The retail industry has been one of the major growth drivers of the Indian economy—contributing over 10% of the country’s GDP and around 8% of employment. 1 Swapna Pradhan explores how the industry has grown till now, challenges posed by the rise of onlin
Swapna Pradhan, Welingkar Institute of Management, scrutinizes the Indian retail sector and lays bare its strengths and shortfalls.
Retail in India is dynamic as well as complex. The country’s retail market stood at $672bn in 2016 and is expected to touch $1.2 trillion by 2020.2 Unorganized or traditional retail makes up almost 90% of the market while the organized segment is only 9-10% ($60bn). Between 2005 and 2015, the overall retail market grew at a CAGR of 12-13%, with organized retail growing at ~22%. The market comprises several verticals such as food and grocery, apparel, consumer durables, mobile and IT, home decor and furnishings, footwear, health and beauty, books, and music. Food and grocery is the most dominant, with almost 65% of the category share; but it has the lowest organized retail penetration (ORP) at 3%. ORP is the highest for consumer durables at 33%, followed by apparel at 23%, and footwear at 22%. Steady economic growth, a
large youth population, increase in urbanization, and greater consumer awareness have fuelled the growth of the Indian retail market. International brands and retailers have also reposed faith in India’s growth story and the country was ranked second on the 2016 Global Retail Development Index, AT Kearney.
The country has also witnessed rapid growth in ecommerce in the past five years, enabled by the enhancement of IT infrastructure and penetration of smartphones. E-tailers have aggressively pursued augmenting customer experience and facilitated multiple payment options to deal with the lack of trust, which was a key factor that stopped many from adopting e-tail. The present online shopping spend in India is estimated to be around $8bn and is expected to cross $45bn by 2020.
growth of Indian retail
Post independence, retail in India evolved to support the unique needs of the country given its size and complexity. Pre-liberalization, the domestic retail market was characterized by outlets set up by manufacturers. These were largely fabric and apparel outlets. The early
90s saw a gradual shift to modern formats that included department stores, hypermarkets, supermarkets, and specialty stores across a wide range of categories. However, it was only around the turn of the century that the speed of change and growth in retail caught momentum. Large Indian corporate houses saw retail as an opportunity and entered the space with various formats and product offerings. Malls started dotting the landscape and many international brands started showing an interest in the growing market. Between 2006 and 2016, successive governments eased FDI norms for retail and as on date, 100% FDI in single-brand retail and up to 51% in multi-brand retail with prior government approval is permitted. According to the Department of Industrial Policies and Promotion retail trading received FDI equity inflows totaling $537.61mn during April 2000–March 2016.
E-tailers have aggressively pursued augmenting customer experience and facilitated multiple payment options to deal with the lack of trust.
Over a period of time India transitioned from an agrarian to a service-led economy. Steady GDP growth driven by liberalization enabled rise in income levels. This increase is not restricted to the metros alone—it includes tier 2 and 3 cities as well. It is expected that there will be a three fold increase in average household income from $6,393 in 2010 to $18,448 in 2020.5 As income levels increase, it is estimated that demand for products other than food and grocery would rise. Increase in income is also an indicator of a propensity to consume and is a key driver of organized retail.
The other factor driving the growth of retail is population in the working age group of 16-54. As per census of 2011, more than 50% of India’s total population falls under this group, indicating the influence wielded by this segment on consumer spending. Moreover, literacy levels
too have increased significantly, to 74% in 2011, from 64% in 2001. The third factor enabling the growth of retail sector is urbanization. It is estimated that 40% of the population will live in urban cities by 2020, up from 31% in 2010.6 This has also led to a breakaway from the traditional family structure and the emergence of nuclear families. Over 200 million households are expected to be nuclear by 2020—with 25-50% higher consumption per capita spend. Growth in urbanization presents an opportunity for the development of organized retail. However, a large part of the rural market remains untapped by modern retail trade.
The Government of India too has ensured clarity in the norms for FDI in retail. The implementation of GST is expected to enable easier movement of goods across the country, thereby improving retail operations for pan-India retailers.
Growth of ecommerce and popularity of websites is a reality that has to be faced by bricks and mortar retailers.
India is a diverse market, to say the least. Retailers today encounter consumers who are well informed about products and also have a set of expectations. They also have a lot of choices in terms of where they buy their product from. At the same time, challenges pertaining to infrastructure in terms of supply chain and logistics exist. Added to this is the fact that real estate costs in terms of rentals are fairly high. This often affects the profitability of a store. This is in contrast to the unorganized sector where the retailer has some inherent advantages in terms of rentals, and at the same time enjoys a close proximity with the customers.
Growth of ecommerce and popularity of websites is a reality that has to be faced by bricks and mortar retailers. Between 2010 and 2015, internet penetration in India underwent a phenomenal change—it took more than a decade to move from 10 million to 100 million and three years to grow from 100 to 200 million, but it took only a year to move from 300 to 400 million users. Increased availability of smartphones across price bands and competitive mobile internet tariffs have helped increase usage. E-tailers offer convenience of buying and are aggressive in creating a buzz around various product categories. While many bricks and mortar retailers sell online, there are a few who have managed to integrate their product offerings across channels.
Winning in the Indian market is about understanding that the consumers vary by region, state, city, and even locality. It thus becomes critical to understand the local market and create product and service offerings, which can cater to those needs. A one-size-fits all approach may not lead to success. ■