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Great changes in store for India's retail sector
By Kunal Kumar Kundu
MUMBAI - The retail industry in India may be on the verge of a paradigm shift.
The Indian government, at the cost of angering its leftist partners, has in
recent days hinted that it is inclined to allow foreign direct investment (FDI)
into the sector. Commerce and Industry Minister Kamal Nath recently told
reporters: "FDI policy cannot be static. Some areas where employment-generating
potential is high are under consideration, like branded and dedicated retail
segments." Even in February, he was heard singing similar paeans to retail's
employment-generating potential.
Retail has played a major role the world over in increasing productivity across
a wide range of consumer goods and services. Its impact is best seen in
countries such as the US, UK, Mexico, Thailand and, more recently, China. The
economies of Singapore, Malaysia, Hong Kong, Sri Lanka and Dubai have also been
heavily assisted by the retail sector.
Retail is the second-largest industry in the United States, both in terms of
number of establishments and employees. It is also one of the largest
worldwide, with a turnover of around US$7 trillion. Wal-Mart is the largest
single global player, with annual sales of around $288 billion. Overall, there
are nine retailers in the list of Fortune 100 companies.
Historically, the Indian retail sector has been dominated by small independent
players such as traditional, neighborhood grocery stores and "mom and pop"
outlets. In the 1990s, organized, multi-outlet retail gained acceptance, which
has since accelerated. The retail sector in India is on a veritable take-off
stage and organized retailing, which currently accounts for about $6 billion,
is expected to touch $17 billion by 2010, according to a recently released
study by the Associated Chambers of Commerce & Industry (ASSOCHAM). In 2005
itself, the organized retail industry is expected to grow to $8 billion.
Overall, the sector is likely to grow into a $200-280 billion enterprise by
2010.
India's retail industry generates 10% of the country's gross domestic product
(GDP), but remains one of India's least developed industries. Multi-brand
stores, malls, and franchises are currently estimated to be only 3% of the
total retailing business in India. Organized retail, however, is now poised for
an exponential growth. It's expected to log 25-30% growth per annum until at
least 2010.
Growth in Indian retail has been driven by the country's economic fundamentals
over the past few years, including an increase in the proportion of
upper-income households, rising consumption expenditure and the greater use of
credit cards. Consumers are now showing a growing preference for organized
retail, resulting in increased penetration. As a result, in 2003 alone, an
estimated 10 million square feet was added to organized retailing in India,
higher than the additional retail space added in the preceding decade.
Nothing seems to symbolize India's transformation from a stagnant Third World
country into an emerging economic powerhouse as much as the sparkling new
malls. American brand names such as Levi's and McDonald's clutter the
plush air-conditioned malls as teenagers in low-cut jeans hang out in groups
and cappuccino flows at coffee kiosks.
Over the past few years, the Indian retail sector has been characterized by:
larger store formats; rapid expansion by existing players; and more players
with a variety of formats. India's retail landscape is changing, with elaborate
shopping malls and superstores springing up in all major cities. Domestic
retail majors have announced huge expansion plans. Companies such
as Pantaloon Retail, Shopper's Stop, Trent, Lifestyle and Subhiksha are
expected to invest over Rs6.50 billion (US$149.3 million) over the next two
years in capacity expansion and modernization.
Trent Ltd, the Tata group's retail arm, is set to use Rs1.18 billion to set up
17 new stores and expand existing ones by March 2008. Similarly, Shopper's Stop
has just closed a public offer meant to raise up to Rs1.35 billion from the
market. Proceeds from the issue will be used to set up 11 new stores, including
two hypermarkets - one each in Bangalore and Pune - and for further expansion.
Pantaloon Retail Ltd has already received funding from the Bennett &
Coleman Group of about Rs700 million and plans to finance a further capacity
expansion program worth Rs1.20 billion through a combination of internally
generated funds and debt, according to Fitch Ratings India. The company targets
an addition of 1 million square feet of retail space in each of the next two
years. Its total retail area increased by over 70% in the last financial year
to 955,000 square feet, with hypermarkets accounting for a higher proportion of
the total retail space. Between July and October 2004, the company added an
additional 50,800 sq ft of retail area to its Food Bazaar operations by opening
three new standalone stores. Not surprisingly, it hired another 1,000 people in
October 2004 alone.
