Coming of age for retail sector

There is renewed hope that 2011 would lay the foundation for organised retail to move from a decade of experimentation to a decade of consolidation.

Organised retail in India is that paradox which has been on the top of the potential chart for almost half a decade, but can still be considered only an infant in the retail maturity curve.

As we get into the new decade, the promise still remains and a healthy concoction of retailer maturity and systemic changes will enable organised retail to reach the estimate of 12-13 per cent of the estimated over $500 billion (Rs. 22,78,000 crore) in the next five years.

It is no secret as to what really is the current state of organised retail and even more so what are the reasons behind it.

While the last decade has been one of experimentation, the coming decade would be that of consolidation as far as the maturity of organised retail is concerned.

The retailers have been dabbling with a variety of formats, supply chain configurations, product portfolio, project financing, manpower planning and so on, and have had a mixed bag of success. At the end of the decade, there is a certain amount of confidence in the Indian organised retailer on how to really tap the Indian opportunity.

Unfortunately, the systemic issues of poor supply chain infrastructure, restrictive foreign direct investment policies, and complex tax regimes and so on have also been the highlight of the last decade.

As we enter the new decade, there is growing awareness and acceptance among the political circles of the positive impact of organised retail on the economy, including the possibility of coexistence of organised with traditional formats, better realisation to farmers, supply side efficiencies and so on.

It is in this context that organised retail in India enters the new decade and as green shoots appear in the industry, there is renewed hope that 2011 would lay the foundation in terms of systemic changes for organised retail to move from a decade of experimentation to a decade of consolidation. As we stand at this threshold, we see few key themes emerging in the market:

The battle hardened retailer


Apart from the negative effects of the recession which have been talked about a lot, the slowdown has proven to be a blessing in disguise for the Indian retail industry.

The retailers who survived the economic downturn got creative and competent with their business models.

They have started focusing on their fundamentals rather than being irrationally exuberant in their expansion. Retailers would continue to chalk out and implement their expansion plans while keeping a keen eye on financial health, operational best practices and customer focus.

Growing dominance of private labels


Walk in to any retail store and one would see the in-house brands sharing shelf space with other well known brands. Organised retailers have been successful in garnering demand and increasing revenues shares of private labels.

With an average cost for private brands around 15-20 per cent lower due to the absence of intermediary's margins and logistics costs, this is one more pillar for addressing the Indian markets beyond the top of the pyramid.

This in turn would also create a huge business opportunity for the smaller vendors to supply semi or finished products for private labels.

Supply chain innovations


Retailers have started experimenting with new business models so as to achieve maximum efficiency from their supply chain. One key trend would be the collaborative models in the form of joint venture partnerships to tap international best practices in the absence of an FDI policy.

Another concept is the collaboration among competing players in back-end resource sharing to reduce operational costs and improve margins. We would also see vertical integration gaining foothold where product firms move downstream into retailing.

Enabling infrastructure


One of the key learning from the last decade is that we seriously lack efficient enabling infrastructure. With an estimated loss of 30-40 per cent of produce in transit, creating this would become a must do both for the private players as well the government.

This has become all the starker with these supply constraints playing into the high inflationary pressures we are currently facing in essential commodities.

Whether it is efficient logistics or transparent commodities trading, the focus on enabling infrastructure would be a priority for both private as well the government. Private participants to prove the efficiencies that organised retail can bring in and government to control the price shock the economy is reeling under.

Policy liberalisation


Though government policies are probably the most challenging topic to take a guess on, the current state of commodity prices probably would prompt them to take some serious measures.

Almost two years after the release of the paper titled "First Discussion Paper on Goods and Services Tax in India", it is expected to be introduced in 2011.

The implementation of Goods and Services Tax should simplify the supply chain for consumer goods, make cash flow improvements by removing the excise duty on goods manufacturing, lower business input costs, rationalise prices and enable enhanced profitability due to the exclusion of tax cascading and so on.

Similarly, opening up FDI in multi-brand retailing may come up seriously for consideration in the current context that requires serious best practices and efficiencies to be brought in.

To conclude, organised retailers were supposed to bring in the "farm-to-fork" model which was expected to give a higher price to the farmers and a lower price for the consumer.

But facts suggest that they have not been able to live up to the generated expectations.

While this could probably be attributed to pains of the "decade of experimentation", 2011 would be a defining year on how private players as well as the government lay the foundation for ushering in the "decade of consolidation" and making organised retail deliver what it potentially could given the right environment.

Karthik Ramamurthy is Head, Synovate Business Consulting, and Pratik Puprediwar is Senior Consultant with the organisation