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Organized Retail Growth + Challenges

October 4, 2008


Indian industry leaders that the game has just begun for organised retail in India. Though the global economy is witnessing a slowdown, the Indian economy is set to grow at 7.5% p.a. Total retail sales in India is estimated to grow at a CAGR of 10% to $680bn by the end of 2011 increasing from to $511bn at the end of 2008. Organized Retail to grow at a CAGR of 42% to reach US $70bn and capture 10.3% of the total retail in India by 2011.

The top 20 cities in India make up less than 10% of India’s population but generate more than 30% of household income. Tier I cities would drive growth of organized Retail sector in the medium term, we believe long-term retail growth would come from Tier II and III cities.

Key Challenges faced by Indian Retailers:

Supply Chain & Back-end: Drawing a leaf out of Sunil Mittal’s Telecom business, where IT and Network operations were outsourced to the specialists in that field [IBM and NokiaSiemens Network], retailers are agreeing on the idea of outsourcing back-end operations of SCM and Logistics handling to supply chain companies. SCM should be viewed as the knowledge and research based arm of the industry itself, failure of which could question execution capabilities of retailers.

Additionally, to be successful in the Retail segment in India, the retailers need to have in-dept knowledge about the consumers and make the supply chain efficient to make sure that the product categories and SKUs in the stores meet consumer requirements in an efficient and cost effective manner.

Retail Rentals: Many retailers have moved out of prime destinations in various malls in Tier I cities as they are not clocking sales in proportion to the rent that they are paying, which sometimes is as high as Rs50 lakh per month. Cities like Mumbai and Delhi have Real Estate cycles of five and three years respectively, wherein the real estate market starts to cool off and rents starts falling.

Revenue Sharing as a part of rental is emerging as the new mantra. It is still at the testing stage in India.

Different Formats:
Store formats are not retailer but consumer specific. The foremost thing that a consumer looks for is convenience and variety. We believe any format will work and thrive, be it a hyper-mart or a small store in the neighborhood, as long as it provides an optimum mix of convenience variety to the consumers. In this context, hypermarts in the heart of the cities seem to fit the bill and going ahead, would drive the Retail growth in India.

We Hope that retailers in India will convert these challenges into opportunities 🙂

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