v3 Journal of Management Volume 1, Issue 1

Retail Industry in India

*Jyoti Kandpal Bhatt

Abstract:

Retailing in India is one of the pillars of its economy and accounts for 14 to 15 percent
of its GDP. The retail industry in India gathered a new momentum with the
establishment of different international brand outlets, hyper or super markets, shopping
malls and departmental store. India is one of the fastest growing retail market i the
world. The retail industry in India is highly unorganized and predominantly consists of
small, independent, owner-managed shops. The organized retail segment in India is
projected to be 9 percent of total retail market by 2015 & 20 percent by 2020.
Hypermarkets would be the largest retail segment accounting for 21 percent of the total
retail space by 2013-14.

Introduction:

The Indian retail industry is divided into organized and unorganized sectors. Organized
retailing refers to trading activities undertaken by licensed retailer, that is, those who are
registered for sales tax, income tax, etc. These include the corporate-backed
hypermarket and retail chains, & also the privately owned large retail businesses.
Unorganized retailing, on the other hand, refers to the traditional formats of low cost
retailing for example local kirana shop owner manned general stores, paan/beedi
shops, convenience shops, hand cart and pavement vendors, etc.

Retail has the quickest cycle time from idea, to implementation, to assessment and
refinement of any industry. The pase is exhilarating. In the stores feedback is
instantaneous; customer buy or not, they are pleased or not, and team members can
have an immediate impact. Even at senior levels the feedback is real time. Retailing is
such a common part of our everyday lives that it’s often taken for granted. Retail
managers make complex decisions in selecting their target markets and retail locations;
determining what merchandise and services to offer; negotiating with suppliers;

* Assistant Professor, Shri Ram College of Engineering and Management, Palwal

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distributing merchandise to stores; training and motivating sales associates; and

deciding how to price, promote and present merchandise. Considerable skill and
knowledge are require to make these decisions effectively working in this highly
competitive, rapidly changing environment is challenging and exciting and offers
significant financial rewards.

Retailing is the set of business activities that adds value to the products and services
sold to consumers for their personal or family use after people think of retailing only as
the sale of products in stores, but retailing also involves the sale of services; overnight
in a motel; a doctors exam, a haircut, a dvd rental; or a home delivered pizza.

Retailing by its very nature, is a dynamic industry. The past decade has been one of
turmoil and transition in the world of retail. Some economics roared ahead, and then
rebounded. The emergence of the 24/7 culture has had a very strong impact on the
changes occurring in many industries. Each passing year has had new and for reaching
effects on the retail industry and this is not surprising considering that retail is an
industry which is all about change.

Social and economic significance of retailing:

1-support for community- retailing view 1.1 on the previous page illustrates how
retailers provide value to their communities and society, as well as to their customers.
Retailers are also responsible for developing many innovative products and services.
For e.g. A macy’s buyer designed the first tea bag:

Manufacturing wholesaler retailer

consumer

Table-1.1

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2- Retail sales:

Retailing affects every facet of life. Just think of how many daily contacts you have with
retailers when you eat meals, furnish your apartment, have car fixed and buy clothing
for a party or job interview American retail sales in 2003 were $ 3.4 trillion-more than 9
% of the us gross domestic procduct1. However, this sales level underestimates the
impact of retailing because it does not include the retail sales of services to customer,
such as movie tickets, automobile services and repairs, hotel rooms, or legal assistance
while the majority of retail sales are made by large retail chains, most retailers are small
businesses. There are over 1000,000 retail firms in the united states, and 95% of these
firms have only one store, less than 1% of us retail firms have over 100 stores2.

3- Employment:

Retailing also is one of the nation’s largest industries in terms of employment. As exhibit
1.2 indicates over 27 million people were employed in retailing in 2003-approximately
21% of the nonagricultural us workforce. Between 2004 and 2012, the retail industry
expects to add 2.1 million jobs, making it one of the largest sectors for job growth in the
united states3.

