A Microeconomic Analysis of Indian Retail Industry

MODERN sell MICRO ECONOMICS PROJECT REPORT ABSTRACT The stire trope of bracing-fashioned sell outlets in India on the one hand and habitual sale seasons and talks of on a natural depressioner floorperformance on the unlike evidence to a assorted bag and make us wonder whether the field is on the beneficial harvest trajectory. In this report, rather than providing with just the facts, we set out tried to deduce the newfangled sell firmament from an economists point of get wind and visualize its future-whether it is in its expansion or contraction phase.Motivated by the advance per-capita incomes and increase spending on consumer goods, modern retail stores argon approaching up with new strategies and plans to unlock the Pandora box of the untapped and ununionized retail orbit. In the course of the report, we try to find out how the retail sector works, major(ip)(ip) regulations that affect its functioning and the challenges that await the sector and summarize w ith our psychoanalysis and recommendations. Note We sacrifice habituated where weve analyzed the situation from a micro-economic point of view. INTRODUCTIONThe retail sector in India washbowl broadly be categorize as organize and unformed where the shargon of un make sector is more than 93% of the extreme and includes the kirana stores, mom and pop stores and the ilk. The organized or modern retail sector on the different hand captures a holy 7% of the total grocery share. Modern retail is defined as a form of retailing whereby consumers can grease ones palms goods from a like purchase environment a scratch more than one physical fixing and operate on a lower floor three levels Specialist stores catering to nigh particular category of product such(prenominal) as footwear, pharma & beauty, food and grocery etcetera classified under level I. Departmental stores that cater to a hardly a(prenominal) categories of retail puzzle under level II, and malls where we fi nd an agglomeration of many a(prenominal) departmental stores, hyper commercialises etc classified under level III retail. The figure 1 to a lower place shows the various players at different levels of retail. sell stores can in addition be classified under life style, appraise and luxury formats based upon the consumer income piece they target.Figure Players operating at different levels Figure Organized Retail Although, the sector boasts of covering nearly all the verticals, a account at the markets under different verticals shows that Organized Retail Penetration is extremely low 2. 4 percentage 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 contri exceptors under organized retail and have been prospering at a rapid pace.The figures at a lower place depict the market share and Organized Retail Penetration in different verticals. Figure Market Share of distin ct Verticals in Organized Retail seminal fluid CRISIL Figure Organized retail penetration (%) in different verticals Source CRISIL Retail almost accounts for close to 15% of Indias GDP and then plays an valuable role in determining the Indian economic indicators. Organized retail became the apple of e reallyones eye when Vishal Mega Mart profited from its operations in different parts of India.Soon, other players started with their own retail compasss such as V-Mart, monumental funfair, Subhiksha, Pantaloons et al and the market turned into a very competitive market, probably morose 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 opinion, Big Bazaar and others. The major reasons for this are the selling mix of these grunges and benefits from economies of scale. However, because a number of factors go into determining business profitability, it would non be correc t 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 of India has many domestic corporate houses competing with their ventures such as Tatas intensity, Reliance Trends, Reliance clean, Futures Pantaloons, RPG & so on. Other than these, fascinated by the Indian demographics and potential market, worldwide players have entered through joint ventures with national players and are planning to get by for the share through such strategies.Major players along with their pits are shown below. * Landmark (books and music) * Croma(multi-brand electronics) * manhood 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 convulse (sunglasses) * Brand Factory (multi-brand readymade garments) * KBs 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 Fresh (neighbourhood store) * Reliance Mart (supermarket) * Reliance Super (mini-mart) Reliance Digital (consumer durables and reading engine room) * Reliance Trends (apparel and accessories) * Reliance Wellness (health, wellness and beauty) * iStore(Apple products) * Reliance pace (footwear) * Reliance Jewels (jewellery) * Reliance TimeOut(books, music and entertainment) * Reliance AutoZone (automotive products and services) * Reliance Living (h ome ware, furniture, standard 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 metropolis (hypermarket) As we can see that all major hosts in India have opened up their retail stores catering to different sections of the society providing for different needs of the nodes. This has yielded in a sort of monopolistic argument in organized retail market in metro and Tier 1cities owing to the macroscopic 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, merely however because of topical anesthetic players and unorganized retail the effects of oligopoly generally don t show up. The posture of competitors thus affects not notwithstanding the player, but the industry and the nation as full-page. Lets discuss in brief the effects of competition. disceptation AND RIVALRY contender is one of the operator to achieve economic efficiency.It restrains prices and encourages companies to acquaint 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 stead 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 as well single brand established alien 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 