What's in store for India's organised retail?

Krishna KarwaMoneycontrol Research

Undeniably, Indian retail is at an inflection point by virtue of its growing importance in the macro economic landscape of the country. Consequently, a noticeable transformation in the size, scope, and complexity of retailing warrants attention.

CRISIL, in a recently held conference call, highlighted some of the underlying trends currently visible in this domain. Here are the key takeaways from the same:-

GST transition: Unorganised retailers, who, until now, have been dominant in India (comprising 70-80 percent of the industry size), will gradually lose a considerable chunk of their market share to organised players because of compliance-related intricacies. The latter, particularly, stand to gain immensely on account of logistical simplifications and input tax credit availments (on lease rentals and services), too.

Co-existence: The importance of offline and online retail store formats is eminent, with neither format enjoying any significant advantage over the other (as stated in our earlier article). Going forward, the trend seems unlikely to change, and both forms will continue to thrive and grow despite the stiff competition between them. In fact, one can expect more partnerships between the two in due course.

Expansion: Given the bullish prospects of India’s consumption story, it’s unsurprising to see large retail companies upping the ante by adding new outlets across the nation at a quick pace. To derive synergistic benefits, a cluster-based model (wherein new stores will be located in cities/towns not too far from each other) seems to be the preferred choice for network augmentation as well.

Consolidation: Retail businesses aren’t high-margin ones, regardless of the size. This can be attributed to the inherent nature of the model (margins in trading activities are usually much lower versus a combination of manufacturing and distribution) and rising operational costs. As the competitive intensity in this sector increases, only the well capitalised players may be able to survive profitably in the long-run.

Branding: To facilitate margin accretion and enhance product recall value, retail majors have been investing heavily in promoting brands, especially the private label ones in categories such as apparel, accessories, and home furniture. Furthermore, to capitalise on the festive season demand in H2FY18, retailers have been loosening their purse strings by increasing spends on advertisements and promotions.

Some roadblocks

Irrespective of the numerous tailwinds in Indian retail, a few sore points could play spoilsport. Penetration of organised retail remains very low in India vis-à-vis developed nations.

Availability of real estate in terms of size and location has been a challenge as well. Lease rentals in marquee areas command a high premium and may adversely impact the retailers’ already-thin margins even more. Store maturity/break-even/productivity can be a fairly time-consuming process, too.

Poor/underdeveloped infrastructure (on fronts such as supply chain management, warehousing, technical feasibility, and electrical connectivity) in the smaller cities/districts of India is another big growth hurdle that retail majors ought to tackle.

 The future perspective

Increasing brand awareness, rising disposable incomes, an encouraging consumer sentiment, growth saturation (to a marked extent, even if not entirely) in tier 1 cities and metros,and an optimistic outlook towards modern retail channels are some of the key factors that have caused retail majors to shift their attention towards tier 2/3/4 cities of India in recent times. These regions are anticipated to be the pivotal growth drivers in the long-run, too.

The share of unbranded sales may witness a downtrend, albeit slowly, as a large percentage of aspirational consumers are no longer averse to the idea of opting for pricier, fashionable, and better quality product variants. The foreign direct investment (FDI) limit in retail has been raised to 100 percent, thereby ensuring that buyers get more brand options to choose from.

Retailers have been aiming to showcase apparels, electronics, and food items in most of their outlets to optimally leverage the positives that the three segments have to offer, besides offering a comfortable shopping experience. While the former two play a crucial role in driving margins, the latter is a segment that drives sales growth (in volumes) by attracting comparatively higher footfalls.

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