US Employment by Industry
2003
other
manufacturi
ng
6% 11%

retail
other 22%
services
45%
government
16%

Table-1.2

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1-retail industry indicators, Washington, DC: national retail foundation, August 2004.
2-ibid, p: 33.
Retail industry in India:
In India the retail sector is the second largest employer after agriculture. It is highly
fragmented and consists predominantly of small independent and owner managed
shops. Besides the country is also dotted with low-cost kiosks and pushcarts. There are
some 12 million retailed products. Valued at us $ 511 billion according to leading
commercial real estate advisor; c.b.richard eills findings in 2008, the Indian retail market
is the fifth largest retail destination globally.
There has been a boom in the retail trade in India owing to a gradual increase in the
disposable income of the middle households. More and more players are venturing into
the retail business with new and attractive formats, such as malls, supermarkets
discount stores, transforming altogether the traditional bookstore, chemist shops, and
furnishing stores. Food sales constitute a high proportion of the total retail sales; it was
60 percent in 2006-2007, worth approximately rs. 8068 billion. Clothing and footwear
sales were worth rs. 1356 billion (refer table 1.1). However the non food retail sector
registered faster year on year growth than food sales.
India today is a dynamic combination of demanding consumers rising levels of
consumption and a growing population base. It has emerged as the fourth largest
economy in the world in terms of purchasing power parity (ppp) and is expected to rank
third by 2010, after the us and china. According to the global retail development index
(grdi) developed by A.T.kearney, for the third year, India has emerged as the nation
which has topped the index4. India is currently the twelfth largest consumer market in
the world. According to a study by mckinsey global

Institute, India is likely to join the premier league of the world’s consumer markets by
2025, improving its position to the fifth. The recent growth spurt was achieved primarily
through a surge in productivity and is sustainable. As per this report India’s contribution

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to world growth will be ‘high & increasing’. It is believed that 21 million people are
employed in the retail sector

In India which is 7% of the total national workforce5. It is estimated that an additional

eight million jobs will be generated through direct and indirect employment related to the
retail sector. Since independence, retail in India has evolved to support the unique
needs of our country given its size and complexity. In India, while retail has not yet been
accorded the status of an industry, it has been a witness to a large number of formats
emerging in the market at a very fast pace.

The evaluation of retail in India

While barter is considered to be the oldest form of retail trade, since independence,
retail in India has evolved to support the unique needs of our country given its size and
complexity. Haats, mandis, and melas have always been a part of the Indian landscape.
They still continue to be present in most parts of the Indian landscape. They still
continue to be present in most parts of the country and form an essential part of life and
trade in various areas. The pds or the
3- Retail industry indicators, p.17.
4- Growth opportunity for global retailers, the a.t.kearney global retail development
index 2007 www.atkearney.com accessed 9/07/07
5- The rising elephant: the benefits of modern trade to the Indian economy, cii, pwc
paper
Public distribution system would easily emerge as the single largest retail chain existing
in the country. The evaluation of the public distribution of gains in the India has its origin
in the ‘rationing’ system introduced by the British during the world war ii. The system
was started in 1939 in Bombay and subsequently extended to other cities and towns. By
the year 1946, as many as 771 cities/towns were covered. The system was abolishing
post war; however, on attaining independence, India was forced to reintroduce it in 1950
in the face of renewed inflationary pressures in the economy.
The khadi & village industries (kvic) were also setup post independence. Today there
are more than 7,050 kvic stores across the country6. The co-operative movement was

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again championed by the government, which setup kendriya bhandars in 1963. In the
past decade, the Indian marketplace has transformed dramatically. However from the
1950’s to the 80’s investments in various industries was limited due to the low
purchasing power in the hands of the consumer and the government’s policies favoring
the small-scale sector. Initial steps towards liberalization were taken in the period of
1985-90. It was at this time that many restrictions on private companies were lifted, and
in the 1990’s, the Indian economy slowly progressed from being state led to becoming
‘market friendly’.
This was in a sense, the beginning of a new era for retail in India. The fact that post
liberalization, the economy had opened up and a new large middle class with spending
power had emerged, helped shape this sector. The vast middle class market demanded
value for money products. The emergence of the modern Indian housewife, who
managed her home and work led to a demand for more products, a better shopping
ambience, and more convenience and on stop shopping.

