The travails of the retail industry.

A lot has been talked about the viability of the industry but given the nature of this industry and that too in a developing country like India it is bound to take some years before someone can start deciding on its fate.

Some of the present concerns are

Rental costs: the rent paid for occupation is very high and at present constitutes almost 4% of a retailer’s turnover. Whereas they constitute only approx 1-2 % of the turnover in developed nations.

Utility costs: The electricity charges are also high at almost 5% of the turnover whereas it’s less than 1% in developed countries. A Store of size 4000 sft might have to shelve an average of Rs.10 Lakh for rent alone.

Margins: Even the biggest retailer here has very little say when it comes to negotiating with its vendors. This has led to lesser margins for the Indian retailers to operate upon. The situation is completely the opposite in other countries where the retailers calculate the final price by demanding to know the price of every ingredient.

Aggregation: Fruits and Vegetables continue to be the biggest footfall driver for a retail business, but the retailer still goes to multiple sources for procurement of these items. The average farmer in India owns ½ acre of land whereas the minimum land owned in developed countries is 400 acres. With this kind of setup cost efficiencies are over looked, quality takes a hit and supply chain management becomes a daily headache. Although these conditions will continue to be present, government should atleast chip in with infrastructure development in terms of building cold chains, building distribution centers, helping farmers generate better yields and incentivising retailers who create such an environment.

Multiplication: Retail is a game of multiplication and the industry is hardly 2 years old. Even the largest retailer has 600 outlets whereas the country can take a minimum of 20,000 outlets. It will take some time before economics tilts the favor in the retailer’s hands.

Standardization: Servicing India is like servicing 26 different countries with 750 modern towns (towns with more than 50,000 populations). Spread over different geographies with different statuary laws and bizarre governmental policies it takes more than experience to set up and run stores. With different festivals for different towns and different climatic conditions engulfing different states it becomes but complex to devise marketing plans that fits all.

IT systems: The key to retail is information and information comes from data provided by the consumers who shop. It will take atleast a couple of year’s data to forecast demand and therefore providing the right product, at the right time, at the right place, to the consumer remains a challenge. With changing tastes of the new consumer class it is but difficult to give the customer what he/she wants.

Supply Chain model: Retailing in India has traditionally been a multiple hub and multiple spook model with cheap labor to service these multiple points. It is very well entrenched in the Indian psyche (be it communities or be it traditions) and is difficult to dislodge them in a short time. These communities with their distribution capabilities have been able to service the different cities and more specifically districts and towns seamlessly. When a new retailer wants to set up an efficient supply chain model in smaller cities or towns or districts it becomes economically unviable to service stores.

All the above are serious problems, business houses which can work around these issues or come up with innovative solutions will gain the first mover advantage. And this advantage cannot be replicated for a long time.