A Microeconomic Analysis of Indian Retail Industry

MODERN sell MICRO ECONOMICS PROJECT REPORT ABSTRACT The growing enactment of modern sell outlets in India on the one clear and frequent grapple seasons and talks of underperformance on the different point to a mixed bag and make us wonder whether the domain is on the right growth trajectory. In this report, rather than providing with just the facts, we invite tried to understand the modern sell heavens from an economists point of view and visualize its future-whether it is in its involution or contraction phase.Motivated by the rising per-capita incomes and increase spending on consumer goods, modern retail stores atomic upshot 18 coming up with tender strategies and plans to unlock the Pandora encase of the untapped and unstructured retail sector. In the course of the report, we try to find out how the retail sector works, major regulations that affect its functioning and the ch eachenges that await the sector and summarize with our analysis and recommendations. No te We gift utilization where weve analyzed the situation from a micro- sparing point of view. INTRODUCTIONThe retail sector in India can broadly be separate as unionized and un organized where the conduct of unorganized sector is more than 93% of the entire and includes the kirana stores, mom and pop stores and the ilk. The organized or modern retail sector on the other hand captures a mere 7% of the core grocery destiny. Modern retail is defined as a form of retailing whereby consumers can buy goods from a akin purchase environment across more than one physical location and operates under collar directs Specialist stores catering to nearly particular sept of product such as footwear, pharma & beauty, intellectual nourishment and grocery etc. material bodyified under level I. Departmental stores that cater to a few categories of retail put under level II, and malls where we find an agglomeration of many departmental stores, hypermarkets etc classified under level I II retail. The figure 1 below shows the various instrumentalists at different levels of retail. retail stores can in addition be classified under lifestyle, value and extravagance formats based upon the consumer income segment they target.Figure Players operating at different levels Figure nonionic Retail Although, the sector boasts of covering almost all the verticals, a look at the markets under different verticals shows that nonionic Retail shrewdness is extremely low 2. 4 percent for the food and grocery, which in contrast makes up for the biggest part of the total retail market. The apparels, foot wear and interior(a) decor are the major contrisolelyors under organized retail and constitute been prospering at a rapid pace.The figures below depict the market share and Organized Retail Penetration in different verticals. Figure Market Share of Different Verticals in Organized Retail Source CRISIL Figure Organized retail penetration (%) in different verticals Source CR ISIL Retail almost accounts for around 15% of Indias GDP and so plays an important role in determine the Indian economic indicators. Organized retail became the apple of everyones eye when Vishal Mega Mart profited from its operations in different parts of India.Soon, other players started with their own retail grasps such as V-Mart, Big Bazaar, Subhiksha, Pantaloons et al and the market turned into a very combative market, probably lowering the economic profits of the retailers, and so the situation now is that Vishal, Subhiksha and others stand nowhere compared to the biggies such as credence, Big Bazaar and others. The major reasons for this are the marketing mix of these brands and benefits from economies of scale. However, beca usage a number of factors go into determining business profitability, it would not be pose to give all credit to the above mentioned factors.Lets now look at the major player in organized retail in India. MAJOR PLAYERS The organized retail sector o f India has many domesticated corporate houses competing with their ventures such as Tatas Chroma, Reliance Trends, Reliance Fresh, Futures Pantaloons, RPG & so on. Other than these, fascinated by the Indian demographics and potential market, international players withdraw entered through joint ventures with national players and are planning to get by for the share through such strategies.Major players along with their brands are shown below. * Landmark (books and music) * Croma(multi-brand electronics) * World of Titan (watches) * Tanishq (je well(p)ery) * Titan heart and soul+ (eye wear) * Westside (lifestyle retail store) * Star Bazaar (hypermarket chain) * Fashion Yatra(family fashion store) * Central (shopping mall) * Big Bazaar (hypermarket) * Pantaloons (fashion outlet) * good-for-naught Sky (sunglasses) * Brand Factory (multi-brand readymade garments) * KBs Fair Price (essential products) * Navaras(jewellery) Planet Store (multi-brand sports and lifestyle speciality ret ail) * aLL(fashion garments) * Ethnicity (Indian ethnical wear) * Home Town (home needs), * eZone(electronics), * Furniture Bazaar (home furniture), * Electronics Bazaar(under Big Bazaar, electronics stores) * Home Bazaar (satellite version of Home Town) * allurement I (lifestyle furniture) * Gen M One Mobile (mobile phones) * M-Port (electronics) * Shoe Factory (footwear) * Depot (books and music) * Reliance Fresh (neighbourhood store) * Reliance Mart (supermarket) * Reliance Super (mini-mart) Reliance Digital (consumer dur adequate to(p)s and information technology) * Reliance Trends (apparel and accessories) * Reliance health (health, wellness and beauty) * iStore(Apple products) * Reliance Footprint (footwear) * Reliance Jewels (jewellery) * Reliance TimeOut(books, music and entertainment) * Reliance AutoZone (automotive products and services) * Reliance Living (home ware, furniture, standard kitchens and furnishings) * Music World (music and home video store) * Books Beyon d (book store) * Spencers (multi-format retail store) K RAHEJA Shoppers Stop (clothing, accessories, fragrances, cosmetics, footwear and home furnishing store) * Crossword (book store) * Inorbit Mall (fashion, lifestyle, food and entertainment) and Hyper City (hypermarket) As we can see that all major groups in India have open up their retail stores catering to different sections of the society providing for different needs of the customers. This has resulted in a sort of monopolistic competition in organized retail market in thermionic tube and Tier 1cities owing to the large number of variants being offered to the customers.However, in Tier 2 and 3 cities there are fewer of such modern retail stores and the market situation can be compared to oligopoly, but however because of local players and unorganized retail the effects of oligopoly generally dont show up. The front of competitors thus affects not only the player, but the industry and the nation as whole. Lets plow in bri ef the effects of competition. COMPETITION AND RIVALRY Competition is one of the means to achieve economic efficiency.It restrains prices and encourages companies to innovate provide better quality of products. In the retail sector competition is driven by many factors, including variety, products, price, quality, service, location, reputation, credit and availability of retail space etc. It can broadly be classified under 1. Competition because of Internal Factors The large number of groups in multibrand retail such as TATA, Raheja et al and in addition single brand established foreign players such as Adidas, Nike etc pose a brat to speedy expansion of Indian Retail. . Competition because of External Factors The organized retail industry in India is face immense competition from the unorganized sector. Traditionally, retailing has been established in India for centuries. It is a low cost structure, generally owner operated, has negligible real estate and labor costs and little or no taxes to pay. The unorganized retail sector constitutes over 93% of Indias total retail sector and thus, poses a heartbreaking hurdle for organized retailers.Because of the largely unorganized nature of Indian retail, inefficiencies have crept in and large number of intermediaries exists, reducing the functional and productive efficiency of the retail industry. The government in power has thus been knifelike to promote FDI in retail in India. Hundred percent FDI in single brand retail invited global companies for competition in the Indian retail sector. With this the companies are working with a strategy so as to be able to cater to the needs of the consumers and grow volumes by ensuring footfalls, bandage being able to reduce costs, withstand downturns, and face competition.Here we also see a common practise to prevent other companies from affecting the economic status quo of a country, by imposing barriers and caps on FDI, for example what has been done in multibrand ret ail. As of now, FDI in multibrand retail cannot exceed the specified cap which has kept global retailers such as Walmart, Carrefour et al from entering the Indian market, although they still do exist in whole sale cash and carry segment.The market structure of the modern retail is that of monopolistic competition in metros horizontal surface I cities which usually have hundreds of shopping alternatives including multi-brand retail outlets, single brand outlets in the shopping malls and nation-wide chains. Whereas in the tier II tier III cities the market structure is oligopoly in nature as they have fewer stores and somewhere only a single super centre or shopping mall. in any case if we look at prices of different products in various retail outlets, we find that there is not often difference between the prices, except during periods or seasons of sale.This shows that because of the very competitive nature of modern retail, which now also includes online retail, the players are almost operating at zero economic profit, and thus dont have much scope to offer different prices for similar products. Moreover almost all use similar technologies and processing techniques to provide the final product and thus the prices cannot be change magnitude significantly, for fear of loss of market share. For example, Pantaloons and Westside have almost the similar brands in offering for the customer, leaving little scope for preeminence or price discrimination.Price discrimination can however happen when we compare lifestyle or high life and value format stores, value stores charging lesser price for the comparable product sold at a higher price in lifestyle