EMERGING FORMATS
TRADITIONAL ESTABLISHED FORMATS  Exclusive retail outlets
FORMATS
 Hypermarkets
 Kirana shops  Internal retail
 Itinerant
 Department stores  Malls/specialty malls
salesman
 Haats
 Showrooms  Fast food outlets
 Moles
 Co-operative stores  Multiplexes
 Mandis etc.  Fair price shops  Rural oriented formats

Table 2.1- indicators of socio-economic change in India

Drivers of retail change in India:

1- social-economic factors.

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India is today a nation which has a large middle class, a youth population which is
happy spending and a steady rate of growth of GDP. Table 2.1 indicates the changes
that have been visible in India over a period of time.

6- www.kvic.org.in, accessed 25/04/08.

Table 2.1
Indicators 1991-92 1996-97 2006-2007
Life expectancy (in terms of years) male 57.7 60.1 66.1
Female 58.7 61.1 67.1
Infant mortality rate (per thousand births) 78(a) 68(b) 48
Death rate (per thousand) 10 8.7 7.4
Birth rate (per thousand) 28.9 25.72 21.7
Fertility rate (per thousand) 130.3 113 91.4
Literacy rate (%) 15-35years 56 90 100
7 years & above 52 75 90
Per capita consumption of food grains (kg) 182 193.6 225
(a) villages without drinking water 3.0(d) 0 0
(thousand) 150 Neg. 0
(b) villages partially covered (less than 40
ipcd) 27© 50 80
Electricity as source of lighting (% of 75 © 80 95
dwelling)
Rural
Urban

2- Changing income profile:

Steady economic growth has fuelled the increase in personal income in India. The
middle class forms the backbone of the Indian market story and it is the rising incomes
in the young middle-class population that is fuelling its growth. As is seen in table 2.2,
the share of persons falling in the deprived category is likely to decrease and it show a

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negative growth rate from the period 2001-2002 to the period 2009-10. At the same
time, the share of persons falling in the super rich, near rich and almost rich is seen to
be increasing, which is reflective of an increasing affluent society and this is also an
indicator of consumed. This increase in incomes has happened in both urban and rural
India giving rise to what is now popularly termed as the ‘great Indian middle class’.

Table 2-2 the growing Indian middle class

Classification income 1995-96 2001-2002 2005-6(p) 200910(p) Cagr(%)
class
Deprived <90 131,176 135,378 132,250 114,394 -2
Aspirers 90-200 28,901 41,262 53,276 75,304 8
Seekers 200-500 3,881 9,034 13,813 22,368 12
Near rich 1000=2000 189 546 1,122 2,373 20
Clear rich 2000-5000 63 201 454 1,037 23
Sheer rich 5000-10000 11 40 103 255 26
Super rich >10000 5 20 53 141 28

Total 164,876 188,192 204,283 221,945

P: projected
1
cagr between the period 2001-02 and 2009-10
Note: income is in rs. ‘000 per annum at 2001-02 prices, while households are in ‘000s.
3- The age factors:
Compared with several advanced countries where the overall population is aging. India
is a very young nation, with more than 70% of its population below the age of 40, and
more than 47% of its population below the age of 20. This age distribution is of
significance to marketers of goods and services. It partially explains the boom in all
Indian cities in consumption of impulse products and leisure-related expenditure in
general since the onset of liberalization. According to the census of India, 2001,545 of
the population in India is aged 24 years and below,35%and 19% of the population in the
ages 0-14 years and 15-24 years respectively. The youth population in the age-group
15-24 years is expected to increase from 195 million in 2001 240 million in 2011. Out of

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the total population increase of 371 million between 2001 and 2026 the share of the
share of the work in the age-group of 15-59 years in this total increase is 83%. The
increasing youth population which has also started earning early also increases the
overall purchasing capacity in the country and has implications on the productivity of
labour.

