The Indian retail sector is growing rapidly. The relaxation in FDI norms is bound to generate even more interest in the Indian retail market. To provide a bird’s-eye view of the market dynamics, we have given below the SWOT analysis of the sector. This will help investors approach the market with a well-formed strategy.
Strength
The inherent strength of the Indian economy provides a boost to retail. Following are some of the factors that strengthen the economy:
Purchasing Power
An increasing number of Indian consumers are ascending the economic pyramid to form an emerging middle class. Though they still earn modest income between 1.70 and 5 USD per capita, per day, in the coming decade, these consumers will collectively have around 6 trillion USD worth of purchasing power annually.
In 2010, there were about 470 million people in the emerging middle class. As per PwC estimate, this segment will grow to 570 million by 2021. This segment, existing between the lowest-income group and the middle class, will constitute about 42% of India’s total population.
Population Demographics
India’s working population is expected to be 117 million over the next decade as compared to China’s four million. In the following decade, from 2020, the former will add 98 million to its workforce, while China will contract 51 million. This is a big positive for India.
Low Retail Penetration
The penetration of organised retail in India is still very low at 6 to 8%, especially when compared to developed nations such as the US and the UK which have retail penetration of 85% and 80%, respectively. With new policy reforms, increasing purchasing power, and changing spending pattern, we are bound to see a difference in the coming years. As per the Images Retail research, FY15 will witness a jump in the share of organised retail.
Aspiring Middle Class
With a population of 100 million, the tier II and III cities in India are larger than countries such as Germany and the UK. Besides, the untapped rural population holds immense potential for retailers. It is estimated that by 2021, approximately 67% of Indians will still live in rural areas.
Weakness
Despite the positives, there are certain facets of the sector that may dampen growth. Following are the key areas to consider:
Political Uncertainty and Regulatory Requirements
The announcement of FDI in retail has stirred the political pot. The government faces stiff opposition with its allies threatening to withdraw support. In case, this policy is finally implemented, there is another important aspect for the companies to overcome. The way the policy is currently drafted, a retailer can set up stores only in those states which have agreed or will agree in the future to allow FDI in multi-brand retail.
Poor Infrastructure and Supply Chain Management
Apart from the political and regulatory scenario, infrastructure will play an important role in deciding how this sector will evolve and retailers will manage the supply chain. While the FDI regulation states that the retailer will have to invest a substantial amount in building the infrastructure, this will take time. Meanwhile, due to poor infrastructure, multiplicity of taxes, high cost of fuel, dependence largely on the road transportation, etc. logistics still remains a high percentage of the cost of a product, in certain cases going beyond 15 to 20%.
Opportunity
Retailers in India have been experimenting to arrive at a successful formula, but there is no ‘one size fits all’ strategy. The market is still undergoing a lot of changes, both from the regulatory as well as demand side. Following are some of the winning factors that players could focus on:
Innovation
During PwC’s 15th Annual Global CEO Survey, one of the questions posed to the CEOs in the R&C sector was as follows: To what extent do you anticipate changes at your company in any of the following areas over the next 12 months? Nearly 73% indicated that the following two areas will change in the near-term:
• R&D and innovation capacity
• Technology investments
Digital Strategy
Going digital is not only about e-commerce but the way interaction will change in a few major areas including changing business models (e-commerce, e-payments and mobile transactions), employee and customer engagement and investment in technology.
Customers are demanding an improved experience in terms of how to search, browse products and conduct transactions online. R&C organisations need to engage with customers differently, in terms of using a range of channels. However, the overall customer experience should be the same-smooth and seamless.
Social media is also becoming a popular tool for consumers to educate themselves about offerings, seek advice about products and compare brands. For retail companies it is important to define how social media can support sales activities throughout the various channels, especially e-commerce. Social media analytics is the focus area for retailers.
Customer-centric Approach
The retailer is no longer looking at product innovation at the merchandising level only but the entire store today is a product that needs to appeal to the customer. The following are factors that will make a difference:
• Experience design
• Digital change
• Analytical insights
Changing the Regulatory Scenario
Recently, the Indian government made the following two significant announcements that will go a long way in developing the Indian retail sector:
• Permitting foreign investment in multi-brand retail trading
• Simplifying the rules for single brand retail trading to make it more business-friendly
Threat
The retail sector is marred with many issues. The two most important threats are as follows:
Availability of land and real estate
Retail space and rentals are key considerations in multi-brand retail and getting a feasible rate in the desired location is important. There are retailers who have exited cities because of the high rentals that put more pressure on profitability.
Human Capital
With attrition still very high in the industry, human capital management continues to remain one of the top three agenda points for the retailer. The attrition in the industry can be anywhere between 20 and 25% in non-food and grocery business to as high as 60% in the food and grocery segment.
Thus, the Indian retail sector has its own set of strengths and opportunities. However, the challenge lies in overcoming the weaknesses and providing an environment that is conducive to the business, not only for the national players but also the foreign retailers.
(Source: An article by PricewaterhouseCoopers (PwC) in India Retail Report 2013)
