retailing in India

retailing in India - Transcript

C MY K

Retail in India Getting organized to drive growth

Retail in India
Getting organized to drive growth
A CII A T Kearney report

C MY K

Retail in India
Getting organized to drive growth

Retail in India
Getting organized to drive growth

A CII A T Kearney Report

Confederation of Indian Industry

November 2006 Confederation of Indian Industry 23 Institutional Area Lodhi Road New Delhi 110 003 India Tel 91 11 2462 9994 7 Fax 91 11 2462 6149 2463 3168 Contact Chandrajit Banerjee Senior Director Anindya Acharya Deputy Director A T Kearney Limited IL FS Financial Centre 3rd Floor Quadrant A Bandra Kurla Complex Bandra E Mumbai 400051 Tel 91 22 2653 3299 75 76 Fax 91 22 2653 0199 14th Floor Tower D Global Business Park M G Road Gurgaon 122002 Tel 91 124 4090700 Tel 91 124 4069725 Contact Raman Mangalorkar Principal Consumer Industries and Retail Practice Hemant Kalbag Principal Consumer Industries and Retail Practice To the extent this report relates to information prepared by A T Kearney Limited for the Confederation of Indian Industry CII it is furnished to the recipient for information purposes only Each recipient should conduct its own investigation and analysis of any such information contained in this report No recipient is entitled to rely on the work of A T Kearney Limited contained in this report for any purpose A T Kearney Limited makes no representations or warranties regarding the accuracy or completeness of such information and expressly disclaims any and all liabilities based on such information or on omissions thereof The recipient must not reproduce disclose or distribute the information contained herein without the prior written consent of CII and A T Kearney Limited

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Retail in India Getting organized to drive growth

Contents
Foreword vii

Executive summary

ix

1 Retail landscape in India

1

2 Key issues in the way of retail growth in India

9

3 Key imperatives

19

4 Conclusion

31

Appendix 1 Study methodology

35

Appendix 2 State wise analysis

41

Appendix 3 Recommended initiatives for six select states

63

Appendix 4 Cluster wise analysis

71

Contents

v

vi

Retail in India Getting organized to drive growth

Foreword
ndia is currently facing the world s most dynamic combination of highly informed and demanding consumers on one hand and of rapidly increasing consumption levels across various retail product categories and geographies on the other Growing consumer demands and the consequent response of leading businesses have created a more complex and competitive marketplace one that requires each firm to be more adaptive to customer needs and more aggressive at exploiting their unique capabilities to meet those needs In the context of Indian consumer products and retail companies this spells multiple challenges and opportunities for them

I

continue to drag our economy down In this context the Confederation of Indian Industry CII requested A T Kearney to identify key issues and challenges that Organized Retail faces in India today and to develop specific actionable recommendations that will propel the industry on a growth path The report has analysed several areas of concern for growth of retailing in India These issues were detailed out for generic Indian industry for retail sector specific and also across seven Indian states and union territories that were selected based on their geographic representation of India The report has assessed best practices in policy and infrastructure facilities and analyzed case studies from China and South Africa that highlight the catalyst role regulatory bodies can play in promoting retail and the related economic benefits employment tax revenue etc It has also identified and analyzed by issue and by state what specific actions can be taken to foster organized retail and observed key initiatives that need to be driven by the retail industry to foster its own success and strength We strongly believe this report will help us achieve significant progress in enhancing the share of organized retail in the industry Many people contributed to this effort Several CII members both Indian companies and MNCs overseas MNC managers industry experts and government officials spent time with the A T Kearney engagement team sharing experiences and debating ideas

Having emerged as the world s most attractive market for global retailers India still faces alarming issues that pose a serious hurdle to the growth opportunity that the retail industry promises for the country s economic progress The overall positive outlook of the present business conditions is tempered by the fact that the country is grappling with severe infrastructure and policy issues Cold chain warehousing and logistics infrastructure will fast become unmanageable challenges for India if pro active action is not taken soon The critical challenges facing the Indian retail industry in its quest to continually add value to the consumer are twofold First unlike many other countries India is a fragmented market in terms of policy and economic laws at the state level and dealing with varying regulations affects the industry s competitiveness adversely And secondly India is way behind the US Western European and other developed nations in implementing best practices across its industries Issues like inadequate quality control and the lack of skilled workforce

Foreword

vii

A T Kearney partners and principals including Raman Mangalorkar Hemant Kalbag Vivek R Gupta Kaustav Mukherjee and Saurine Doshi provided overall direction for this study Subhendu Roy Manas Majumdar Namit Garg Saurabh Singh Jasraj Singh Virdi Supratim Banerjee Munir Suri and Divya Sahay were involved on a day to day basis in conducting the study

and preparing the report We would like to extend our appreciation to everyone who helped us in our effort

Confederation of Indian Industry

viii

Retail in India Getting organized to drive growth

Executive summary
he Indian retail sector is at an inflection point with organized retail poised for an approximately 35 per cent compounded annual growth rate CAGR for the next few years However valued at around USD 320 billion the Indian retail sector is still relatively small by global standards with retail giants like Wal mart alone reporting over USD 315 billion in global sales

T

eral issues need to be addressed These issues vary from core infrastructure challenges to knowledge management to human resources

There are issues that need to be addressed
A retail consumer in India today still does not enjoy the value that organized retail has brought to the table in some international settings Groceries sold in hypermarkets are still priced higher in comparison to those sold by local street vendors parking and traffic at large format stores continues to be a challenge and it is not easy finding experienced and polished sales floor associates These symptoms are caused by some core issues that are preventing the next level of maturation in the Indian retail industry Based on the findings of this study there are 10 overarching issues that most retailers view as major impediments to growth and the associated escalation in consumerism These issues are Underdeveloped Supply Chain Capabilities Inadequate Utilities IT Infrastructure Hurdles Supply Base Vendor Hurdles Inadequate Human Resources Limited Consumer Insights Taxation Challenges Real Estate Hurdles Insufficient Government Incentives Policy Related Hurdles These issues are somewhat universally experienced by retailers in India whether it is a fast food services restaurant a chain of movie theatres a convenience store a department store or a hypermarket Of course

But India is catching up and catching up fast For two years in a row A T Kearney has ranked India at the top of the Global Retail Development IndexTM Several of the major Indian conglomerates have announced and are in the process of implementing major retail projects Reliance AV Birla Group Tata etc existing retailers continue to experiment with new formats and concepts Pantaloon Shopper s Stop etc many of the multi national retailers are pacing the sidelines and evaluating different ways to participate and mall development continues at a staggering pace What lies behind this euphoria is an omnipresent confidence in the ability of organized retail to grow along with the ongoing wealth generation amongst the middle class in India The consumer class in India is estimated at 400 million people with a rising disposable income About 29 per cent of the population is now urban compared to 26 per cent in 1991 and over 50 per cent of the population is below the age of 24 and faces a job market more resilient than it is has ever been before However to sustain the type of double digit growth we have seen in organized retail in the last two years and to continue to deliver value to the consumer sev

Executive summary

ix

the magnitude of the issue varies by geography and by cluster metro large city small city town or rural For example supply chain issues such as a logistics infrastructure the availability of a cold chain network and the presence of distribution hubs and networks is a much bigger challenge in small towns and rural areas than in the large metros such as Mumbai Delhi or Kolkata On the other hand real estate challenges are proving to be a bigger impediment in metros than in smaller cities such as Agra Nasik or Amritsar Similarly if we look at the organized retail challenges across geographies within India the differences are quite stark In this study we specifically examined seven distinct states and union territories Andhra Pradesh Chandigarh Delhi Maharashtra Tamil Nadu and West Bengal As an example the road network in Maharashtra at 93 9 kilometres per 100 square kilometres offers the best land non rail connections amongst all Indian states But in terms of rail network Maharashtra only has 18 kilometres of rail lines per 1000 square kilometres and substantially lags behind Tamil Nadu which has 51 kilometres for the same area These differences manifest themselves in all areas that impact the organized retail environment from Internet penetration to real estate costs to rent control acts to taxes to corruption A retailer in India currently must navigate these issues try to make a profit deliver value to its shareholders and continue to add value to the consumer A daunting task for the best of companies and doubly so for most companies trying to start their retail venture A hypermarket in Mumbai must apply for 29 unique licenses that could take up to six months and then when it opens the second store it must apply for the same 29 licenses all over again So what is the solution and where will it come from As in most problems in the business world there is no simple solution and no single accountability There are however two entities that can address the specific issues identified the Government and the Retail Industry

