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The Curious Case of Organized Retail

30 August, 2010

Organized retail has clearly been one of the most talked about consumption stories of the last decade in India. Interestingly, in the next 2-3 years, we will have a generation of urban affluent teenagers who have continually been exposed to shopping centres and organized retail since they were born (readers may recall that the first few shopping centres in India: Ansal Plaza – New Delhi, Crossroads – Mumbai and Forum – Kolkata came into existence in the late nineties and early part of the present decade).

Unlike my peers, this new generation probably does not remember ever going into a Dadar or a Karol Bagh to shop and hence feel absolutely at home at shopping centres and chain stores. As the size of this group and their spending power increases over time, there is bound to be exponential growth in the wallet share of shopping centres and organized chains within the overall retail universe.

All that’s great but the growth of organized retail has nowhere been close to what was originally expected. After almost fifteen years of raising its head and consequently everyone’s expectations, the share of organized segment within the overall retail business stands at a paltry 5-6%. It is interesting to note that even today, the annual net profit of most of the larger Indian organized retailers is only in double digit crores.

Compare that with profits of firms in some other services sectors which also started growing around the same time (software, media and financial services for example) and you will get a sense of where it stands. This clearly does not augur well for the future capital expenditure badly needed by most retailers to expand their footprint, invest into the back-end, create greater efficiencies in procurement and ultimately improve net margins.

The recent government discussion paper on allowing FDI in multi-brand retail is of course a welcome move. Why it took so long for the government to start thinking about foreign retailers positively is anyone’s guess. The reason given is that the small and unorganized ‘Indian’ retailers (12 million at last count) need to be protected against the well capitalized ‘foreign’ retailers.

I beg to differ. The question is not between Indian and foreign, it is actually between organized and unorganized. The small retailer’s business doesn’t get impacted only if Wal-Mart sets shop across the road. It also gets equally impacted if Big Bazaar does.

Of course, in the real world, there are various lobbies and pressure groups that exist and influence government decision making. By now most large business houses have established their presence within the retail sector and need foreign retailers to come in and pay fancy valuations so that the promoters can make money and the business can get a capital injection. Obviously it is a good time to allow the foreigners to come in! Let’s see how that evolves given the political compulsions at play.

In the meanwhile, the small & traditional retailers in high streets and bazaars continue to thrive and it is becoming more and more interesting to witness the evolution of the retail business matrix in India. I can only assure you that with or without the foreigners, the Indian retail mix will eventually turn out to be as unique as we are as a nation – something on the lines of a paneer tikka pizza!

I believe both organized and unorganized segments will survive and happily co-exist, given the overall consumption growth.We are anyways seeing more and more standalone mom & pop stores organizing themselves into chains and also expanding into shopping centres. Equally, most large retail chains are expanding not only within shopping centres but also on high streets. The rural market represents a huge untapped opportunity in its own right and will evolve as we go along, with both organized and the existing unorganized players.

By the way, we also had an interesting last two years since the economic downturn. Most retailers consolidated operations and shut down unprofitable stores; several went bust (Subhiksha, Vishal); almost all slowed down their break-neck expansion plans and focused on improving their balance sheets.

The overall universe of organized retailers in India is probably smaller than what it was in 2008 but equally, it is in better shape and now beginning to grow once again. I think the initial evolution phase for most of the larger players is over now and we are in for some interesting times ahead! 

 

(Ritesh Vohra is the Managing Director, Real Estate, Saffron Asset Advisors Private Limited.)


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2 Comments
Premkumar . 6 years ago

Apart from not seeing too much profit being made in organized retail, what do you see missing for the consumers today that foreign retail needs to be allowed?

Consumers right now have choice and competition. Why should small retail yield to big retail in India?

Arup . 6 years ago

I believe both small and big retail will thrive side by side as consumers buy 5 kg of flour at Rs. 100 when they are strolling on a saturday in big retail but buy the milk packet while coming back to home from the small neighbourhood store on a daily basis.

The problem for small retail is when stores like KB’s Fairprice or More start opening in your neighbourhood that would be death knell for small retail.

The Curious Case of Organized Retail

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