4- The changing role of women and the evolving family structure:

According to the 2001 census report the population of working women has increased
from 22% in 1991 to 26% in 2001. The increased economic independence of women
has redefined the rules of social behavior. Apart from an increase in the family income,
it has led to a change in the kind of products and services which are demanded. The
purchasing habit of a working woman is different from that of a housewife, since the
former has lesser time to devote to the household tasks. Working women would prefer a
one-stop shop for purchasing their regular products. Also a working women propensity
for spending is higher than that of a housewife. The increase in the number of working
women will hence drive the need for convenience and will play a major role in the
success of many modern retail formats in the country.

Modern retail formats in India:

Formats that have emerged or become popular in the 1990’s are classified as modern
retail formats. In terms of professional management and efficiency of integration with
the value chain these formats are classified as part of the organized retail sector in
India.

Franchised outlets and company-owned stores:

Economic liberalization, competition, and foreign investment since the 1990s led to the
proliferation of brands, with both foreign and Indian companies acquiring strong brand
equity for their products. Hence, franchising emerged as a popular mode of retailing.

Employing around 300,000 people, the Indian franchise industry has much more to offer
than is generally presumed within franchising there are four rapidly growing-telecom,

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retail, food, and education. In the retail sector there has been a constant flow of real
estate projects. With 300 malls, 1500 supermarkets, the Indian retail market will be
thriving more than ever before.

Retailing in rural India:

An important phenomenon in India’s consumer culture is the emerged of the rural
market for several basic consumer goods. Nearly three-fourths of Indian population lives
in rural areas and raises one-third of the national income. This rural population spread
all over the country in about 0.6 million villages. This simply shows the great purchasing
potential of rural areas. It has also brought about the much needed volume driven
growth for companies, particularly in the fmcg sector.

The national council for applied economic research (ncaer) found in 2001 that the rural
market has been growing steadily over the year and is now bigger than the urban
market for fmcg-53% share of the total market with an annual size , in value terms,
estimated at around rs. 50,000 crore (table 3.5). This is definite boon for the companies
who have already reached the pateau in their business curve in urban India and are
seeking new ways to increase sales.

Table 3.5 rural fmcg market: a snapshot

Category Total size# %growth* Rural size
(rs.crore)
Toilet soap 7500 13.4 6021
Body talcum power 940 23.65 793
Toothpaste 2080 23.5 1441
Tea 6500 10.97 4955
Health beverages 908 28.54 601
Electric bulbs 750 9.4 354
Cigarettes 7662 13.09 6442
Packaged biscuits 2500 6.79 1323
#figures in rs crore for 1998-1999.

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*annual growth rates compounded for last five years (1998-2003)

Source: business intelligence unit and nacer 1998-1999

The study observed that there are as many ‘middle income and above’ households in
the rural areas as there are in the urban areas. There are almost twice as many ‘lower
middle income’ households in rural areas as in the urban areas. At the higher income
level there were 2.3 million urban households as against 1.6 million households in rural
areas (table 3.6)

Table 3.6 percentage of rural households

Income group 1994-1995 2000-2001* 2001-2006*
>rs 106,000 1.6 3.8 5.6
Rs 77,000-106,000 2.7 4.7 5.8
Rs 50,001-77,000 8.3 13.0 22.4
Rs 25001-50,000 26.0 41.1 44.6
<25,000 61.4 37.4 20.2
*2000-2001 and 2001-2007 projections are based on 7.2 percent GDP growth
Source: ncaer

According to ncaer projections, the number of middle-and higher income households in

rural India was expected to grow from 80 million to 111 million by 2007. Nearly 45% of
rural Indians are literate (men 59% women 31%), and 33 % of all villages (0.21 million)
are connected by pucca roads. In all, there are more than 3.8 million retail outlets in
rural India, averaging 5.8 shops per village. But despite the high rural share in these
categories, the rural penetration rates are low, thus offering tremendous growth
potential to the companies. (Table 3.7)

Table 3.7 rural market penetration levels selected goods

Durables Rural share % Product Penetration %
Refrigerator 24.30 Coffee 7
Black and white 62.65 Biscuits 60.1