In South Africa during the mid 1990s the GEAR initiative promoting FDI was started a new Labour Relations Act was adopted and substantial tax reductions were introduced These changes substantially grew the retail sales trend line by 50 per cent touching sales of almost 300 billion Rand in 2005 as compared to the pre reform trend of approximately 200 billion Rand Also post reforms the retail sector has become the largest employment sector followed by manufacturing finance and agriculture in South Africa with a workforce of over 3 million individuals Similarly China s government has also played a critical role in fostering organized retail primarily through FDI The number of convenience stores grew from 899 in the year 2000 to 7 371 in 2004 In the same time frame supermarkets grew from 1 690 to 4 654 and hypermarkets from 104 to 705 While this kind of growth and results are within reach in India the type of support required from the Indian government is quite different from the role the governments in China and South Africa have played However the benefits of state led initiatives can be substantial Some of the key changes that require the support of the Central and State government are Grant industry status to retail Expand rail network density and wagon capacity Reform the Urban Land Ceiling and Regulation Act Computerize land records and make information available online Substantially reduce license requirements and offer a single window facility Overcome power shortage through privatization and infrastructure investment Improve management of city planning exercises with due attention to creating adequate commercial space Amend labour laws to be more supportive of retail requirements 24x7x365 Eliminate any remaining Octroi taxes These and other policy changes are discussed in greater detail in this document

The government can play a meaningful role
Two specific case studies were developed South Africa and China to highlight the important role government plays for the development of the retail sector

The retail industry must take some of the responsibility
While the government must step up and play a sub

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Retail in India Getting organized to drive growth

stantial role there is also quite a bit of self help that the retail industry can provide Many companies are already experimenting with and achieving success with HR policies and talent development analysis of customer insights and supply chain development These innovations are still company specific and have yet to seep into the foundation of organized retail in India The retail industry needs to invest in developing a cadre of strong sales associates and middle management that will be required to sustain the expansion plans that are already on the table While most companies are grappling with the issue of talent shortage few are investing significantly in a new generation of retail managers This investment must come in the form of initiatives to drive training and re retraining programmes for staff Beyond the immediate HR interventions retailers must also drive development of knowledge networks through sponsoring courses on retail as well as setting up retail institutes Two other shortcomings that the retail industry will need to tackle are generation of Consumer Insights and Supply Chain Development Both of these are iterative in nature and have to be anchored with the core belief of continuously delivering value to the end consumer Product innovation coupled with localization will come with the retail industry taking the lead in sourcing products globally and offering a broader assortment to Indian consumers Research and conventional wisdom may point towards cut vegetables and mountain bikes not being products wanted by Indian consumers but both have been highly successful at Hypercity a cutting edge hypermarket set up in the suburbs of Mumbai This kind of experimentation with products and working with vendors to deliver them at reasonable cost is the cornerstone of a retail evolution that the Indian retail industry needs to embrace The lack of Consumer Insight has also been identified as a major shortcoming by the retail industry There are two initiatives that A T Kearney recommends First to establish a widely tracked and published

Consumer Confidence Index that accurately measures the degree of consumer optimism This index needs to be sponsored and supported by a central body for instance the CII Retail Committee Brazil and China have both implemented such an index as have many of the developed retail economies The second recommendation is for the retail industry to cultivate third parties that can effectively mine and analyze consumer data This will require a degree of entrepreneurship which is clearly not lacking in the Indian environment today As far as Supply Chain Development is concerned much has been said about the absence of a cold chain network A T Kearney sees the greatest opportunity to address this through an industry sponsored consortium A group of retailers can tie up with transportation and refrigeration providers and invest in and foster a syndicated consortium that will create a stepchange in how perishable items are transported in India today This effort will not only impact a broad vendor universe but also have substantial positive impact on the current supply chain capabilities in India A mutual commitment to further the cause of retail in India some investment and an effectively managed launch can in a short amount of time create a much needed cold chain and deliver the much desired value to the consumer There is no doubt that the Indian market and consumers are eager to embrace organized retail in a big way The 320 billion market is likely to continue to grow in a robust fashion However to continue to offer consumers value some of the core foundational blocks like supply chain infrastructure and real estate need to be upgraded to keep up with the pace of change The changes recommended here can fundamentally change the trajectory of growth to create a step up shift in the contribution of the retail sector to the Indian economy

Executive summary

xi

xii

Retail in India Getting organized to drive growth

1 Retail landscape in India

2

Retail in India Getting organized to drive growth

1 Retail landscape in India
etailing in India is emerging as one of the largest industries with a total market size of USD 320 billion in 2006 and growing at a healthy CAGR of 5 per cent till date Rising incomes and increased consumerism in urban areas along with an upswing in rural consumption will further fuel this growth to around 7 8 per cent This driver is further illustrated in the statistic Fig 1 1 that the percentage of people in urban areas in India has been growing steadily to reach 29 per cent from just 17 per cent fifty years ago

R

GRDI for 2006 Fig 1 2 The GRDI is conducted annually to follow the attractiveness of top emerging markets for retail For the past five years A T Kearney has helped retailers prioritize their global development strategies by publishing the GRDI The Index ranks 30 emerging countries based on more than 25 macroeconomic and retail specific variables 1 Many factors contribute to India being the most attractive retail target market A stable democracy provides an economic and social background that comforts big international organizations On the economic front the country has seen over 7 GDP growth for the last few years driving increasing prosperity and con

In addition India has been ranked as the most attractive market for global retailers to enter now according to A T Kearney s Global Retail Development Index
Fig 1 1

Indian Retail sector is growing driven by increasing urban population with higher disposable incomes
The retail sector has been steadily growing in India
India Total Retail Market Size USD Bn Total Retail Market Size USD Bn

and is helped by ever growing urban and is helped by ever growing urban population with higher disposable incomes
Urban Population as of Total Population Urban Population as of Total Population

CAGR 7 8
368 321 278 238 201 204

421 23 3 17 3 18 0

27 8 25 7

1998

2000

2002

2004

2006E 2008E 2010E

1951

1961

1981

1991

2001

Sources Economist Intelligence Unit EIU Euromonitor A T Kearney analysis

1 The GRDI study ranks countries on four parameters country risk market attractiveness retail market saturation and retail entry timing

Retail landscape in India

3

Fig 1 2

Retail market attractiveness matrix based upon A T Kearney GRDI 2006
Taiwan Slovenia Hungary Chile South Korea Malaysia Slovakia China

Country Risk Economic And Political 0 High Risk 100 Low Risk

80

On the radar screen To Consider Lower priority Size of the bubble indicates retail sales of food drink and tobacco in US billions excluding taxes in 2005
Latvia

70

Lithuania Tunisia

60

Mexico

India

Saudi Arabia Romania

Thailand

Croatia Bulgaria Turkey Vietnam Russia

Brazil

Morocco Egypt

50

Philippines

Ukraine

40

Pakistan Indonesia Bosnia Herzegovina Macedonia

30 30 40

1 Market Potential 0 Low Potential 100 High Potential

50

sumerism A look at India s demographics further lends credibility to the retail story India s consumer market today encompasses over 400 million people with rising disposable incomes Population shifts towards urban areas and income shifts towards higher income classes are key factors driving consumerism Also higher incomes are now in the hands of a younger population with lesser dependencies This implies
Fig 1 3

more income available for spending rather than for savings and investment Can any retailer now afford to miss this story Another important factor announcing India s significance for retailers is the current optimal stage of readiness within India for retail and for the entry of retailers

Window of opportunity for Retail entry in markets based on GRDI rankings from 1995 2006
Stage of the market High Priority

