The Hindu : Big push to retailing

Online edition of India's National Newspaper
Sunday, Jan 18, 2004

Business

Business

Big push to retailing

By Ramnath Subbu

MUMBAI, JAN. 17. The old axiom of `Consumer is King' is only now being realised in the Indian context with the growth of the fledgling retail industry. Retailing, in its organised form, is only a decade-old in India and today accounts for barely 2 per cent of the overall retail market. The total sales of organised retailers are estimated at around Rs. 17,500 crores. In the last two years, however, this industry got a leg up with the establishment of international quality formats, entry of several domestic and international players and improvement in retail processes. The retailing industry today is clearly in `investment' mode.

Fitch Ratings, an international ratings agency, estimates an addition of one million sq. ft. of retail space per annum in the food and departmental store segment and this would require a total annual investment of around Rs. 2,400 crores. In addition, investments in support facilities such as real estate development for retail and parking could be another Rs. 100 crores. R. Jayakumar, director, Fitch Ratings, said, "Typically the growth cycle lasts ten years. Now there are limitations of foreign direct investment but once this opens up, there will be further growth. Cheap interest rates, improving purchasing power and a credit driven economy are all positive factors for the sector".

A closer look at the industry shows that most of the larger players in the industry have been real estate developers. The reasons for this are not far to seek, setting up these stores requires heavy investment at the outset in real estate. Large properties at workable rentals were just not available earlier and players in the past developed 100-500 sq. ft. properties only. Now, there are sponsors like Rajan Raheja for Globus, K. Raheja for Shopper's Stop, Hiranandani for Haiko supermarket, Tatas (Trent) for Westside and DLF for DLF malls.

B. S. Nagesh, CEO and Managing Director, Shopper's Stop, said, "The biggest boost has been that the real estate developers have become most bullish at the moment. This presents an opportunity not only for departmental stores but for every format of retailing. Department stores can now in fact, grow three times in three years and real estate can grow 30 times in the same period".

A senior executive of a Mumbai-based retail chain said, "In the last 2-3 years, there were different models being experimented and nothing was clear. About three years back most large retailers were in the red. Over the last two years, most have turned around and having done that, and given the large opportunity, there is the need to grow fast and therefore one sees this growth".

Another issue that dogs an industry where many players rush in is that of a consolidation. But given that the pie is so large, takeovers are unlikely unless players voluntarily leave. Mr. Nagesh felt that for another ten years, there are unlikely to be any closures. "In India, organised retail will grow to 20 per cent of the market in ten years. Because of this surge, it seems too soon for any real consolidation to come in. There could be some small buy-outs here and there with essentially efficient players buying out less efficient players, but as things stand, it is probably too early for a consolidation".

The retail players are in no great hurry to move beyond the metros at present. Being a high fixed cost business, players will try to finetune models for every city or town and only experiment with smaller towns. "I see percolation to smaller towns in two years. It has to saturate the metros first. The rural market is a different animal. One has to consider different product categories relevant to rural areas, whether two wheelers or black & white TVs or fertilizers, it will reach these areas in 3-5 years," said Mr. Nagesh.

The unorganised retailers have expressed fears about their being wiped out by the entry and establishment of both domestic and multinational retail chains in India. "However, that in itself is not a very well-founded fear because the way cities and towns are structured, it is unlikely that unorganised sector will be wiped out. For the domestic retail chains, MNCs operate in a parallel system. We are not competing in same space, nor targeting the same consumer although issues such as predatory pricing has to be addressed," said an industry source. According to Mr. Nagesh, "Any incremental spending in the middle class is good news for us. At the end of the day, growth in the retailing sector and sustenance will come from consumer spend and nothing else. The signs are good, economy is growing at 7 per cent and disposable spend is growing at 9-10 per cent".

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