The Shopping Cart Is Not Even Half-Full For The Retail Sector!

Kiran Dhawale

The India consumption story is best reflected in the retail sector's growth in India. Gayathri Udyawar finds out what is shaping the retail sector in India and what investors can expect from the sector 


retail sector is poised for a major upheaval. Be it e-commerce or brick-and-mortar model, every investor, no matter what their pocket size, wants to have a piece of this pie. Our country will become the third-largest consumer economy by 2025. With this strong consumption story and the fact that more than 92 per cent of the retail market in India is unorganised, it is only a matter of time for the retail sector to take off exponentially. Fuelled by this, the Indian retail market, which was at US$672 million in 2017, is expected to cross US$ 1.3 trillion by 2020, while the e-commerce sales are forecasted to touch US$ 120 billion by 2020.

 Modern retail, as it called, has a short and happening history in India. We had some supermarket chains such as Subhiksha, which proved to be short-lived, and some badly-bruised ones like Vishal Megamart, but the organised retail market is very much blooming. The organised retail industry consists of big-box retailers, who have large format physical stores or supermarkets spread out in an area of 10,000 to 50,000 square feet. The basic idea of such enterprises is to provide a one-stop shop for all essential household needs. The big-box retailers generally operate in two segments, grocery and apparel, and can be largely classified as apparel and non-apparel retailers. Most of these retailers stock food, grocery, household and personal care, apparel, electronics, furniture and jewellery items, all under one roof. These include supermarkets such as Future Retail’s Big Bazaar and D-Mart. Then, there are others that focus on a particular segment and are called speciality retailers, including Aditya Birla’s Pantaloon and Trent.

The retail sector is the country's largest sector, accounting for around 10 per cent of the GDP and 8 per cent of the total employment. Due to this, the government has a keen interest in promoting this sector, both as investment destination and as employment generator. The government’s stand on FDI in retail is very positive, due to which the FDI in retail and wholesale trade surged to US$ 4.4 billion in FY2017-18 as compared to US$ 2.7 billion in FY2016-17, according to the RBI. 

In August, the retail companies were buzzing with the news that global giants including Amazon, Google, Paytm are keen on buying stakes in the likes of Future Retail and Aditya Birla Retail. India has always been a top sourcing destination for global retailers, but now global retail companies are vying with each other to either enter or increase their market share here. 

When Walmart announced its desire to acquire 77 per cent stake in Flipkart, some shook their heads in disbelief, but market experts saw this as a validation of their forecast that the best is yet to come for the Indian retail sector. The acquisition presents a perfect example of a merger of two contrasting worlds. Walmart, established in 1962, is an American multibrand retailer operating a chain of hypermarkets across continents, while Flipkart is an India-based e-commerce company founded in 2007. Walmart tops the Fortune 500 list of companies, while Flipkart is unicorn start-up valued at close to US$18 billion. Walmart already owns and operates 21 wholesale stores in India in cash-and-carry format. 

Beyond exhibiting the true potential of Indian retail, the significance of this deal has more to do with Amazon than with Flipkart. India now is a battle ground for the global giants Amazon and Walmart. Amazon has invested around US$ 4 billion in India. The company is also said to be in talks to acquire stakes in Future Retail and Spencer’s. 

Among the Indian retailers that can match the will and might of the global giants is Reliance Industries. Reliance Retail, the retail arm of Reliance Industries, has a total store count of 8,533 stores with 18.60 million square feet of retail area. Reliance also has the ability to extend it reach by clubbing its retail business with Jio Infocomm, its telecom venture. This gives Reliance a winning online-offline retail platform, where its grocery and household supermarket Reliance Smart, apparel and accessories of Reliance Trends and electronic products of Reliance Digital can be made available online. The company's retail segment registered Q1FY19 revenue of Rs25,890 crore, as against Rs11,571 crore, a growth of 123.7 per cent YoY. 

Kishore Biyani is known as the pioneer of the Indian retail industry. Over the years, Kishore Biyani’s Future Retail Limited has strengthened its footprint across the country with the acquisition of Hypercity Retail, Easyday, Big Apple, Nilgiris and Heritage Foods. The Future Group operates probably the widest range of large store formats in India, including large-sized department stores like Big Bazaar, other speciality retail stores like Foodhall for gourmet food, eZone for electronics, and HomeTown for furniture. The company, Future Retail, operates around 1,000 stores with more than 13 million square feet of retail space. The group apparel focused company Future Lifestyle Fashions operates Central, Brand Factory and aLL. Future Lifestyle offers about 30 own brands, licensed brands and third-party brands at more than 400 stores spread over 6 million square feet of retail space. 