Opening
Bulgaria 2003 Vietnam 2003 Ukraine 2004

Peaking
Russia 2006

Declining

Closing

Russia 2004

India 2006

Vietnam 2006

Kazakhstan 2006

Hungary 1995

India 1995

Slovakia 2005

China 1995

India 2003

Bulgaria 2006

GRDI Ranking

Low Priority Strategy Monitor market consider sending research team Not applicable Open sourcing office or step up retail stores test the market Consider supermarkets and hypermarkets cash and carry and convenience stores over other formats as they have higher success rates Hire and train local talent create balance with expatriate employees Scale up opening to capture market share Consider discounter models Determine market position reevaluate strategy as needed No pattern identified

Formats

Labor

Identify skilled labor pool for market

Switch balance from expatriate to local staff

No pattern identified

4

Retail in India Getting organized to drive growth

Slovakia 2006

Hungary 2006

China 2003

China 2006

Retail markets worldwide have been observed to progress through four stages as they evolve from an emerging to a mature market usually over the course of 5 to 10 years Fig 1 3 These stages are defined as 1 2 3 4 Opening A market that is just beginning its modern retail story in all major cities Peaking A market that is developing quickly and is ready for modern retail Declining A market that is still big and growing but space for new entrants is getting tighter Closing A market having small window of opportunity for new entrants such markets generally have a very high penetration of modern retail

in talks to identify the best mode of entry in India we believe it is time for them to enter through means allowed by the Indian government Already domestic retailers and conglomerates are venturing into retail e g Reliance and Birla to stake out ground in the emerging market prior to the entry of international players International retailers should adopt the strategy undertaken by the likes of Metro and Tesco in starting to test the market conditions and initializing the process for an imminent deep dive Because if they wait any longer they may see a repetition of the China story where many retailers missed the bus as the market saturated before they could get their acts together Given the attractiveness of the Indian market for retail it is no wonder that retailing already accounts for 39 per cent of India s GDP which is quite a significant proportion if compared with other developed and developing economies However the proportion of retailing which is in the organized sector is still a very small portion with penetration at 6 per cent Fig 1 4 Organized retail itself has been growing at a frenetic pace and this growth is expected to continue at a blistering rate of approximately 35 per cent per annum till 2010 Retail as a whole can be broken into categories

The above figure shows that key Asian economies viz India and Vietnam are in the peaking phase while China has just tipped into declining This means that the next one to three years are the best time for foreign retailers to enter India They cannot wait for the government to set things in order While the government has announced some benefits for foreign retailers by allowing them to own up to 51 per cent of a single brand retail company the relaxed regulations do not extend to retailers that sell a variety of brands India s government seems to be on a gradual but definite path towards allowing foreign retailers into the country And when it takes the final steps the peak time to enter will quickly pass giving retailers that enter now a distinct edge Different global retailers are
Fig 1 4

Retail is a significant contributor to India s GDP however organized retail plays only a small role in that
Although retail is a significant steadily The retail sector has been contributor to India s economy growing in India
Retail Contribution to GDP Yr 2005 India Total Retail Market Size USD Bn

and is helped by ever growing urban organized retailing is still at a very nascent stage in India population with higher disposable incomes
Organized Retail as of Total Population Urban Population Penetration

55

85 75 39

32 22 17 23 32 22 20 6 USA Brazil South Africa Vietnam China India USA Brazil South Africa Vietnam China India

Sources Economist Intelligence Unit EIU Euromonitor A T Kearney analysis

Retail landscape in India

5

Fig 1 5

Category wise retail market shares and organized penetration
80 70 60 50 40 30 20 10 0
Food and Groceries Clothing Textile Consumers Durables Jewellery Watches Home Decor Furnishings Beauty Care

75 0 20 0

25

20

15 40 0 10 0 8 0 19 0 13 0 1 0 7 0 4 1 4 1 7 0 2 9 7 0 2 1 2 0 0 6 0 3 0 5 10

Market Share Total Retail

Market Share Organized Sector

Penetration Organized Retail

Source CRISINFAC

depending on the type of products serviced For India food and groceries form the biggest category in the retail pie Fig 1 5 accounting for close to 70 However this category has the lowest organized retail penetration of 1 which is indicative of the greater opportunity available for organized retail and also
Fig 1 6

explains why so many retailers have plans for this category in the pipeline In comparison footwear and clothing segments boast the highest penetration of organized retail as international brands like Nike Reebok and Levis had started setting up shop almost a decade ago This segment may see further activity

Category wise share in organized retail

Books Music Gifts 3 Home Decor 7 Jewellery Watches 7 Footwear 9

Beauty Products 2

Clothing Textiles Fashion Accessories 40

Durables 13

Food Grocery 19

6

Retail in India Getting organized to drive growth

Fig 1 7

Organized retailers in India and the store formats being used
Format Key Players in Organised Retail Retailer Original Formats Recent formats

Food and Grocery

Food Bazaar Food World Subhiksha Nilgiris Trinethra Big Bazaar Spencer s

RPG Retail

Supermarket Foodworld

Hypermarket Spencer s Specialty Store Health Glow

Food and Beverage Barista Caf Coffee Day Mc Donald s Pizza Hut Haldirams Department Stores Shoppers Stop Lifestyle Westside Globus Piramyd Pharmacy Health and Glow CRS 98 4 Apollo Pharmacy

Piramal s

Department Store Piramyd Megastore Discount Store TruMart Mall Crossroads Department Store Pantaloon Supermarket Food Bazaar Hypermarket Big Bazaar Seamless Mall Central

Pantaloon

Books Music Gifts Landmark Crossword Archies Music World Planet M

K Raheja Group Department Store Shoppers Stop Home Home Stop Hypermarket Hypercity Speciality Store Crossword
Tata Trent Department Store Westside Hypermarket Star India Bazaar

Landmark Group Department Store Lifestyle Others

Hypermarket Max

Supermarkets Subhiksha Trinethra Nilgiri s etc Speciality Stores Vivek s Vasanth s etc

Source A T Kearney research and analysis

given the recent government guideline allowing FDI up to 51 per cent for single brand retailing

Now if we look at the split of the organized retail market of USD 15 billion for 2005 Fig 1 6 clothing and textiles has the largest share at 40 This is apparent

Fig 1 8

Domestic retailers are expanding and International retailers have significant presence in India
Hypermarkets Number of Cities Number of Stores 2004 05 Turnover USD Mn

Big Bazaar Star India Bazaar Spencer
Department

12 1 4 10 5 13 11 7 18

21 1 4

80 70

Number of Cities

Shoppers Stop Lifestyle Westside Pantaloon Globus Vishal Megamart
Supermarkets

Number of Stores 2004 05 Turnover USD Mn

20 8 20 17 12 24

112 66 54 47 17 33 70 62 58 36 34 76 48 40 34

Apparel Food Beverage

Footwear Others

Number of Cities

Spencer s Retail Across India Subhiksha Chennai Food Bazaar 14 Nilgiri s 15 Trinethra 8
Consumer Durables Number of Cities

Number of Stores 2004 05 Turnover USD Mn

54 164 35 30 80

Number of Stores 2004 05 Turnover USD Mn

Vivek s Samsung DigitAll Vasanth Vijay Sales

17 46 21 1

52 71 41 9

Source A T Kearney research and analysis

Retail landscape in India

7

from the existence of exclusive brand stores as well as specialty chains for apparel other than the upcoming hypermarkets and department stores which also stock and sell apparel Next is food and groceries which occupies 19 per cent of the organized market share and with increased organized retail penetration this share is expected to move up While organized retail is possible in many categories and in India there are organized retailers in the key categories the retailers are currently operating using primarily three types of store formats 1 2 Specialty store Catering to a particular specific category Department store supermarket hypermarket Catering to two three or more categories of retail The distinction being in the sets of products carried Mall An agglomeration of department stores hypermarkets and specialty stores In addition this would have restaurants and food courts entertainment zones and multiplexes along with

huge parking plazas Retailers are also adapting their store concepts to fit with the changing dynamics of the consumer market Fig 1 7 The players in the organized retail sector are currently vying for a small chunk 6 per cent of the overall retail market However with retailer emphasis on geographical expansion diversification into multiple retail formats product and price positioning and potential consolidation and scale benefits the organized retail pie is expected to grow Fig 1 8 The retail landscape as portrayed is bustling with opportunities and retailers trying to establish a foothold in this exciting retail market however there are issues lurking within the business environment which provide challenges to a smooth and easy entry and uptake for retailers In the following section we aim to bring to light the key issues that ail the retail sector and analyse the issues for relevance by city clusters and states to prioritize them for suitable action

