Indian retail Industry – The Challenges

Whenever an industry or an industrial segment grows at a particularly fast pace, and outperforms the rest of the economy, it is inevitable that that industrial sector will come up against speed barriers. Some of these barriers can be removed by the industry, with major players working in tandem against factors which inhibit growth and impact all of them identically. Some barriers however can only be removed by government by bringing in legislative changes, and streamlining certain procedures. The challenges facing the Indian organized retail sector are multifarious, and some of them can act as inhibitors to future growth.

To begin with, if we look at the nature of change which has engulfed the Indian retail scene, we will realize the following. For one, the behavioral pattern of the urban Indian consumer has undergone a big change. This has happened because the Indian consumer is earning more now, is more influenced by western patterns of consumption, there are more no of working women and they are in a better position to influence and drive family consumption patterns, desire along with corresponding availability of luxury items and better quality goods. The Indian consumer now wants to eat, shop, and get entertained under the same roof. All these have led the Indian organized retail sector to give more in order to satisfy the Indian customer. 

However, with expanding opportunities, come challenges! One of the biggest challenges facing the Indian organized retail sector is the lack of retail space. Sky rocketing real estate prices due to increase in demand from the Indian organized retail sector, it is posing a challenge to its growth. With Indian retailers having to shell out more for retail space it is affecting their overall profitability. The situation has remedied to some extent due to the recent recession, however that is not to say that the same situation will not repeat itself.

Another pain area is unavailability of trained manpower for the organized retail sector. Organized retail has specific manpower needs which cannot be easily met by general stream graduates. Retail outlets that are forced to hire such graduates often need to train them extensively. While training itself is expensive, there is the ever present threat of poaching, wherein any new entrant to the retail business simply hires in staff from an incumbent, by offering pay hikes. While this results in wasted training costs borne by the original organization, it also inflates the cost of wages.

Raising enough capital for expansion is the third problem faced by Indian retail giants. The Indian government has allowed 51% foreign direct investment (FDI) in the India retail sector for single brand shops only. This has made the entry of global retail giants to organized retail sector in India difficult. Consequently, the global retail giants like Tesco, Wal-Mart, etc can enter the organized retail sector in India only indirectly through franchisee agreements or in partnerships with an existing Indian firm.

To top it all there is the paradoxical problem of excessive competition. Many Indian companies like Reliance Industries, Future Group, and Bharti Telecom are venturing into the Indian organized retail sector. This has resulted in excess capacity and a glut in the market. To attract new customers and to retain existing customers, these retail giants need to constantly entice their customers with freebies and discount offers. At any point of point some retail store or the other offers exorbitant discounts. Since these discounts are offered for a sizeable period of the year, customers don’t remain loyal to any one store, but perform discount-shopping.

This is a vicious cycle, akin to the telecom war of a few years ago where all major players were offering rock bottom prices for cellular connections and call rates. Or the Airlines war of attrition that has taken a heavy toll on the profitability of the aviation industry as a whole. As I stated before, some of the problems will need to be tackled by the industry, and in some other areas the government will have to extend a helping hand. But despite these teething troubles, or because of them, Indian Retail Industry at the moment is an exciting place to be in.