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television 14.64 Toilet soap 91.6

Washing machine 51.51 Toothpaste 35.6
Pressure cooker 2.04 Talcum powder 16.4
Instant water heater 27.43 Hair oil 16.0
Mixer/grinder 28.77 Shampoo 39.8
Colour television 28.56 Razor blade 47.1
Scooter 47.87 Skin cream 15.5
Motorcycle

Challenges to organized retail in India:

One of the major challenges for companies, seeking to penetrate rural areas, is to
ensure availability of the product or service through the present distribution channel.
India’s 627,000 villages are spread over 3.2 million sq km; about 700 million Indians live
in rural areas, and approaching them is not an easy task with the existing retail
infrastructure. Given the poor state of roads, it is an even greater challenge to regularly
transport products to the far flung-villages.
The companies with years of experience in the urban markets are facing serious
problems in rural areas with respect to distribution strategy. These limitations are
attributed to various factors such as the following:

 Inadequate infrastructure with highly dispersed and thinly populated villages that
need huge expenditure to establish distribution channels.
 Inability of the small rural retailers to invest in stocks for multiple products or
brands.
 Limited or traditional medium of communication and other sales promotion
difficulties.
 Low per capita income and social, economic, and cultural differences of the rural
masses as compared to the urban segment.
 Low level of exposure to different product categories and product brands.

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The problem of physical distribution and channel management adversely affect the
service as well as the cost aspects. The existent market structure consists of the
primary rural market and retail sales outlet. The structure involves stock points in feeder
towns to service these sales outlets at the village level. But it becomes difficult to
maintain the required service level in the delivery of the product at the retail level.

Challenges in retail business in India

The retail industry in India is in a phase of transition and hence is likely to face a whole
new set of challenges. For one, generating large, free cash inflows for expansion is not
easy. Retail margins are already wafer-thin, compared to those in other markets like the
Middle East. The management of lifestyle, which runs over 200 stores there , says its
net profit margins after tax in India are 4-5 percent compared to about 10 percent in the
middle east.

Most retailers are trying to increase margins. For instance, rpg group has started
sourcing its fresh produce directly from the farmers. About 350 farmers in karnataka are
doing contract farming for rpg.

Organized retail in India is little over a decade old. It is largely an urban phenomenon
and the pace of growth is still slow. Some of the reasons for this slow growth are:

 Retail not being recognized as an industry in India: lack of recognition as an

industry hampers the availability of finance to the existing and new players. This
affects growth and expansion plans.
 The high costs of real estate: real state price in some cities in India are among
the highest in the world. The lease or rent of the property is one of the major
areas of the expenditure; high lease rentals eat into the profitability of a project.
 Lack of adequate infrastructure: poor roads and the lack of a cold chain
infrastructure hampers the development of food and fresh grocery retail in India.
The existing supermarkets and food retailers have to invest a substantial
amount of money and time in building a cold chain network.
 Multiple and complex taxation system: the sales tax rates vary from state to
state. While organized players have to face a multiple point control and tax

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system, tax there is considerable sales tax evasion by small stores. In many
locations, retailers have to face a multi point octroi. With the introduction of
value added tax (vat) in 2005, certain anomalies in the existing sales tax system
causing disruptions in the supply chain are likely to get corrected over a period
of time.

Reference:

1. Emerging paradigms in the Indian marketplace, paurav shukla, asia pacific

journal of marketing and logistics, vol: 18, issue: 4, 2006.
2. Suman, yogesh and v.p.kharbanda, (2005), ‘internet diffusion in India and china:
who holds the edge’, journal of scientific & industrial research, vol.64, may,
pp.339-346.
3. Retail industry indicators, p.17.“2004 global powers of retailing,” stores, January
2004, pp.g1-45.
4. “Rating the stores,” consumer reports, November 1994, p.714.
5. Industry outlook: food channel, Columbus, oh: retail forward, February 2004.
6. David moin, department stores, pp. 20-32.
7. “Survey of retail payment systems,” chain store age, December 1999, p.4a.

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