3

8

Retail in India Getting organized to drive growth

2 Key issues in the way of retail growth in India

10

Retail in India Getting organized to drive growth

2 Key issues in the way of retail growth in India
hat Indian retailing is poised for growth is known to all But that s not the whole story We believe there are infrastructure and policy bottlenecks that need to be removed if Indian retailing needs to get on a faster growth trajectory These bottlenecks become even more prominent in case of organized retail development In this section we shall identify and prioritize key issues in the way of retail growth in India

T

Characteristics of retail will not be homogenous across states hence it becomes necessary to segment the country into clusters with homogeneity across issues For this study we have segmented India into five clusters using economic and demographic indicators The demographic indicator used is population 2 As an economic indicator we have used Market Potential Value MPV It is a comprehensive index that includes purchasing power consumption behaviour media reach

Fig 2 1

Segmentation of India into five clusters with illustrative examples Favourable

Metros Large Cities Mumbai Delhi Kolkata Chennai

Market Potential Value

Small Cities Agra Amritsar Asansol Nasik Rural

Ahmedabad Nagpur Jaipur Pune

Towns Ujjain Rohtak Nellore Hisar
Population High

Sidhpura Jamna
Unfavourable Low

2 Other indicators could have been used but population has been shown to be the most critical demographic indicator for the retail sector and has therefore been used in the study

Key issues in the way of retail growth in India

11

and awareness Fig 2 1 shows the five clusters metros large cities small cities towns and rural It must be noted that cluster analysis will be used to identify issues and prioritize them however while some issues can be tackled at the cluster level a majority will need government intervention due to policy impact

Key issues identification
An analysis of the retail landscape across India highlights ten key issues that hinder development of the sector Since these issues can be pertinent for the retail sector specifically or for the overall Indian industry they were rated based on their importance for the retail sector and the Indian industrial sector The origin of these issues and hence their ownership lies with different stakeholders Therefore these issues were also rated based on the extent to which government and industry could control them A 2 x 2 matrix was subsequently created which used the two dimensions to segment the issues The issues were then classified into four categories Generic infrastructure issues These are environmental challenges faced by the Indian industry as a whole and some of the issues like underdeveloped supply chain are critical for retail sector

Generic policy issues They are issues affecting the industrial sector that are shaped by government policies Some of these issues like real estate hurdles can have significant impact on the growth of the retail sector Specific infrastructure issues Issues that are specific to the retail sector and are also controlled by it comprise this category Since the retail industry can affect these issues they are very critical from the industry perspective Specific policy issues Retail sector specific policies like sector incentives fall into this category Fig 2 2 illustrates the categorization of ten key issues The key issues are outlined below Underdeveloped Supply Chain The country lacks quality logistics infrastructure which hinders scaling up of retailing operations Inadequate Utilities Lack of basic infrastructure like power transport and communication creates difficulty in sustaining retail operations across the large geographical spread of country IT Infrastructure Hurdles Reliable IT infrastructure is important for managing modern supply chains which are the backbone of any retailing business and India faces a clear problem in this

Fig 2 2

Key issues in the Indian retail sector
Indian Industry General Generic Infrastructure Issues Underdeveloped Supply Chain Inadequate Utilities IT Infrastructure Hurdles Specific Infrastructure Issues Real Estate Hurdles Generic Policy Issues

Taxation Hurdles

Specific Policy Issues

Supply Base Hurdles Inadequate Human Resources

Insufficient Government Incentives Policy Related Hurdles

Retail Sector Specific

Limited Consumer Insights Infrastructure Market Issue

Policy Issue

12

Retail in India Getting organized to drive growth

tion especially in the vast rural hinterland area as the non urban areas have limited IT infrastructure There is also no reliable national cold chain system Real Estate Hurdles Archaic laws prevent the leading to enormous wastages especially in rural India much needed growth in real estate development unofficial loss estimates are over Rs 50 000 crore in which is imperative for retail growth food products alone There are multiple benefits of Taxation Hurdles The tax structure in India is still proper cold storage facilities The financial benefits can complex and evolving creating challenges for retailers Supply Base Underdeveloped logistics infrastructure Hurdles Underdeveloped The supply Absence of national cold chain networks Supply Chain base for the retail sector Lack of national distribution networks and hubs is fragmentbe shared between the farmer the consumer and the ed due to government policies and legacy issues retailer thereby making organized retailing more which prevent economies of scale in retail sector attractive for all stakeholders Currently each retailer is Inadequate Human Resources There is hardly required to set up individual cold chain facilities and any systematic effort to train manpower for the this makes the cost of organized retailing of mass use retail sector which can create a bottleneck for consumer products prohibitive growth Limited Consumer Insights There is limited India also lacks national level distribution networks knowledge about the consumer behavior due to and hubs Fragmented supplier network in rural areas limited market research conducted on the huge lead to multiple levels of product handling Also conpopulation in towns and rural areas sumer product companies are more focused on front Insufficient Government Incentives end distribution and hence the distribution model is Government is yet to create any major sector spemore robust in urban areas with high consumer concific policies to boost the retail sector centration Policy Related Hurdles The policy environment in India is complex creating challenges for growth While studying Indian states we found there are no and establishment of new business standard best practices in India Maharashtra and Tamil Nadu have the best road and rail network in Generic infrastructure issues India respectively while West Bengal has the maxiSupply chain utilities and IT infrastructure hurdles are mum cold storage capacity in India Globally a better generic infrastructure issues that will be addressed by logistics infrastructure is sustained through road mainthe natural evolution of the industry tenance and capacity utilization of the rail network and this is particularly true in developed countries like Supply chain is a key bottleneck for retail sector the US There are also several specialized refrigerated growth India lacks efficient and reliable logistics infrawarehousing and cold state transLack of adequate and reliable power water and gas portation compasources Inadequate nies in the US and Inadequate public transport facilities Utilities UK that provide professional servInadequate telecommunications and internet facilities ices to the retailing industry Indian companies would do well to introstructure in roads rail and ports We also have a highly duce such practices fragmented trucking industry and absence of reliable national service providers Accordingly supply chain We believe that while the supply chain will evolve management SCM systems have very low penetra

Key issues in the way of retail growth in India

13

meet contracts Increased use of point of sale systems will help speed up the consumer check out process allow multiple payment options minimize human error and help create a consumer database Use of IT infrastructure is still very nascent in India Only some urban areas are equipped to use internet as a selling An acute shortage of power clean water and natural medium this prevents international standards from gas in urban areas are bottlenecks for large organized entering Low automation level in supply chain and point of sale India and are a systems IT Infrastructure major No real time link between suppliers warehouses retail Hurdles deterrent stores for large Lack of online presence of retailers scale organized retailing development retailers at times they have to pay significantly for these utilities and these additional costs are passed to Currently we see global benchmarks much higher than the consumer Power shortage is a major problem Indian standards in IT infrastructure New Zealand has across India implications range from absence of cold the highest internet penetration with over 76 per cent chains to the need for alternative power source instalof its population having access to the internet comlations The situation in rural India is even worse for pared with a 4 5 per cent penetration rate in India these utilities Similarly US retailers lead the industry in Internet retailing with online sales in the US having jumped to The underdeveloped transport system is another key over US 86 billion in 2005 and forecast to reach issue in smaller cities and towns Local railway netUS 148 billion by 2010 works are also found mainly in the metros and large cities and they are usually congested and unsafe at Among Indian states we find that Maharashtra has the times Unofficial estimates suggest freight facilities best IT infrastructure both from the retail industry perneed to be quadrupled to meet the entire national spective as well as for consumers Accordingly Mumbai demand accounts for a 24 per cent share in India s e commerce transactions Other states need to proactively develop Basic telecommunications and internet facilities are IT infrastructure both urban and rural to drive retail reliable solely in metros and large cities the available sector growth infrastructure in rural India is grossly inadequate for meeting requirements of organized retailers in India over time the retail sector needs to proactively seek government help to develop the basic infrastructure as maximum benefits from supply chain development will accrue to the rural cluster

