Indian retail sector has been a strong area of interest and discussion both within and outside India for a number of reasons. India has the highest retail density in the world dominated by small retail outlets, which many call as “mom & pop” stores. But the sector of late has been undergoing a major transformation in terms of its structure and scale. Slowly and steadily, the big players have been entering in this field and the sector is evolving into organized shape and structure. The Indian retail sector has been categorized as the top player among the developing country markets in terms of future growth potential. This has created strong interest am ong big retail players of the world in the Indian retail sector but at the same time has created anxieties and fears in the minds of small Indian retailers. In this context, the regulatory environment for this sector is evolving and has a lot of challenges in hand in terms of how to balance the interests of both small and large players as well as organized and un-organized players. The study is based on an extensive survey of literature, industry reports, and field survey of small retailers. Drawing upon the analysis of primary and secondary data, the study highlights the issues facing the sector and comes out with some pertinent policy recommendations.
Retail sector in India is undergoing a definite transformation in terms of its structure and scale. The sector has been on a path of steady growth since the last decade and half due to many factors such as growing urbanisation, rapid economic growth and the resultant rise in purchasing power and consumerism. The above developments are also reflected in the AT Kearney Global Retail Development Index 2017, in which India is ranked No. 1, replacing China, among top 30 developing countries “where the markets are not only attractive today, but also offer future potential” [
The objectives of this paper are to study the recent developments in India’s retail sector with a view to highlight the emerging trends and possible future directions in term of various indicators such as growth, composition, economic impacts and the regulatory framework. This study is descriptive in nature and uses both primary and secondary data in the analysis.
The structure of the paper is as follows: Section 2 provides a review of select literature; Section 3 presents an overview of Indian retail sector; Section 4 explains the retail formats and structure in India; Section 5 presents the analysis of primary data collected through survey of small retailers; Section 6 presents the regulatory framework pertaining to retail sector; Section 7 provides some policy recommendations and Section 8 concludes the paper.
This section presents an overview of select literature pertaining to retail evolution. Many of these studies have been done in the context of the developed countries. The pattern discernible in those markets may not be applicable in its entirety to developing counties like India at present, but may be relevant in future. Moreover, some aspects are definitely applicable to the present Indian context, and from a survey of these studies inferences may be drawn.
A glance through relevant academic literature and industry reports shows that retail formats are in a state of flux both in developed and developing countries. Several studies show that in the United States, store closures are happening even as consumer confidence is strong and unemployment is low, suggesting that a permanent restructuring is underway in retail sector there. A recent article in New York Times [
In their study of dead malls in Portugal, Daniela Ferreira and Daniel Paiva [
Price water house Coopers and Kantar Retail, in their report [
However, in developing countries like India, an entirely opposite trend is visible, i.e. shift of patronage from shopping street to shopping malls, which has socio-economic implications. In fact there is also a parallel shift taking place from brick-and-mortar retail to on line retail in these countries. There have been plethora of studies on retail patronage, which have identified retail outlet attributes that lead to patronage and shift of patronage [
Changes in urban retail systems have been explained by three major theoretical approaches―life cycle theories, which assume existence of a life cycle for businesses and establishments; environmental theories, which focus on the ability of business and stores to adapt to changes in economic, political, and cultural environment in which they operate; and conflict theories, which focus on the interaction between innovations and existing establishments [
There is also a vast literature available on resilience of retail systems which can be drawn upon to study both large and small formats. Resilience in this context is defined as a system’s ability to cope with internal changes or external shocks while being able to maintain its functions. In this way, various factors contributing to retail resilience may be identified and used in analysis retail change [
There are also many studies undertaken in the context of retail transformation happening in developing countries. According to Arpita Mukherjee et al. [
A seminal study by Mathew Joseph and N. Soundaearajan [
The present study with an empirical focus is more contemporaneous in nature, and unlike earlier studies has the advantage of picking up the changed perceptions of traditional retailers in the context of the challenges posed by fast expanding modern retail formats, including e-commerce. Also the field survey has made an attempt to assess the resilience of traditional retailers vis-à-vis modern retailers based on perception survey.
