subject: Organized Retail: Challenges Ahead For Indian Organized Retail [print this page] Booming economy, favorable demographic patterns, increasing per capita income and urbanization gave rise to a new sector in India: Organized Retail. Opening up of retail sector for FDI can be considered as the prime reason behind the blooming organized retail sector. Sensing this opportunity several companies ventured into this sector, including Reliance, Bharti and Pantaloons.
Despite the Government allowing only 51% of FDI in single format retail segment, global retail giants like Tesco, Wal-Mart and Metro AG are making inroads indirectly through franchise agreements and cash and carry wholesale trading, thus giving some serious competition to domestic retailers. Nevertheless, growth opportunity in this sector can be judged by the fact that only 3% of the total retail sector is organized and 97% of the sector still consists of local mom and pop stores.
Unfortunately, the growth strategy used by all organized retail players of increasing their number of stores backfired when rentals dramatically shot up following the global economic melt down. Profitability is seriously hampered and almost all major retailers are now struggling to maintain their bottom line. Average operating profit margin declined from 9.5% in 2007 to 7.9% in 2008. The worst part is that such a drastic growth in the number of stores was backed by significant leverage which is expected to further hurt these organized retailers" liquidity and profitability levels.
Retailers are correcting their over enthusiastic strategies of the past and focusing on improving their business model. This section will review some of the challenges these organized retailers are facing on both macro as well as local levels.
Aggressive Expansion
Over the last few years Indian retailers most preferred mode of expansion was to increase their number of outlets across metros. Outlets were built wherever real estate was available and not where they were actually required, which led to "Clustering". Following credit crunch in 2008, several outlets were cast strapped and had to be closed down simply because they were operating in un-viable locations.
Poor Supply Chain Management
One of the major challenges for retailers is to reduce shrinkage which includes short-weighing, pilferage and poor product handling. While the average shrinking percentage of inventory in developed countries is 1% to 2% of Cost of Goods Sold, it is estimated to be much higher for Indian retailers, primarily due to the lack of focus on supply chain management. The existing supply chain is not devoid of inherent weakness of India"s infrastructure, besides being corrupted along the entire chain. Tracing shrinkage is a Hercules task as almost all the transactions still continue to be based on paper system. This gives rise to the need of third party logistics organizations that can provide services at competitive prices. Third party logistics is a concept still absent from the Indian retailers" value chain.
A large part of shrinkage takes place within the retailer by its employees. Moreover, tracking an employee"s track record and background checks is difficult. Retailers are now joining hands to fight this battle by creating a database of employees and share it amongst themselves to avoid shrinkage from within.
To read more on the other challenges faced by Indian Organized Retailers, please feel free to visit my blog.
by: Geetika
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