Generic policy issues
Among Indian states Punjab has the best power and Real estate and taxation hurdles are macro level genergas telecom and water infrastructure Other states are ic policy issues that need to be addressed by the CII in also developHigh real estate costs ing howReal Estate ever the Archaic and user unfriendly land laws Hurdles pace of developLack of proper city planning models ment needs to accelerate substantially to meet industry a broader forum demand Real estate is one of the most critical issues facing Currently a high level of human involvement in supply organized retailers in India This problem is particularchain increases delays shortages and an inability to ly severe in urban areas where a lack of transparency

14

Retail in India Getting organized to drive growth

and corrupt practices increases land cost Also Indian stamp duty rates at the rate of 5 14 per cent are among the highest in the world Countries like the UK have much lower stamp duties 0 4 per cent on commercial property needed for retailing Another key issue is Indian land laws that have outlived their utility Obscure zoning laws cause confusion over use of land for commercial purposes The brunt is borne by retailers and traders as was shown in the recent sealing drive in Delhi Further landowners are likely to hike up rentals as the pro tenant Rent Control Act prevents them from evicting unlawful tenants or illegal encroachers even after providing sufficient notice

tures currently there is inconsistency among states So while most states have abolished octroi and entry tax a few states like Karnataka Maharashtra and Gujarat still have them These create delays in transportation due to long queues at check posts which is especially harmful in case of perishable goods There are other taxation issues as well Sales tax issues drive warehousing location choice many companies have one company owned distribution centre in every state to avoid paying central sales tax Similarly there are issues linked to multiple points of taxation in India For example sales tax is levied at both central and state level These prevent optimal supply chain models being developed and act as

Inconsistent octroi and entry tax structure Another issue in Taxation Hurdles VAT and multiple taxation issues metros and cities Large grey market presence is the lack of proper deterrents for organized retailing in India Similarly city planning Inadequate planning coupled with masnon uniform VAT regimes across states lead to differsive influx of immigrant workers leaves them crippled ential pricing of goods and multiple taxation formats for space Most developed countries have well for the same goods in different states planned cities providing ample infrastructure for the retail trade this ensures availability of basic space and Another issue particularly in cities is the presence of a utilities for the commercial sector Compare this to large grey market This not only impacts the price of Delhi where the master plan provides for only 16 per goods but also consumer perception should there be cent of commercial space resulting in high speculative a quality issue Very often the price is paid by retailers prices and the use of residential properties for comand consumer product companies as consumers mercial activities switch loyalties A combination of the above issues drives real estate We believe these are issues the government needs to costs to as high as 10 20 per cent of net sales forcing intervene and provide solutions to urgently Octroi retailers out of prime locations Various states are in and entry tax has been abolished by almost all develdifferent stages of evolution regarding real estate with oped countries including the USA UK and EU while no definite best practices across states Retail forums the EU has also implemented a compulsory common need to drive government to remove real estate hurVAT system among member countries Political condles for development of organized retailing and indussensus is needed to eradicate taxation hurdles for try in general industrial development in India Even though there is a drive to standardize tax strucFragmented Supply base

Specific infrastructure issues
Supply base human resources and limited consumer insights are specific

Supply Base Hurdles

Underdeveloped supplier relationship management Programs Inadequate quality assurance processes

Key issues in the way of retail growth in India

15

The inadequate availability of Inadequate skilled personStringent employment and industry laws Human nel is a key botResources tleneck with litFragmented industry approach to human resources tle help coming from government and academic institutions The probissues that need to be tackled within the retail sector lem is extremely severe in middle management levels itself as historically there have been minimal skill development programs In contrast the US has over 150 colA fragmented supply base prevents economy of scale leges and universities such as Kent State Indiana benefits for organized retailing Vendors are mostly University Texas A M etc that offer programmes small time players with no economies of scale due to ranging from associate to masters degrees in retailing SSI advantages leading to higher cost of manufacturretail management retail merchandising retail maring Also a large number of suppliers increase transacketing retail sales and fashion apparel merchandistion costs so to set up multi category organized ing developed in collaboration with industry leaders retailing is a cumbersome task as backend systems Another concern shared by employees is the lack of need to be developed from scratch There are also very adequate entry level training programs and career few long term contracts with suppliers in India comprogression plans The problem is very acute in rural pared to developed countries The lack of supplier relationship programmes reduces supplier reliaLack of detailed region specific customer data bility As a result retailLimited ers in both urban and Lack of adequate data on consumer spending patterns Consumer rural India need to Insights Absence of a central body to aggregate industry keep high inventory as information high as two three areas where there is no availability of trained personweeks in some cases due to the high average supply nel across levels time Another issue is the lack of standardized quality assurance programmes across the country This not Labour laws in India prompt retailers to prefer the paronly increases product returns and wastages across tial employment model due to the difficulty in laying the system but also presents a major credibility issue off employees Retailers are therefore reluctant to for retailers and consumer product companies introduce training schedules for employees This creates a vicious circle that can be resolved if labour laws There is currently no Indian state exhibiting superior are made more flexible Retailers face constraints on practices in supply base infrastructure Large national the number of working hours seven day operations retailers need to develop supplier relationships and standardized quality Lack of industry specific incentives assurance processes in Insufficient conjunction with conGovernment sumer product compaIncentives nies to enable the supInconsistent agriculture and fertilizer subsidies ply base becoming a source of competitive working time for women these constraints vary by advantage India can learn from the US example of states and are on the whole regressive for the developNational Retail Federation NRF that provides certifiment of organized retailing cation for various retail related aspects including quality assurance skills standards customer service certifiThe retail industry itself has done little to tackle the cation sales certification management certification issue It is very fragmented and poaching within the and testing of sites

Lack of trained personnel at all levels

16

Retail in India Getting organized to drive growth

industry is widespread across levels in an effort to hire the best talent This leads to a very high employee turnover ratio as high as 50 per cent in some cases and workforce movement occurs both within industry as well as to other industries Till date there is no significant effort to attract the best talent through active participation in undergraduate and graduate institutions We believe that retailers need to take the first step to correct the situation There is urgent need for large and mid size retailers to join hands in developing training institutes to develop talent Limited consumer insights especially in rural areas deter scientific norm setting for organized retailing and is a competitive disadvantage There is limited knowledge about consumers and shoppers across categories Advanced countries have a Consumer Confidence Index that measures consumer sentiment on various business and environmental issues In India there is limited data implying that stores cannot be easily customized for the particular local area There is inadequate data regarding consumption patterns that could have led to significant savings in terms of store operations category management and merchandising functions This is a source of competitive advantage for mom and pop stores which through experience have gained good understanding of the local consumer Also within the data generated there is limited government and private sector knowledge transfer of insights leading to duplication of efforts nationally and productivity losses Currently no region in India has made any significant progress in capturing consumer insights relevant to the retail sector that can be labelled as best practice Like human resources we believe that retailers need to join hands to develop best practices in generating

standing of the consumer will be a source of competitive advantage for organized retailers who can then spend dedicated time and resources on winning consumers

Specific policy issues
Insufficient government incentives and policy hurdles are issues that need to be taken up by retail associations and government bodies for speedy and effective resolution The government has still not granted industry status to retail This limits industry specific incentives to flow to the sector Lack of government incentives reduces investor interest in the sector the problem is worse in rural areas where investment flows are already lower Another key issue arises from the fact that the bulk of retailing in India is in food and grocery Inconsistent agriculture and fertilizer subsidies by states lead to price anomalies and variations for the same product this leads to supply chain inefficiencies It is imperative that the government should grant industry status to retail Some of the world s largest companies are retailers Indian companies are also entering the space and it is appropriate that the government should support them As stated earlier the sector is facing hurdles due to lack of industry status Financing from banks does not come by easily This leads to extremely high interest rates for retail pushing up capital cost and the problem is compounded in rural areas where financing is anyway a cumbersome process There is also no nodal government agency to frame policy and provide clearances The retail sector has been given industry status in numerous developed countries including the USA resulting in the formation of national governmentfunded industry bodies