In the absence of reliable data on the size of retail sector in India, estimations based on GDP have been attempted. It is estimated that about 57% of GDP constitute private final consumption expenditure (PFCE). Further, an average of 60 per cent of PFCE component indicates retail consumption. Finally, about 90% of retail component may be taken as the size of the retail market [
2013-14 | 2014-15 | 2015-16 | 2016-17 | ||
---|---|---|---|---|---|
1 | Gross Domestic Product (at MP) | 112,335.22 | 124,451.28 | 136,820.35 | 151,837.09 |
2 | Private Final Consumption | 64,756.5 | 72,328 | 79,323.31 | 89,270.1 |
Expenditure (PFCE) | |||||
3 | PFCE as per cent to GDP | 57.65 | 58.12 | 57.98 | 58.79 |
4 | Retail Component @ 60% of PFCE | 38,854 | 43,397 | 47,594 | 53,562 |
5 | Retail market @ 90% of Retail Component | 34,969 | 39,057 | 42,835 | 48,206 |
6 | Retail market Growth Rate (%) | 11.69 | 9.67 | 12.54 | |
7 | Exchange Rate (USD 1 = INR) | 60.502 | 61.144 | 65.468 | 67.072 |
Source: GDP and PFCE data have been taken from Economic Survey 2016-17, Vol. 2, Ministry of Finance, Govt. of India. Retail Component and Retail Market values have been computed by the authors from PFCE by using the ratios adopted from India Retail Report, 2015 [
Value addition in retail sector is estimated to be 9.5% of GDP in 2016. Retail sales is projected to growth at a CAGR of 13.7% during FY 2016 to FY 2020 [
Retailers prefer to locate themselves next to other retailers in one place or locality, giving rise to retail agglomerations, where there is clustering of retailers. Several types of agglomeration formats have been identified in literature [
Infrastructure within malls such as public toilets, cash dispensers and recreational areas have been planned and created to meet the expectations and demand of customers, and adds to the shopping experience, thereby facilitating fulfilment of shopping tasks. In shopping streets, infrastructure services are rarely provided according to the requirements or views of the customers, but they depend on the municipality, city authorities or government. The superior infrastructure and other factors such as accessibility, parking etc. make malls more attractive compared to shopping streets which are often congested and overcrowded and lack parking facilities.
In spite of the rapid increase in the number of organised retail outlets in the last one and half decade, Indian consumers even in urban areas still predominantly buy their main food and non-food household items from local kirana stores ( mom-and-pop shops) or neighbourhood grocery stores [
However, like many other countries, there is increasing evidence of strong growth in non-store retail in India too. In fact omnichannel retail might be the future retail model for the country. It has been pointed out that over 50% of Croma’s2 sales during the 2015 holiday season came from online sales through the company’s website [
In future, even large retailers may start offering a number of options for order and fulfilment such as home delivery, store pick-up, or in-store payment thereby taking away some aspects of competitive advantage enjoyed by small retailers. However, India is still placed at the initial stage of the retail evolution model in the Kantar Retail Market Evolution Model (MEM) [
Looking at the financials of the trading companies, according to Economics Survey 2016-17, [
A survey of small (traditional) retailers was conducted in 11 cities spread across 10 states of India. For this study, stand-alone shops of less than 500 square feet in area have been defined as small retailers. The total sample size was 400; they belonged to 4 different categories―grocery, textile, fruit & vegetable vendor and fruit & vegetable hawker. The average store size/space available was found to be 280 sq. feet. The objective of the survey was to find out the perception of the small (traditional) retailers about various aspects of their working in the context of increasing competition from large (modern) retailers3. The perception of the small retailers regarding their preparedness, resilience and competitiveness against the large (modern) retailers were the major aspects to be studied.