The coming retail storm has already pumped up the real estate sector. Up to 600
malls are likely to be up and running in India by the end of 2009 - up from 20
this year - according to KSA Technopak, a New Delhi-based consulting firm. The
capital is the epicenter of the boom, with as many as 100 malls - some
estimates put the number at 150 - planned for New Delhi and its vicinity in the
next three years. The mall mania is also spreading from metros to smaller
cities with population between 3 and 5 million. The trend is more toward
integrated retail-cum-entertainment centers that offer both shopping as well as
entertainment facilities. The traffic driver could also be the big discount
stores. Sahara Group's Sahara Mall and Pantaloon's Big Bazaar are major
crowd-pullers.
The key growth drivers of organized retail in India are:
Growth in per capita income and household consumption
Changing demographics and improved standards of living
Changing consumption patterns and accessibility to low-cost consumer credit
Infrastructure improvement and increased availability of retail space
Access to capital markets and other sources of financing
The retail sector can generate huge employment opportunities and lead to
job-led economic growth. In most advanced economies, the "services" sector, of
which retailing is a major part, creates the most employment. The US has over
12% of its employable workforce engaged in the retail sector. The retail sector
in India employs nearly 21 million people, accounting for roughly 6.7% of the
total employment. However, employment in organized, multi-outlet retailing is
still very low because of the small overall share of organized retail business
in India. The market share of organized retailing in India - around 2% - is
abysmally low, compared to 80% in the US, 40% in Thailand and 20% in China. A
modern retail sector has the potential of creating over 2 million new jobs
directly within the next six years in India (assuming only 8-10% share of
organized retailing), according to KSA Technopak - as many as the
business-process outsourcing (BPO) and the IT-enabled services sector put
together can generate.
The retail industry is estimated to require more than 115,000 skilled workers
to support its explosive growth. In 2003-04, the total number of employees in
Pantaloon rose to 3,500 from 1,700 just a year ago. This number is expected to
rise to 11,000 by 2007, according to estimates by Cygnus Research. Even the
Planning Commission has identified retail as a prospective employment
generator.
A strong retail outlet can also provide a necessary fillip to agriculture and
food processing, handicraft, and small and medium manufacturing enterprises,
creating millions of new jobs indirectly. Through its strong linkages with
sectors like tourism and hospitality, retail has the potential of creating jobs
in these sectors also.
As per AT Kearney's "Global Retail Development Index 2004" - an annual survey -
which ranks 30 emerging markets in terms of their attractiveness as retail
destination (based on four parameters: country risk, market attractiveness,
market saturation and time pressure), India comes second, just after Russia but
ahead of China. Obstacles such as stringent FDI rules and regulations thus
haven't dimmed India's attractiveness to global retailers. India's country risk
score is higher due to improved living standards and continued economic growth.
Looking ahead, India's market size offers tremendous potential as its
population is expected to surpass China's by 2050. India's market
attractiveness score is relatively low because of its large rural population,
but the country scores well in other areas. Retail sales per capita have
increased by one-third between 1999 and 2003. Also, India's retail market is
fragmented, with the top 10 companies holding just about 2% market share, which
means there is large untapped potential. Two foreign retailers - Hong
Kong-based Dairy Farm and Germany-based Metro AG - are in the top five. South
Africa retailer Shoprite has also started operations in Mumbai. A number of
global retail majors, including Wal-Mart and Carrefour, have expressed interest
if FDI regulations are eased. Once that happens, expect a stampede.
Kunal Kumar Kundu is a senior economist with a leading bilateral Chamber
of Commerce in India. He has a Masters in Economics from the University of
Calcutta.
(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us
for information on
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republishing.)
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