Another issue is Policy Related Numerous license permit and registration requirements t h a t Hurdles ap proximately Farmer and retailer unfriendly APMC Act 37 45 consumer insights across regions With increased comlicenses are required to start a retail operation this petition from both domestic and foreign players causes considerable delays in starting a new store operation Often it leads to bad practices as retailers retailer margins are bound to shrink Good under

Lack of industry status for retail

Key issues in the way of retail growth in India

17

Fig 2 3

Criticality of issues across clusters
Cluster Key Issues Generic infrastructure issues To be addressed with natural evolution Generic policy issues Macro issues needing CII intervention Specific infrastructure issues To be tackled within the retail sector Specific policy issues Government and association issues
Underdeveloped Supply Chain Inadequate Utilities IT infrastructure hurdles Real Estate Hurdles Taxation Hurdles Supply Base Hurdles Inadequate Human Resources Limited Consumer Insights Insufficient Government Incentives Policy Related Hurdles

Metros
P 4 P 4 F

Large Cities
P 4 P 4 F

Small Cities
P 4 P 4 K P P 4 K P 4 P K K

Towns 0 5 0 5
K K P 4 P

Rural 0 5 0 5
P F P 4 P

0 5 0 5
K P 4 K F K

0 5
P 4 K P 4 K F K

0 5 0 5
K P

0 5 0 5
K P

Non Critical Issue 0 Critical Issue

are at the mercy of government officials for clearances Within this different states have different licensing requirements Even in the US licenses for opening retail operations are governed by individual states however the US and China follows single window clearance models which makes it ideal for retailers and minimizes time lost in bureaucratic paperwork Also as noted earlier food and grocery is the largest category within retailing The APMC Act has proved a deterrent in developing efficient practices both for the retailer as well as for the farmer The Act provides a monopoly status to the state owned Agricultural Produce Marketing Committee in the purchase of agricultural produce from farmers As a result the supply chain is lengthened farmers are not able to realize favourable prices due to the monopoly and consumers have to pay higher prices since the APMC s are typically cartelized For retailers it becomes difficult to source items directly from farmers They are forced to rely on intermediaries thus causing systemic inefficiencies A look at Indian states suggests there is no best practice in license permit and registration requirements and the procedure is cumbersome across the country

Along with the long drawn process there is also no standardization across states Retailer associations need to consistently engage with governments to bring standardization across policies

Key issues prioritization
We see that ten key issues hinder development of retailing in India However not all issues are of equal importance across clusters Fig 2 3 shows that while supply chain utilities taxation and human resource hurdles are the most critical issues across all clusters real estate and consumer insights are critical cluster specific issues Our analysis shows that while there are issues that need government intervention across state and central levels retailers need to proactively develop their own solutions as well We believe Indian retailers are currently fragmented they need to cohesively generate solutions to retail issues and present their case to the government as and when needed In the next section we shall highlight specific imperatives for retailers and the government to accelerate growth in the retail sector

18

Retail in India Getting organized to drive growth

3 Key imperatives

20

Retail in India Getting organized to drive growth

3 Key imperatives
ased on the study of the Indian retail sector a comprehensive set of actionable recommendations were developed for the Central government State governments and the Retail Industry in India These recommendations cover both infrastructure as well as policy related issues pertaining to the retail sector in India

B

the US has over 150 colleges and universities such as Texas A M Indiana University etc that offer programmes ranging from associate to masters degrees in retailing developed in collaboration with industry leaders in retail At the same time it should also work towards developing a trained middle management layer by providing effective career guidance to entry level managers This is aptly supported by India s score on A T Kearney s Retail Labour Index Table 3 1 which is just average reflecting an inadequate availability of required workforce and increasing salary levels Appropriate career path and personnel management techniques need to be adopted to ensure a steady supply of senior managers from within the company by honing skills at junior levels Retailers should widen the net of the qualified labour pool by also looking at people with relevant functional experience in similar sectors but not necessarily from retail In terms of criticality both these initiatives are important in today s context considering that India does not have a well developed pool of trained retail executives and there aren t many specialized programmes on retail management in most Indian universities

Depending on their relative importance the initiatives have been prioritized so as to ensure that the most critical ones are taken up by the concerned stakeholder at the earliest

Imperatives for the Retail Industry
The Indian retail industry needs to act as a unified body and drive the following initiatives with immediate effect to facilitate the development of the retail sector in India Invest in human resource development Develop mechanisms for understanding consumer behavior and satisfying customer needs Improve supply chain infrastructure All the above mentioned initiatives have been accorded the highest priority and should be taken up together in right earnest by the retail industry

Invest in human resource development
The retail industry should actively work towards developing training programs both in house and in association with schools to provide training on retail management operations merchandising marketing sales etc They should actively participate in the design of customized retailing courses and also in their delivery in classrooms by teaching some classes For example

Develop mechanisms for understanding consumer behaviour and satisfying customer needs
The retail industry needs to better understand the Indian customer and his or her behaviour Retailers should together develop a fact base on Indian customer trends across regions and city clusters that should be updated at regular frequencies so that it can

Key imperatives

21

Table 3 1

A T Kearney Retail Labor Index and India s Rank
2006 Retail Labor Index Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

2006 GDRI Rank
19 14 8 7 23 26 22 1 4 5 9 27 2 15 18

Country

Weight Slovakia Malaysia Slovenia Latvia Hungary Lithuania Romania India Ukraine China Croatia Brazil Russia Macedonia Bulgaria

Talent Availability 50 100 66 69 61 61 62 50 43 55 48 56 34 54 61 54
0 Low Talent Availability 100 High Talent Availability

Talent Development 30 79 96 62 65 64 64 50 100 49 55 29 80 6 10 0
0 Low Talent Development 100 High Talent Availability

Labor Economies 20 77 100 65 82 86 78 81 28 59 70 58 45 83 44 69
0 High Cost of Labor 100 Low Cost of Labor

Retail Labor Index Score
100 75 66 65 65 64 50 50 49 48 43 40 39 37 34

Legend

Source

World Bank Doing Business 2005 World Economic Forum Global Competitiveness Report 2005 06 International Labor Organization s LABORSTA Database A T Kearney

serve as a common starting point for customer needs analysis Fig 3 1 Further specific customer insights should be gleaned from PoS data analysis CRM tools and analytics by retailers so as to be the basis for providing customers with an ideal shopping experience Based on customer data and analysis retailers should segment customers and target products service offerings to satisfy their specific needs This will ensure optimal utilization of investments and resources in meeting actual customer needs leading to enhanced productivity and cost savings and improved RoIs as opposed to adopting a generic and broad based approach that attempts to meet all customer requirements and satisfies none Indian retailers should also take the lead in setting up a Consumer Confidence Index similar to the ones in the US China and Brazil to track consumer behaviour and spending patterns The index should then be analyzed using scientific techniques and the results can be used to guide pricing and promotions related decisions and other category management issues Retailers should also explore appropriate store management practices to enhance the customer experi

ence and induce further spend by better presentation good product assortment and availability Adopting category management techniques in handling specific product categories in terms of packaging pricing demand fulfilment and replenishment will also serve to present a positive shopping outlook to consumers resulting in greater sales

Improve on supply chain infrastructure
The current transport infrastructure in terms of road and rail network is being improved but an accelerated track should be taken to realize the benefits of having streamlined supply chain fresher products and reduced logistics costs leading to increased sales and better margins For example in the US 75 per cent of the national road budget is spent in upkeep and maintenance of roads as travel worthy as opposed to 50 per cent for India Similarly rail capacity utilization is better in the US with 3 3 kilo tons per wagon per year as versus 2 3 kilo tons per wagon per year for India The retail industry should take it upon itself to develop the stakeholders in the logistics process transport companies warehouse providers and build long term relations with them to leverage the benefits of a supply chain running like clockwork