veneer immense competition from the unorganized sector. Traditionally, retailin g has been established in India for centuries. It is a low cost structure, mostly owner operated, has negligible real landed 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 serious hurdle for organized retailers.Because of the largely unorganized spirit of Indian retail, inefficiencies have crept in and large number of intermediaries exists, reducing the serviceable 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 rick volumes by ensuring footfalls, while being able to reduce costs, withstand downturns, and deliver competition.Here we excessively see a common practise to prev ent other companies from bear on the economic status quo of a country, by imposing barriers and caps on FDI, for prototype what has been done in multibrand retail. As of now, FDI in multibrand retail cannot exceed the stipulate cap which has kept global retailers such as Walmart, Carrefour et al from entering the Indian market, although they let off 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 more or lesswhere 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 period s or seasons of sale.This shows that because of the very competitive nature of modern retail, which now besides 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. further almost all use similar technologies and processing techniques to provide the final product and thus the prices cannot be increased significantly, for fear of want of market share. For example, Pantaloons and Westside have almost the similar brands in offering for the customer, loss 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 uniform product change at a higher price in lifestyle stores. To take a shit advantage in such a competitive environment major retailers have started to distinguish themselves by providing products under snobbish labels. In India, undecomposed produce purchases are made more often from cart vendors who buy their stock from sellrs. Retailers have tried to bridge the gap with direct originate procurementeliminating middlemen and introducing private labels.They are coming up with new ideas to snap up a major share of the market which is prospering (see figure below) because of the followers factors The average income of the middle class population has been increasing at a rate of around 12%, which will result in increased use of goods and services change magnitude proportion of working women in the country Increasing population of employed youth Increasing desire for better standards of aliveness and trends in consumer expenditure Increase in the use of plastic silver Emerging markets in Tier II and Tier III citiesFigure sales (in million Rs. ) plotted against the financial year Source Company decreed website These factors whitethorn cause a shift in the demand curve, but more number of retaile rs will be willing to enter and lastly the price would not be impingemented much. There would, infact a slow shift from unorganized to the organized retail. All these and a huge untapped market potential thats locked in the unorganized retail has actuate 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 moldiness 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 fashion 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 coupled StatesFigure 5 US Online Ad Spending The growth of online video ads among the brand marketers and Social networking a re 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 oft see advertisements from major retail players such as Big Bazaar, Chroma etc in newspapers.Digital Advertising This form uses advertising using digital media. television receiver 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, care 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 study that helps them localize their own communications with consumers.For this category, we evaluate two criteria whether the retailer offers l ocate 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 fulgent 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 tasting 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 concourse employed and thus creating job opportunities. The rural market is home to the 46% of the rich and prospe rous 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 ontogeny 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 shortage 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 f arming 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 admitd 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 determined 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 magnification of Production Possibility frontier (not by reducing consumption but with introduction of new technology) RECENT TRENDS Growth of Modern Retail India travel from being 10th largest economy in 1990 to 4th largest in 2010 accord 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 draw near 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 climb up in affluence and growing attraction towards branded goods. The parameters over which modern retail has been faring better than traditional retail are product commixture and range, quality, everything under single roof model. FDI in retail FDI in exclusive BrandIn 2006, FDI in single brand retai l was permitted to the design 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 world-wide 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 p ut entry of worlds 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 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 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, lo oking for any drawbacks, in the lead 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 owned and sold byretailers at their stores and are typicallypr iced lower(5-15 percent) as compared tothe existingbrands. 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 put thus becomes very important to create great brand draw off value. 9 . Unique Selling Proposition 10 . Opened up multi brand retail in phases.