The retailers were interviewed by trained enumerators who filled in a structured questionnaire. In addition to questions eliciting factual information on the profile of the establishment, growth in turnover and profits etc., there were twenty one statements on different aspects of the competitiveness and confidence of the small retailers, where their responses were marked on a Likert scale with range 1 (Strongly disagree) to 5 (Strongly agree). These 21 statements were divided into four broad assertions on the functioning of large retailers vis-à-vis the small retailers. They were: 1) Confidence of small retailers in competing with large retailers 2) Store amenities in large retail being considered superior 3) Large retailers being more Price competitive, and 4) Government policies favour large retailers. The average scores of responses under the above four dimensions were cross tabulated against the type of retail establishment and the age of the retail establishment. The results are presented in
In
Sl No | Year of Starting of the Retail Establishment | Number |
---|---|---|
1 | 1990 or before | 110 |
2 | 1991-2000 | 106 |
3 | 2001-2010 | 167 |
4 | 2011 and after | 23 |
5 | Total | 406 |
Sl No | Category of Retail Establishment | Number |
---|---|---|
1 | Grocery/General store | 102 |
2 | Textiles/Ready Made Garments | 106 |
3 | Fixed Fruit/Vegetable Shop | 100 |
4 | Fruit/Vegetable Hawker | 98 |
5 | Total | 406 |
compete with large retailers. The scores tend converge to the mid-point on the Likert scale 3, showing they do not feel too confident about their ability to compete with the large (modern) retailers. Columns 3 and 4 show the average score on the respondents’ perceptions about competitiveness of large retail vis-à-vis small retail. It may be seen from columns 3 and 4 that the values tend toward 4, indicating they tend to agree with the fact that large retail is more competitive on price and store amenities, as compared to small retailers. Column 5 of
From
Confident of competing with large retailers | Store amenities are superior in large retail | Large retailers are more Price competitive* | Govt. policies favour large retail | |||||
---|---|---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | ||||
Category of Small Retailer | n | Mean rating (SD) | n | Mean rating (SD) | n | Mean rating (SD) | n | Mean rating (SD) |
1. Grocery | 85 | 3.37 (0.47) | 93 | 3.78 (0.60) | 89 | 4.08 (0.79) | 91 | 3.81 (0.57) |
2. Textile | 89 | 3.40 (0.50) | 98 | 3.61 (0.60) | 96 | 3.84 (0.74) | 95 | 3.88 (0.63) |
3. Fruit/vegetable vendor | 67 | 3.25 (0.55) | 84 | 3.40 (0.65) | 75 | 3.54 (0.77) | 75 | 3.71 (0.57) |
4. Fruit/vegetable hawker | 53 | 3.36 (0.54) | 80 | 3.46 (0.65) | 77 | 3.46 (0.87) | 66 | 3.64 (0.60) |
Note: *Chi-square test p < 0.05, n (sample size) values vary due to missing responses.
Confident of competing with large retailers | Store amenities are superior in large retail | Large retailers are more Price competitive *** | Govt. policies favour large retail | |||||
---|---|---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | ||||
Year of starting | n | Mean rating (SD) | n | Mean rating (SD) | n | Mean rating (SD) | n | Mean rating (SD) |
Before 1980 | 45 | 2.98 (0.47) | 45 | 3.55 (0.53) | 45 | 3.50 (0.86) | 48 | 3.69 (0.58) |
1980-2000 | 161 | 3.08 (0.50) | 200 | 3.62 (0.64) | 188 | 3.81 (0.85) | 177 | 3.78 (0.61) |
Post-2000 | 88 | 3.19 (0.51) | 110 | 3.50 (0.67) | 104 | 3.79 (0.55) | 102 | 3.80 (0.59) |
Note: ***Chi-square test p < 0.01, n (sample size) values vary due to missing responses.
Questions | Yes | No | Total |
---|---|---|---|
1) Do you think large/modern retailers can take away the market share/customers in future? | 233 (60.52 ) | 152 (39.48) | 385 (100) |
2) Do you think large/modern retailers will be a threat to small retailers in future in future? | 238 (61.82) | 147 (38.18) | 385 (100) |
3) Do you think large/modern retailers are a threat to small retailers in currently? | 236 (61.30 ) | 149 (38.70) | 385 (100) |
4) Do you think Government should introduce time & location restrictions on large retailers? | 251 (65.19 ) | 134 (34.81) | 385 (100) |
large retailers are more price competitive.
