A Microeconomic Analysis of Indian Retail Industry Free Essays

string(89) " COMPETITION AND RIVALRY Competition is one of the means to achieve economic efficiency\." MODERN RETAIL MICRO ECONOMICS PROJECT REPORT ABSTRACT The growing number of modern retail outlets in India on the one hand and frequent sale seasons and talks of underperformance on the other point to a mixed bag and make us wonder whether the sector is on the right growth trajectory. In this report, rather than providing with just the facts, we have tried to understand the modern retail sector from an economist’s point of view and visualize its future-whether it is in its expansion or contraction phase. Motivated by the rising per-capita incomes and increased spending on consumer goods, modern retail stores are coming up with new strategies and plans to unlock the Pandora box of the untapped and unorganized retail sector. We will write a custom essay sample on A Microeconomic Analysis of Indian Retail Industry or any similar topic only for you Order Now In the course of the report, we try to find out – how the retail sector works, major regulations that affect its functioning and the challenges that await the sector and summarize with our analysis and recommendations. Note: We have used where we’ve analyzed the situation from a micro-economic point of view. INTRODUCTION The retail sector in India can broadly be classified as organized and unorganized where the share of unorganized sector is more than 93% of the total 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 total market share. Modern retail is defined as a form of retailing whereby consumers can buy goods from a similar purchase environment across more than one physical location and operates under three levels: Specialist stores catering to some particular category of product such as footwear, pharma beauty, food and grocery etc. classified 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 III retail. The figure 1 below shows the various players at different levels of retail. Retail stores can also be classified under ‘lifestyl e’, ‘value’ and ‘luxury’ formats based upon the consumer income segment they target. Figure : Players operating at different levels Figure: Organized Retail Although, the sector boasts of covering almost all the verticals, a look at the markets under different verticals shows that Organized Retail Penetration 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 home decor are the major contributors under organized retail and have 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: CRISIL Retail almost accounts for around 15% of India’s GDP and thus plays an important role in determining the Indian economic indicators. Organized retail became the apple of everyone’s eye when Vishal Mega Mart profited from its operations in different parts of India. Soon, other players started with their own retail chains such as V-Mart, Big Bazaar, Subhiksha, Pantaloons et al and the market turned into a very competitive market, probably lowering the economic profits of the retailers, and consequently the situation now is that Vishal, Subhiksha and others stand nowhere compared to the biggies such as Reliance, Big Bazaar and others. The major reasons for this are the marketing mix of these brands and benefits from economies of scale. However, because a number of factors go into determining business profitability, it would not be correct to give all credit to the above mentioned factors. Let’s now look at the major player in organized retail in India. MAJOR PLAYERS The organized retail sector of India has many domestic corporate houses competing with their ventures such as Tata’s Chroma, Reliance Trends, Reliance Fresh, Futures Pantaloons, RPG so on. Other than these, fascinated by the Indian demographics and potential market, international players have entered through joint ventures with national players and are planning to compete 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 (jewellery) * Titan Eye+ (eye wear) * Westside (lifestyle retail store) * Star Bazaar (hypermarket chain) * Fashion Yatra(family fashion store) * Central (shopping mall) * Big Bazaar (hypermarket) * Pantaloons (fashion outlet) * Blue Sky (sunglasses) * Brand Factory (multi-brand readymade garments) * KB’s Fair Price (essential products) * Navaras(jewellery) Planet Store (multi-brand sports and lifestyle speciality retail) * aLL(fashion garments) * Ethnicity (Indian ethnic 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) * Collection I (lifestyle furniture) * Gen M ; One Mobile (mobile phones) * M-Port (electronics) * Shoe Factory (footwear) * Depot (books and music) * Reliance Fre sh (neighbourhood store) * Reliance Mart (supermarket) * Reliance Super (mini-mart) Reliance Digital (consumer durables and information technology) * Reliance Trends (apparel and accessories) * Reliance Wellness (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, modular kitchens and furnishings) * Music World (music and home video store) * Books ; Beyond (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 opened 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 metro 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 don’t show up. The presence of competitors thus affects not only the player, but the industry and the nation as whole. Let’s discuss in brief the effects of competition. COMPETITION AND RIVALRY Competition is one of the means to achieve economic efficiency. You read "A Microeconomic Analysis of Indian Retail Industry" in category "Essay examples" 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 also single brand established foreign players such as Adidas, Nike etc pose a threat to speedy expansion of Indian Retail. . Competition because of External Factors The organized retail industry in India is facing immense competition from the unorganized sector. Traditionally, retailing has been established in India for centuries. It is a low cost structure, mostly owner operated, has negligible real estate and labor costs and little or no taxes to pay. The unorganized retail sector constitutes over 93% of India’s total retail sector and thus, poses a serious 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 keen 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, while 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 retail. 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 ; tier 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. Also if we look at prices of different products in various retail outlets, we find that there is not much 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 don’t 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 increased 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 differentiation or price discrimination. Price discrimination can however happen when we compare lifestyle or luxury and value format stores, value stores charging lesser price for the same 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 produce purchases are made more often from cart vendors who buy their stock from wholesalers. Retailers have tried to bridge the gap with direct farm procurement  eliminating middlemen and introducing  Ã¢â‚¬Ëœ private labels’. They are coming up with new ideas to grab 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 will result in increased expenditure Increasing proportion of working women in the country Increasing population of employed 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 cities Figure: Sales (in million Rs. ) plotted against the financial year Source: Company official website These factors may cause a shift in the demand curve, but more number of retailers will be willing to enter and eventually the price would not be impacted much. There would, infact a gradual shift from unorganized to the organized retail. All these and a huge untapped market potential that’s locked in the unorganized retail has motivated modern retailers to invest heavily in marketing and advertising, to grab customer attention and retain 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 States Figure 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 Traditional 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 job opportunities. JOB CREATION With a CAGR of around 14. 5% in the last five years and the bright prospects of expansion , the the no of jobs in this sector are expected to grow at a fast pace. The existing 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 prosperous people of the country. Besides, these people stay in 17% of the villages of the country. The infrastructure costs in setting up retail outlets in 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 likely, 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 aggressive 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 time 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 Production Possibility frontier (not by reducing consumption but with introduction of new technology) RECENT TRENDS Growth of Modern Retail India moved from being 10th largest economy in 1990 to 4th largest in 2010 according to Purchasing Power Parity (PPP). The growing economy has driven the 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 Single Brand: In 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. But 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 Retailing Online retailing is gaining popularity in India with growing penetration of internet. It is expected that online retail will triple in size 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 due to its widespread opposition, it has not been approved yet. This has put entry of world’s leading retail chain in Indian market. A lot has been said about possible loss of potential job and 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 MARKET The graph below shows India’s 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 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 ——————————â€⠀Ã¢â‚¬â€Ã¢â‚¬â€Ã¢â‚¬â€Ã¢â‚¬â€œ [ 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 ]. Private  labels or private  brands  Ã‚  are the brands that are owned and sold by  Ã‚  retailers at their stores   and are typically  priced lower  (5-15 percent)   as compared to  the existing  brands. [ 5 ]. These factors will result in a shift of demand 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 Proposition [ 10 ]. Opened up multi brand retail in phases. How to cite A Microeconomic Analysis of Indian Retail Industry, Essay examples