22

Retail in India Getting organized to drive growth

More relevant for retailers is the development of a sustainable cold chain infrastructure An effective cold storage infrastructure would be extremely beneficial for the overall retail sector and would be helpful in cutting down supply chain losses A T Kearney sees the greatest opportunity to capture these benefits through an industry sponsored consortium The consortium should promote the entry and growth of specialized companies providing refrigerated warehousing and cold storage transportation following the US and UK model The industry leaders should also lobby with the government to allow global cold storage majors into India or set up their own consolidated cold storage network Following this retailers can tie up with suitable cold storage transportation providers and invest in and foster the consortium to create a step change in how perishable items are transported in India today A mutual commitment to further the cause of retail in India some investment and an effectively managed launch can in a short amount of time create a much needed
Fig 3 1

cold chain and deliver the much desired value to the consumer

Imperatives for the Government
Retail is the single largest sector in India at USD 320 bn and has strongly emerged as a leading economic transformation driver We all know that only 6 per cent penetration of organized retail clearly signifies a huge opportunity in India and organized retail is expected to explode at close to 35 per cent growth rates for the next few years even without major structural changes in the economy What does this mean for Indian Governments at both state and central levels It calls for a strong recognition and support to the fast growing necessities of this sector for sustaining growth Governments at the centre and states need to engage with the sector and utilize its potential for overall economic development This sector begins and ends with the consumer Governments and economies that focus on the consumer are the ones that will derive maximum benefits from the growth opportunity in Indian retailing

Illustrative customer insight analysis Market clusters in India

North India 30 35 of total market Key States Haryana Punjab Uttar Pradesh

West India 25 30 of total market Key States Maharashtra Gujarat Madhya Pradesh
Legend Population Density people sq km 100 100 300 300 500 500

East India 10 15 of total market Key States West Bengal Orissa Bihar

South India 15 20 of total market Key States Kerala Tamil Nadu Andhra Pradesh

Source Census 2001 A T Kearney Analysis

Key imperatives

23

Before laying out the action plan for Indian State and Central Governments we analysed strategies adopted by other governments South Africa and China For South Africa it was observed that significant positive changes in retail sales and in overall economy were propelled by substantial tax reductions and a new Labour Relations Act shown in Figure 3 2 These
Fig 3 2

reforms enabled retail sector to become the largest employment sector in South Africa with a workforce of over three million individuals shown in Figure 3 3 China s government played a vital role in promoting development of organized retail primarily through FDI The number of convenience stores grew from 899

Changes in policy led to retail growth and growth in related sectors in South Africa
Policy changes throughout the 1990s catalyzed growth in the retail sector which in turn had its impact on agriculture and the construction sector amongst others

Impact on the Economy
Agricultural Produce
R 53 3 b R 38 8 b
20 15 10 5 0 5 10 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

GDP vs Retail Sales

Construction Industry
R 100 4 b

R 19 7 b

1993

2002

change in GDP change in retail sales

1994

2004

Repeal of the agro marketing policies allowed retailers to source products directly from producers and both sectors benefited greatly as 55 of supermarkets sales come in food and grocery Demand for retail real estate boomed as a result of the growth in the retail sector and favourable economic conditions A look at the pattern of movement in retail sales and GDP shows that while the impact is greater on retail sales it is a leading variable and shows the impact that an increase in sales has on the economy in the future
Sources Statistics South Africa Food and Agriculture Organization of the UN A T Kearney Research

Fig 3 3

South Africa Retail sector employment growth in sector
3 500 3 000 2 500 2 000 1 500 1 000 500 0 1994 1995 1996
Agriculture

CAGR 7 5

1997

2001
Retailing

2002
Finance

2003

2004

2005

Manufacturing

Employment in the retail sector grew at a CAGR of 7 5 just lower than employment in Finance and Construction

In 1994 retailing accounted for 17 2 of all employment however by 2005 the retail sector accounted for with 24 6 of all employment in South Africa
Sources Statistics South Africa A T Kearney Research

24

Retail in India Getting organized to drive growth

Fig 3 4

China s policy intervention on FDI has driven retail sector growth
Retail Sales grew at a CAGR of 19 8 for the next five years after the introduction of FDI in 1992
Retail Sales USD bn
600 500 400
100 FDI allowed All major restrictions removed Foreign shareholding in JV could exceed 50 Provincial and regional capitals opened for FDI FDI CAP 49

Growth of Modern Retail Formats 2000 Convenience Stores Supermarkets Hypermarkets 899 1 690 104 358 2004 7 371 4 654 705 738

300 200 100

FDI allowed in 11 cities with minority stake in JVs FDI CAP 26

Other nonfood formats

Sales trend line had there been no policy intervention

0 1987 1989

Organized retail which accounts for 20 of China s total retail sales is expected to go up with deregulation

1991

1993

1995

1997

1999

2001

2003

2005

Sources Economist Intelligence Unit A T Kearney analysis

in the year 2000 to 7 371 in 2004 And in parallel supermarkets grew from 1 690 to 4 654 and hypermarkets from 104 to 705 It is shown in Fig 3 4 The strategy in the Indian context has been articulated in a set of key initiatives that need to be driven by the central and state governments in order to facilitate the growth of the retail sector in India The initiatives have been separated based on whether they fall under the ambit of the central or the state government

medium priority As much has been written and said about FDI in the retail sector this report has not delved into its implications FDI in retail has become a political issue and will require political strength to pass it through

Grant industry status to the retail sector
Granting industry status to the retail sector should be the first initiative on the part of the Central Government to ensure growth of the retail sector in the country A regulatory body on the lines of TRAI the telecom regulator should be set up to legislate on industry norms tax enforcement and consumer protection A related step would be to ease up bank financing for the sector including insurance norms that do not exist currently This action would facilitate financing options that would enable the retail industry to expand and grow rapidly It would also result in a much needed nodal agency for business aspirants in the retail space that will help in simplifying the processes and procedures Going forward this step is extremely critical in strengthening the sector s competitiveness and building a platform for the growth the retail industry promises

Central Government
The Central Government is a key stakeholder in the development of the retail sector in India It has to review some of its existing policies to ensure that all bottlenecks in the path of growth of the retail sector are removed and an appropriate environment is provided to facilitate the growth of the Indian retail sector The Central Government needs to take up the following initiatives to achieve this goal Grant industry status to the retail sector Establish minimum quality assurance standards Reformulate the Small Scale Industries policy The first two initiatives have been accorded the highest priority while the third initiative has been given

Key imperatives

25

Establish minimum quality assurance standards
Another key step towards ensuring the development of retail sector in India would be to mandate compulsory assurance for product and service quality This would help in establishing minimum quality assurance standards for the entire industry The Central Government should also facilitate setting up a system to provide certification on quality assurance skills standards customer service etc to ensure minimum best practices across the industry The element of quality is extremely crucial for the future of the current retail boom in India It would be essential for the retail industry to spruce up quality standards as they grow at a rapid pace As and when the FDI opens up the challenge to meet world class quality standards in order to sustain the exhilarating growth would only get tougher Although the players need to gear up now the key to implementation of minimum quality assurance standards lies with the Central Government and hence the Government should respond to this need proactively

policy formulation decisions fall in their domain These policy decisions will play a vital role in significantly easing the constraints under which the retail sector is currently operating in various Indian states The state governments need to take up the following initiatives to facilitate the development of the Indian retail sector Amend labour laws Undertake real estate reforms Undertake taxation reforms Amend state level policies to simplify retail operations set up and supply chain practices Improve logistics and utilities infrastructure Develop IT infrastructure Of the above mentioned initiatives the first four have been accorded the highest priority while the last two have been given medium priority

Amend labour laws
The government should amend the Shops and Establishment Act to allow flexibility in working hours including seven day operation of stores It should also simplify hiring firing rules to promote at will employment and performance measurement systems It is an area that directly controls industry s ability to respond to growth opportunities and hence it requires a transformation that recognizes the growth opportunity and its impact on the country s economy Currently the industry is struggling to capitalize on the growth prospects and is unable to maximize its resource potential In an environment where the sector is leading the country s economic growth this scenario is alarming and should prompt the authorities to urgently make the necessary amendments