The respondents were also asked dichotomous response questions (Yes = 1, No = 2) about the likely impact of large (modern) retail on their business. The results are tabulated and presented in
Retail in India is at a point where new retail formats are emerging and consumers are switching their preferences. Regulatory framework governing retail sector in India is also undergoing constant changes as the governments from time to time try to find the right balance between various concerns such as efficiency, growth and employment. For example, the supply chain of agriculture products in metros has on average 5 - 6 intermediaries between the primary producer and the consumer resulting in total mark up to 60% - 75%. As a result the primary producers received only 20% - 25% of the consumer price and inefficiencies in the supply chain resulted in wastage of 15% - 25% of the value of output [
The low share of organised retail (8% in FY2016), a rising household income and growing aspirational levels of the people, is likely to increase demand for modern retail formats. Thus, modern trade (organised retail) is expected to be one of the main drivers of growth in retail sector in the coming years [
I. Foreign Direct Investment (FDI) in Retail and Modern Trade | ||
---|---|---|
Sector/Activity | % of Equity/FDICap | Entry Route |
a) Cash & Carry Whole sale Trading/Whole sale Trading (including sourcing from MSEs)1 | 100 | Automatic |
b) E-commerce activities2 | 100 | Automatic |
c) Single Brand Product Retail Trading3 | 100 | Automatic up to 49%. Beyond 49%, through Govt. route |
d) Multi Brand Retail Trading4 | 51 | Government |
e) Food Retail | 100 | Government |
f) Duty Free Shops | 100 | Automatic |
II. Implementation of Goods and Services Tax (GST) | ||
Implementation of Goods and Services Tax (GST) w.e.f. 1 July 2017, is expected to facilitate seamless trading across states. It is expected to remove hurdles in interstate movement of goods and turn the concept of one nation one tax into a reality. With GST, traders are spared of the need to comply with multiple taxes and multiple rates. This is also expected to help rationalise logistics operations of trading entities, thereby reducing cost of operation. | ||
III. Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill, 2016 | ||
Shops and Establishments act regulates working conditions of commercial establishments in India. The proposed new bill would cover shops and establishments employing ten or more workers except manufacturing units. The bill has provision for establishments to operate 24 × 7, which is expected to boost retail market. It is expected to boost employment in general and that of women particular, as it allows women working during night shift, which may again boost the retail sector. It is expected that if the model law is adopted by state governments, it will help smooth functioning of services sector, especially the retail sector. | ||
IV. Other Enabling Measures Impacting Trading | ||
a) Government’s efforts to promote cashless payments may boost modern/online retail. b) Retail has been accorded status of a priority sector by the government in the National Skill Development Mission. Retailers Association of India is the nodal agency for training the manpower. This would make available the required trained manpower for the growth of the sector. |
Source: Consolidated FDI Policy Circular (2017) Department of Industrial Policy and Promotion, Government of India. 1Cash & Carry Wholesale trading/wholesale trading, would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Thus, whether the sale is wholesale or not would depend on the type of customers to whom the sale is made and not the size or volume of sales. Wholesale trading can include resale, processing and thereafter sale, bulk imports for business sales and B2B e-Commerce. 2E-commerce entities can engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce.FDI under automatic route is permitted in marketplace model of e-commerce only, where the e-commerce entity provides an information technology platform on a digital & electronic network to act as a facilitator between buyer and seller. 3In respect of proposals involving foreign investment beyond 51%, sourcing of 30% of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen etc, in all sectors. 4Minimum US $ 100 million to be brought in as FDI, and at least 50% of total FDI brought in the first tranche of US $ 100 million, to be invested in 'back-end infrastructure' within three years. Further, at least 30% of the value of products purchased shall be sourced from Indian MSMEs. Activity permitted only in cities with more than a million population as per 2011 census. Final decision maker is the government of the concerned state, where the outlet is to be established.
To tackle the above, policies and regulations should be crafted which would facilitate coexistence of both organised and unorganised retail and better prospects for the overall retail sector and their customers. Broadly, these policies and regulations may be divided into three categories: transformative, collaborative and restrictive.