stores. To gain advantage in such a competitive environment major retailers have started to distinguish themselves by providing products under private labels. In India, fresh green groceries purchases are made more often from cart vendors who buy their stock from wholesalers. Retailers have tried to tie the gap w ith direct farm procurementeliminating middlemen and introducing private labels.They are coming up with new ideas to gimmick a major share of the market which is prospering (see figure below) because of the following factors The average income of the middle class population has been increasing at a rate of around 12%, which allow for result in increased usance Increasing proportion of working women in the country Increasing population of employ youth Increasing desire for better standards of living and trends in consumer expenditure Increase in the use of plastic money Emerging markets in Tier II and Tier III citiesFigure Sales (in trillion Rs. ) plotted against the financial year Source Company official website These factors may cause a sac in the demand curve, but more number of retailers leave alone be go awaying to enter and lastly the price would not be impacted much. There would, infact a gradual shift from unorganized to the organized retail. All these and a huge unta pped market potential thats locked in the unorganized retail has motivated modern retailers to invest heavily in marketing and advertising, to grab customer attention and have got them.ADVERTISING Promoting the modern retail brand is very important especially in metro and Tier I cities. The retailer must strive hard to communicate the USP of the brand and help the end-users know to which brand a particular product belongs influencing the buying behavior of the customer. Not only in India, retail industry all over the world spends large amount of funds on advertising. The figure below shows comparison of expenditure by the retail sector with others on online advertising in the United StatesFigure 5 US Online Ad Spending The growth of online video ads among the brand marketers and Social networking are primary contributors to the growing market share of the retail sector. Advertising in modern retail is broadly done under the following three categories Traditional Advertising Tradit ional advertising means advertising using traditional media such as TV, newspaper, radio, circulars, hoardings etc. For eg. we frequently see advertisements from major retail players such as Big Bazaar, Chroma etc in newspapers.Digital Advertising This form uses advertising using digital media. Video advertising, Mobile advertising etc are some of its examples. Alternative Offers Under this we may have guerilla marketing where the marketer may use graffiti, fliers, deal of the day type offers, groupon etc to promote or advertise the product. Website Communication or on-site communication evaluates how well retailers currently collect the kind of information that helps them localize their own communications with consumers.For this category, we evaluate two criteria whether the retailer offers localized information about their own stores on their eCommerce site, and whether they solicit customer information email address and mobile number, prominently on their site. The expansion of the retail sector and the creation of meta-mediaries has provided with increasing commercial enterprise opportunities. stage business CREATION With a CAGR of around 14. 5% in the last five years and the bright prospects of expansion , the the no of business organisations in this sector are expected to grow at a fast pace.The alert players will have to face competition from the new players and this would also lead to opening up of new stores and thereby increasing the job opportunities in the country. Shift in consumers preference from traditional stores and shops to departmental stores and hypermarkets is definitely going to put pressure on retailers to provide for adequate staff and services, thereby increasing the number of people employed and thus creating job opportunities. The rural market is home to the 46% of the rich and wanton people of the country. Besides, these people stay in 17% of the villages of the country.The infrastructure costs in setting up retail outlets i n these places are going to be lower compared to the cities. This will encourage the emergence of regional players and would again lead to creation of jobs in many regions. However, some more prospering regions or cities which have shown good growth rates will have an edge over others, even in the same state. Whatever is the case, the supply has to be met with the demand, especially when there is no dearth of labor in India and job creation is highly probably, an event when it comes to the retail sector expansion and penetration.FDI in multi-brand retail is going to be a deciding factor in creation of jobs as well. Once permitted, this will lead to hostile competition. The entry of new players would balance the supply chain and farmers will be benefitted. If this happens, more people will be attracted towards farming, also contract farming would lead to creation of rural jobs. Moreover, entry of foreign investors is likely to shift the production possibility frontier outwards(see figure below), because they are