To strengthen its online offering, Future Lifestyle plans to acquire 29.9 per cent stake in e-commerce site Koovs. Last week, there was a buzz that Future Retail plans to strategically tie-up with Google and Paytm to raise funds and scale-up its operations. Future Retail also benefits from its listed sister company Future Consumer Limited, which is the group's integrated packaged food company with several private label brands like KOSH, Desi Atta Company and Golden Harvest. These products compete with established FMCG majors and improve profitability. 

If Biyani is the pioneer, Radhakishan Damani can be considered as the entrepreneur who has given direction to the Indian retail sector. D-Mart, a supermarket chain founded by Damani, had a blockbuster stock market debut last year. Avenue Supermarts Limited, the listed company that operates the D-Mart chain, operates 155 stores with 4.9 million square feet retail space. The company's hypermarkets stock up grocery, non-food, general merchandise and apparels under a single roof. The company also has a very sharp focus on its margin and has the best EBITDA margin amongst its peers. It plans to add around 20 to 25 stores annually. Although it is on a right footing with predominantly ownership model of operation, it is evaluating other formats including cash-and-carry and leased stores. Avenue Supermarts reported Q1FY19 revenues of Rs4,559 crore, as against Rs3,598 crore, a growth of 26.7 per cent YoY 

Huge growth potential 

Despite the low margins and all the noise made by the online players, more than 90 per cent of Indian retail sales still happen in brick-and-mortar stores, that is, offline. There is a humongous opportunity in retail because of the sheer size of consumption which is driven by rapid urbanisation, young population and increase in discretionary spending aided by dual income households. Better infrastructure in Tier-II and Tier-III cities is also helping the sector by providing ideal retail estate spaces and connectivity to increase the overall footfall for the retailers. The organised retail market in India is currently valued at around US$ 60 billion. 

Brand awareness 

The penetration of internet has, on the one hand, aided online retailers and, on the other hand, fuelled the aspirations of the middle class by creating brand awareness. The customers are shifting more and more towards branded products and also demanding experience-based shopping.

Pricing 

Retailing is all about focus on high volumes to make up for the low margins. Big-box retailers need to keep prices competitive as they are neither in their customer's neighbourhood like the kiranawala nor in their phone-like e-commerce players. The cut-throat competition from deep-pocket foreign players like Walmart, Amazon and PayTM, who are selling products at minimal to zero profits or even at a loss just to increase their customer base, is the biggest challenge for offline retailers. Also, Indians are cautious spenders and demand value for their money, and addressing this concern is imperative for the growth of retail players.

Right merchandise at right location 

Merchanise mix is vital for any retailer and understanding customers needs and providing the right assortment at the right location is a big challenge. Where is the retailer located, whether it is a premium mall or busy high street, is it in the city or town or on the outskirts and even small things like access to parking—all these factors heavily impact customers' shopping decision. So, balancing new India's aspirations and lifestyle with traditional and cultural likes and dislikes will provide domestic retailers an edge over the global players.

Family Experience 

The biggest opportunity as well the challenge that retailers have in hand is offering shopping as a family experience. Indian families, especially the middle class, have little time, so projecting shopping malls as a destination for family outing is the key. So, having hypermarts in the premises with theatre, gaming and good food outlets, help make shopping an ideal weekend outgoing for the family. 

Expansive reach of online retailers 

Today, the big-box retailers are adopting a cluster approach and opening stores in Tier-I, Tier-II and Tier-III cities, focusing more on urban areas. However, in many semi-urban areas or rural areas with good infrastructure, online retailers are having the first mover advantage as the absence of physical outlets of big-box retailers is allowing e-commerce to flourish in these small towns and hinterlands 

Conclusion 

For retail industry and players, just as in any other industry, innovation is the key to survival. The biggest challenge is to bring customers to the store and engage with them both online and offline. The kind of optimal strategy the retailer adopts to attract and retain customers will be the key to success in business. The industry will see more and more competition and hence the margins may come under pressure. The pricing strategy will be crucial as India remains a price-sensitive market. In spite of growing competition, the retail industry remains on a growth trajectory. If we compare the retail players in India with the global players , one can sense the growth opportunity and potential for investments. A long term investor who intends to tap the India growth story cannot miss investing in the retail sector 

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