Several support measures can be undertaken which would help traditional retailers reinvent and transform themselves. Measures such as tax breaks, infrastructural support, assistance in reaching out to more customers by leveraging digital retail/e-commerce etc can be provided to small retailers to enable them to compete with large retailers. They should also be encouraged to connect to retail aggregators to take advantage of e-commerce facilities, and reach a larger number of customers in a cost effective manner. Further some measures could be taken by the retail association/govt. to spread awareness among the general public about the role and significance of small business in the economy. National Small Business Week celebrated in the US every year to recognise the role of small business is worth mentioning in this context.
Drawing upon the conflict theory of retail transformation, small retailers in India seem to be concurrently employing a multi-pronged approach to counter the forces affecting their business. The first is a defensive strategy―that of putting pressure on government to prevent or delay reforms such as FDI in multi brand retail. In addition, as the field survey has shown, they are very much aware of the changes happening in retail ecosystem, and have started responding and adapting to these through innovations such as better in-store facilities, better display, selling below the maximum recommended price (MRP) etc.
Urban planning and management policies can also increase or decrease the resilience of retail sector [
These actions may be explored by those traditional retailers, who find it difficult to sustain the business in the hyper competitive environment. Some of these could be to become franchisee of large chains, who may want to leverage the locational advantage or cost effectiveness provided by traditional retailers; taking advantage of cash and carry opportunities provided by modern trade etc.
As e-commerce gathers steam in India, traditional retailers can be co-opted into the system. A good example is that of Amazon. The company has enlisted mom-and-pop store owners as partners in its delivery platform. Residents of small villages and remote areas can go to their local store and use the owner’s internet connection to browse and select goods from Amazon in Store owners act as conduits whereby they place order for goods selected and the customers can collect the same from the store by paying cash. The store owner passes on the payments to Amazon after deducting handling charges. In this arrangement, Amazon can reach to customers in remote areas and store owners get increased sales of their own products while customers are on-site [
On the part of the government, there is a need to exercise greater caution in opening up the retail sector to foreign multiband retailers. Traditional retailers running into millions would need at least 5 - 7 years to prepare themselves to face the competition from the former. Thus it may be imperative not to relax the exiting caps on foreign investment in this sector any further until that time. In addition, the restrictions on the cities where multi-brand retail with foreign investment can be started based on size of population, and need to be continued and strictly implemented. Further, competition watch dog, Competition Commission of India should be tasked with looking into cases of unfair trade practices such as predatory pricing in this sector. Other reasonable restrictions on large retail, even the domestic ones like zoning restrictions can be considered in appropriate cases.
Based on an extensive survey of secondary sources―both academic and industry reports, the study has attempted to highlight the structure and fast paced changes happening in Indian retail sector which provides livelihood for millions. Retail transformation which has taken decades in other countries is happening in a short span of time in India with different retail formats emerging simultaneously. The field study undertaken shows that there is increasing tension and stress among the traditional retailers, as they face competition from modern retailers. In this context, the study recommends a cautious approach to opening up the sector to foreign investments and a proactive approach to transforming the traditional retailers and making them competitive, before any further liberalisation measures are undertaken in this sector.
Some of the limitations of present study are the relatively narrow coverage in terms of sample size and the cities covered, and lack of adequate data on the financial aspects of small retailers. Future studies should attempt to cover wider sample in term of sample size and geographical coverage, develop an instrument for measuring resilience of small retail, focus more on analysis of financial data and use more sophisticated statistical tools such as factor analysis and cluster analysis to identify common factors and characteristics impacting retail competitiveness and resilience.
This paper comes out of a research project on retail sector funded by All India Council for Technical Education (AICTE), Ministry of Human Resources Development, Government of India and the authors acknowledge their gracious support.
Sebastian, V.J. and Gupta, R. (2018) Retail Ecosystem in India―An Overview of the Regulatory Framework and the Emerging Paradigm. Theoretical Economics Letters, 8, 183-196. https://doi.org/10.4236/tel.2018.83014