more likely to invest in storage, supply chain and other capital goods.Retail sector is expected to expand by leaps and bounds in the near future and this would create a lot of jobs. The advancement of technology though can also reduce the manpower required in the long run and the jobs created over a period of cartridge clip may get killed. The entry of multi brand retailers may also adversely impact the local kirana walas, because they will be able to recover there fixed cost easily and gain from economies of scale. Further, because all food and grocery require very similar capital investment, they also stand to gain from economies of scope.Figure Expansion of yield Possibility frontier (not by reducing consumption but with introduction of new technology) RECENT TRENDS harvest-home of Modern Retail India moved from being 10th largest economy in 1990 to 4th largest in 2010 harmonize to Purchasing Power Parity (PPP). The growing economy has driven th e growth in per capita income of Indian consumers. Indian retail sector (organized and unorganized) has grown by 14. 5% from 2006-07 to 2011-12 and is valued at $396 billion out of which 5-6% is the share of organized retail.Organized retail has had growth more than double of total retail. With the overall rise the penetration of organized retail sector has increased and is expected to grow its share to 10% by the year 2016. changing shopping behavior Shopping behavior has changed over time, with growing urbanization there has been rise in affluence and growing attraction towards branded goods. The parameters over which modern retail has been faring better than traditional retail are product assortment and range, quality, everything under single roof model. FDI in retail FDI in angiotensin converting enzyme BrandIn 2006, FDI in single brand retail was permitted to the extent of 51% which has recently been increased to 100% in Jan, 2012. There is also a mandate of sourcing of goods from local SMEs and local dealers. FDI in multi-brand sector International retailers are allowed 100% ownership in cash carry wholesale trade stores. only when similar initiative in multi-brand retail stores, i. e. allowing 51% FDI has been met by widespread rejection and has been put on hold. Online retail Online retailing is gaining popularity in India with growing penetration of internet.It is expected that online retail will triple in size of it by 2014-15. It will be dominated by branded, low ticket size, easily transportable, lifestyle products and books. Flipkart and Yebhi. com have already established themselves as major players in this segment in the Indian market. Challenges posed by recent developments Indian government intended to bring 51% FDI in multi-retail sector but ascribable to its widespread opposition, it has not been approved yet. This has put entry of worlds leading retail chain in Indian market. A lot has been said about possible loss of potential job an d infrastructure development due to this.Besides that the suggested provision of sourcing from local SMEs is also proving to be a deterrent. INDIA AND THE INTERNATIONAL food market The graph below shows Indias status wiz a wiz status of organized retail in other countries. It can be observed that India still has a long way to go if it wants to increase the share of organized retail in the retail market. Figure Organized retail as a percentage of total retail in different countries Source CRISIL In the second half(prenominal) of the 20th century, many countries opened up there markets for Organized Retail and some also opened for multi-brand retail.There were some countries who felt a positive impact of the same, China is one such example while there were others such as Uk which were adversely affected. India should also proceed with implementing FDI in multi-brand retail in phases, looking for any drawbacks, before it opens up fully. REFERENCES CRISIL Research, http//crisil. com/ research/list-of-industries. html Dun and BradStreet, http//www. dnb. co. in/IndianRetailIndustry/overview. asp Indian retail News, http//www. indiaretailnews. com/ Tata group official website, http//www. tata. com/company/profile. aspx? ectid=oH90Rc8X7Dg= Croma retail, http//www. cromaretail. com/ FDI in Retail, http//cci. gov. in/images/media/ResearchReports/FDI%20in%20Indian%20Retail%20Sector%20Analysis%20of%20Competition%20in%20Agri-Food%20Sector. pdf Futures group Official website, http//futuresgroup. com/ BIBLIOGAPHY Economics by Samuelson and Nordhaus 1 . Lifestyle formats include departmental stores and specialty stores 2 . Value formats include supermarkets and hypermarkets 3 . Retailers can use price differentiation to gain from the consumer surplus 4 .Privatelabels or privatebrandsare the brands that are own and sold byretailers at their stores and are typicallypriced lower(5-15 percent) as compared tothe existingbrands. 5 . These factors will result in a shift of d emand curve to the right 6 . Source CRISIL 7 . Organised retail penetration expected to cross 10 per cent by 2016-17 8 . In such cities, the number of market players is very large forming a monopolistic market, brand positioning thus becomes very important to create great brand recall value. 9 . Unique Selling marriage proposal 10 . Opened up multi brand retail in phases.