to set up shop in India.

This is not the first time that the government has considered lifting the ban on foreign investment in retail trade. The proposal has been discussed many times at the GoM meetings as well as at cabinet meetings. However, due to division within the government on this issue and also resistance from key opposition parties, the proposal has regularly been relegated to the background. Now with pressures building from a section of the industry, the government has decided to take a slightly flexible stand which it hopes will not ruffle the feathers of the small shop owners. Earlier proposals included allowing up to 100% participation by international companies in the retail trade business.

While a 20-25% stake holding may not be a very attractive proposition, particularly when it comes with minimum investment stipulations, the move would enable several Indian retail chains to introduce vital foreign expertise and capital in managing their businesses.

By Debasish Ganguly, correspondent

This is the second part of a two-part feature. To read part one please click here.

To view related research reports, please follow the links below:-

Global Food Market Trends and Strategies

Global Retailing

The World’s Top 100 Retailers