Reformulate Small Scale Industries policy
The Central Government should periodically review its small scale industry policy and gradually remove reservations on SSI manufacturing of 506 items to promote consolidation of supply base The government should also study the applicability of China s TVE structure for India TVEs or Township and Village Enterprises are a form of rural cooperatives in China that are partly subsidized by the government Although the SSI policy has been formulated to guard the interest of small players in the industry it s time we looked at the long list of 506 items for serious revision urgently Otherwise this policy would act as an unnecessary safeguard for categories which would actually benefit from healthy competition and thus would provide customers with more choice better products and better price

Undertake real estate reforms
A key initiative to be undertaken by the respective state governments is to bring about reforms in the real estate sector This would entail reforming land use regulations including Urban Land Control Ceiling and Regulation Act and Rent Control Act to simplify usage and increase transparency for retail operations in renting places and utilization of those premises It would also require the state governments to reduce peak stamp duty on commercial property to 2 per cent to promote healthy registration practices There is definitely a case for reduction of stamp duty when one

State Governments
The respective state governments in various states within India have a key role to play in the development of the retail sector in the country as many of the key

26

Retail in India Getting organized to drive growth

compares that even the lowest Indian stamp duty is 5 per cent whereas in countries like the UK the stamp duty for retail property ranges from 0 to 4 per cent Another step for easing registrations would be to computerize land records so as to allow visibility of all registrations thus clearing any potential issues in land ownership and legality The governments should also undertake detailed city planning exercises with adequate commercial space allocation Currently Indian cities lag behind in allocating dedicated space for commercial and retail activities For example in Delhi the future master plan keeps aside only 16 per cent of planned space for commercial purposes as compared to over 20 per cent in markets like the UK and Hong Kong Thus the government would be taking a step in the right direction and provide an incentive to retailers to set up shop by allocating a substantial portion of city space for retail purpose

rience a next level growth and transformation that will lead India into a Developed Nations league

Improve logistics and utilities infrastructure
The state governments should consider the public private partnership model for road and rail infrastructure including construction and maintenance thus sharing the responsibility of improving logistics and infrastructure with the private sector They should also increase power generation capacity and transmission capability in their respective states thus creating a conducive environment for businesses to flourish Another area of focus should be towards modernizing airports and improving their freight handling capability Other infrastructure improvement avenues such as promoting rain water harvesting and developing plans for efficient water utilization should also be explored Infrastructure in India is a far cry from what one of the world s fastest growing economies should ideally have And with the pace at which the retail industry in India is growing infrastructure issues are bound to pose a significant challenge to growth prospects The state governments have no option but to make sincere efforts towards improving the logistics and utilities infrastructure State governments role will be extremely critical to support growth over the next few years

Undertake taxation reforms
The state governments should implement a uniform VAT policy and deploy resources to increase collection efficiency Also octroi and entry tax should be abolished across all states State level policies should be amended to simplify retail operations set up and supply chain practices They should rationalize license requirements from the existing 37 45 licenses to moderate levels reduce contact points and permit license reuse this will help faster start up of retail operations and release blocked capital They should also amend the APMC act and adopt the model act suggested by the Centre this will improve agricultural product pricing by allowing efficient market driven practices The Government urgently needs to recognize the fact that players in the industry leading the country s economic transformation are plagued with different tax structures across various states which restricts them from being competitive in their own country Simplification of tax structure and implementation of a uniform VAT policy will not only help the retail players achieve higher levels of competitiveness but will also have the government at state and central levels expe

Develop IT infrastructure
Developing IT infrastructure in their respective states should be another area of priority for the state governments This would entail increasing internet penetration and reducing access costs developing a model similar to the telecom sector The state governments should also promote real time linkages throughout the retail supply chain to minimize wastages and support faster decision making It will not only ensure a much greater degree of effectiveness and efficiency in processes but will also take the advantages and benefits of the retail boom to the interiors of India While the industry plays its part of achieving higher levels of growth and competitiveness Governments should make it accessible and available to the masses the impact will be positive and twofold firstly an increase in the standard of liv

Key imperatives

27

ing of the rural population and secondly the retail industry will become even more competitive when it has a broader market space

Central government driven initiatives
Policy Framework Initiatives Grant industry status to retail Reduce license requirements for starting retail operations Amend APMC Act to allow contract farming The policy framework initiatives would also require the involvement of the state government in some cases

Initiatives for select states
A series of initiatives has been proposed for seven Indian states and Union Territories Andhra Pradesh Chandigarh Delhi Maharashtra Tamil Nadu and West Bengal to facilitate the development of retail in these regions The key stakeholders responsible for each of these initiatives have also been identified The initiatives have been proposed at the state level rather than at the cluster level as many of the policies relevant to retailing are typically formulated at the state level

State government driven initiatives
Supply Chain Development Expand rail network to increase reach and density and increase capacity utilization per wagon Also expand cold storage facilities with the help of the retail industry to meet the growing demand Real Estate Reform Urgent reform needed in the Urban Land Ceiling and Regulation Act The state also needs to speed up computerization of land records and online availability Tax Regime Reform Repeal octroi tax immediately to unite national markets Utility Services Development Urgent need to address the power shortage in the state Similarly initiatives have been suggested for the other six states of the sample set These initiatives have been attached in Appendix under section Initiatives for select states

Initiatives for Maharashtra
The following initiatives have been proposed for Maharashtra to facilitate the growth of retail See Fig 3 5

Retail industry driven initiatives
Generating Consumer Insights Urgent need to develop a national Consumer Confidence Index similar to that used in the United States China and Brazil

Fig 3 5

Maharashtra Initiatives
Development Area 1 Supply Chain Development Key Recommendations Expand rail network to increase reach and density and increase capacity utilization per wagon Expand cold storage facilities to meet greater need Ownership State government and Retail industry

2

Real Estate Reform

Urgent reform needed in the Urban Land Ceiling and Regulation Act State government The state needs to speed up computerization of land records and online availability Urgent need to develop a Consumer Confidence Index similar to that used in the United States China or Brazil

3

Generating Consumer Insights

Retail industry

4

Policy Framework Initiatives

Grant industry status to retail Reduce license requirements for starting retail operations Amend APMC Act to allow for contract farming

Central and State government

5

Tax Regime Reform

Repealoctroitax immediately to unite national markets

State government

6

Utility Services Development

Urgent need to address the power shortage in the state

State government

28

Retail in India Getting organized to drive growth

In summary the belief is that when all the initiatives highlighted above are taken on board and implemented by the respective stakeholders at various levels there is bound to be significant positive impact on the Indian retail sector

Key imperatives

29

30

Retail in India Getting organized to drive growth

4 Conclusion The impact of recommended changes will be significant

32

Retail in India Getting organized to drive growth

4 Conclusion The impact of recommended changes will be significant
ome of the recommendations coming out of this study are already on the path of implementation Maharashtra recently announced plans to phase out Octroi charges a few companies are already teaming up with education institutes and some labour laws are being modified to be more supportive of the retail industry Other changes will also come over the due course of the industry s evolution However if retailers want to succeed in today and tomorrow s environment they will need to continuously focus on generating more value for the consumer And until some of the core fixes are implemented supply chain consumer insight etc much of that value is being lost in the system

S

Additionally and perhaps more importantly there is an opportunity for a step change in the trajectory of retail sales growth As a consequence of all these foundational issues being addressed A T Kearney projects a 11 12 CAGR up from a historic 7 8 which will accelerate sales to 504 billion by the year 2010 Fig 4 1 This will add approximately USD 80 billion in incremental revenues over the current trajectory The future for organized retail in India is a bright one The demographics the sense of optimism and the deep rooted entrepreneurial culture are ready ingredients for success

Fig 4 1

Retail Growth Projections
India Total Retail Market Size USD Billion
600 500

CAGR 11 12 504 bn Revised Trajectory
A T Kearney Projection

421 bn
400

CAGR 7 8 321 bn

Current Trajectory

300 200

238 bn

100 0 2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E

Source A T Kearney Analysis

Conclusion The impact of recommended changes will be significant

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The retail industry needs to get organized and drive its own destiny The government needs to be lobbied with to help create a conducive environment so that the latent entrepreneurial spirit can get unleashed and ultimately value can be delivered to consumers who will push their shopping carts and participate actively in this great retail boom

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Retail in India Getting organized to drive growth