Indian Retail Mad Rush and the Problems

by Deepak Sharma on Wednesday, August 15, 2007

On the occasion of India's 60th Independence day, Economic Times yesterday had a story on India Retail on how almost all big Indian corporate houses (Tata, Birla, Reliance, Bharti etc) are storming retail space. But the ride has not been easy with problems being faced in supply chain and warehousing, high retail space rentals and red tape. The story also captures in short the history of Indian Retail.

Every large Indian corporate house is storming the retail space. If RPG was the first mover, the last two years have seen Reliance, Aditya Birla, Bharti, Godrej and ITC, to name a few, all throw their hats into the ring. The dominant format is the discounted food and grocery chains. Explains Govind Shrikhande, “Convenience is a big factor to the Indian consumers and catchment shopping will still take some time to get displaced. They’d rather go close to home than 20 minutes to a hypermarket.”

Retailers however face several roadblocks. An underdeveloped supply chain, lack of a strong cold chain, poor warehousing facilities and storage are just a few areas of concern, especially for perishable goods. So, retail chains in India have to start from scratch. “Typically, in the more organised markets, retailers prefer to outsource the supply chain to specialised companies. However, in case of India, they will have to develop the entire infrastructure on their own,” says Dhruv Parasher, CEO, Decube, a retail consultancy firm. In recent times, some companies have entered the logistics sector dedicated to retail chains. However, it’s not sufficient to address the massive demand-supply mismatch. “To attract players in the supply chain and logistics businesses, government will have to provide incentives,” says Delhi-based Tiger Logistics MD Harpreet Singh. His company is working to create a supply chain infrastructure with Reliance Retail.

Another big hurdle for retailers is the high real estate cost, which shows no sign of stabilising. In the developed economies, a hypermarket spends less than 5% of its revenue in real estate. Conversely, in India, a one-lakh sq ft hypermarket in the NCR would end up paying 10-12 % of its revenue on real estate costs alone. In case of smaller formats, the spend on real estate is as high as 25-30 %. The industry believes that the present real estate costs are a result of artificial scarcity, leading to widespread speculations . “These speculations can easily be addressed if a better due diligence is done while notifying master plans in various states. Also, states should abolish the Urban Land Ceiling and Regulations Act,” says Parsvnath Developers MD Pradeep Jain.

Taxes and licence requirements are other major issues that the retail sector has been complaining about. For instance, a hypermarket in Mumbai has to apply for 29 licenses and the process can take six months. And when the retailer opens a second store, he has to apply for the licenses all over again.