Global retailers and Indian conglomerates seem to be getting serious about the large Indian retail opportunity. Over the past 10 years, retail in India has seen many domestic and global companies build a play into possibly the most promising consumer opportunity.
The overall market numbers continue to look very attractive and India continues to grow consumption at a pace faster than any other major economy in the world.
Very few retailers have been able to crack the code for profitable growth. The parallel growth of digital retailing makes the scope of profitability and scale of brick and mortar retailing elusive.
The rising cost of real estate, workforce and infrastructure along with price-sensitive Indian consumer behaviour is giving pain to the sector. However, the gradual growth of household final consumption expenditure and rising urban demographic dividend is bringing the hope of moonlight in the gloomy night.
Of course, the government taking significant steps like 100 percent foreign direct investment (FDI) in single-brand retailing, simplified goods and services tax (GST) structuring, improving supply chain management by developing warehouses and logistics hubs and most recently the reduced corporate tax rate to 22 percent are mostly welcome moves, but organised retailing is at the verge of applying Darwin’s principle of ‘survival of the fittest’.
So where is the problem? Are leaders not able to envision the ground realities while developing strategies?
If you want to serve a large demographic spread, you have to open more stores and that comes with more price competition from traditional retail channel, growing infrastructure, management and rental costs.
Here is the question: how to grow and stay profitable?
If we consider Forever 21, the American fast fashion retailer filed bankruptcy under Chapter 11 in the US because of rising debt piles, whereas Uniqlo the Japanese retail major debuted in India on October 4. Here we can feel the sense of opportunities along with threats.
To become fit in a competitive sense they have to provide deep discounts like e-tailers which in return will attract more store footfall and hence higher inventory turnover ratio.
The strategic alliances with e-tailers along with penetration of stores in Tier II and III cities and supply chain efficiency through spoke and hub strategy will bring a rise in this sector.
To reduce the cost of real estate is somehow impossible and challenging, but if the government intervenes to bar the deep discounts provided by e-tailers then only bricks and mortars will see some scope of hope with their unique offerings.
The author is Head of Research at CapitalVia Global Research- Investment Advisor
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