impact of recession on organised retail sector in india

20

Click here to load reader

Upload: shivuamar

Post on 22-Nov-2014

208 views

Category:

Documents


2 download

TRANSCRIPT

Page 1: Impact of Recession on Organised Retail Sector in India

Impact of Recession on Organized retail sector in India by

Pooja SareenAssistant Professor,GC-46, Chandigarh

Abstract

India has the highest number of retail outlets in the world at over 13 million retail outlets, and the average size of one store is 50-100 square feet. It also has the highest number of outlets (11,903) per million inhabitants. Since liberalization in early 1990s, many Indian players like Shoppers Stop, Pantaloon Retail India Ltd (PRIL), Spencer Retail ventured into the organized retail sector and have grown by many folds since then. These were the pioneers of the organised Indian retail formats. The organised retail sector in India has been witnessing various issues and challenges which are proving to be a hurdle for its fast-paced growth. Even though the organised retail sector is in a very nascent stage in India, it provides ample opportunities for retailers, and mitigation of a few challenges also. Global meltdown has adversely affected growth of retail industry in India . India’s retail industry is changing or putting on hold expansion plans largely due to the economic slowdown. Despite the setbacks experienced this year, the retail sector is likely to flourish in the coming years. This paper is an modest attempt to highlight the challenges and risks faced by organized ratail sector and impact of recession on Organised retail industry in India.

Introduction

A retailer is one who stocks the producer’s goods and is involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. The retail industry is divided into organized and unorganized sectors. Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc.These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.Unorganized retailing is by far the prevalent form of trade in India . constituting 98% of total trade, while organized trade accounts only for the remaining 2%. Estimates vary widely about the true size of the retail business in India. Food retail trade is a very large segment of the total economic activity of our country and due to its vast employment potential, it deserves very special focused attention. Efficiency enhancements and increase in the food retail sales activity would have a cascading effect on employmentand economic activity in the rural areas for the marginalized workers.While, momentum of retail business in some areas may continue, the sector cannot escape from heat of the global financial meltdown, say experts. .Because of the global crisis, there would be decline in disposable income, and sales of upper end goods

Page 2: Impact of Recession on Organised Retail Sector in India

as well as lifestyle items would get hampered somewhat. The ultimate cause of all the problems we’re facing is government, with its taxes, regulations, inflation . and wars, pogroms, confiscations, persecutions and myriad other stupidities (www.financialsense.com). But the proximate cause of the recent unpleasantness is Sub prime mortgages.

Global Retail Scenario

Retailing has played a major role in the global economy. In developed markets, retailing is one of the most prominent industries. In 2008, the US retail sector contributed 31% to the GDP at current market prices. In developed economies, organised retail has a 75-80% share in total retail as compared with developing economies, where un-organised retail has a dominant share.

Global retail sales was estimated to be around US$ 12 trillion in 20072; however, in 2008, the slowdown in the global economy, especially in the US, and credit crunch, decreased consumer spending. On a global level, the economy performed robustly till 2007, but the US crisis spread over to Europe in early 2008, and its impact was felt in the Asia-Pacific region by mid-2008.

India has the highest number of retail outlets in the world at over 13 million retail outlets, and the average size of one store is 50-100 square feet. It also has the highest number of outlets (11,903) per million inhabitants. The per capita retail space in India is among the lowest in the world, though the per capita retail store is the highest. Majority of these stores are located in rural areas.

Page 3: Impact of Recession on Organised Retail Sector in India

Retail in India: Industry Structure

The retail industry in India is highly fragmented and unorganised. Earlier on retailing in India was mostly done through family-owned small stores with limited merchandise, popularly known as kirana or mom-and-pop stores. In those times, food and grocery were shopped from clusters of open kiosks and stalls called mandis. There were also occasional fairs and festivals where people went to shop. In the twentieth century, infusion of western concepts brought about changes in the structure of retailing. There were some traditional retail chains like Nilgiri and Akbarallys that were set up on the lines of western retail concepts of supermarkets. The government set up the public distribution system (PDS) outlets to sell subsidised food and started the Khadi Gram Udyog to sell clothes made of cotton fabric. During this time, high streets like Linking Road and Fashion Street emerged in Mumbai. Some manufacturers like Bombay Dyeing started forward integrating to sell their own merchandise. Shopping centres or complex came into existence, which was a primitive form of today’s malls.

Since liberalization in early 1990s, many Indian players like Shoppers Stop, Pantaloon Retail India Ltd (PRIL), Spencer Retail ventured into the organized retail sector and have grown by many folds since then. These were the pioneers of the organised Indian retail formats. With the opening up of foreign direct investment in single-brand retail and cash–and-carry formats, a new chapter unfolded in the retail space. Many single-brand retailers like Louis Vuitton and Tommy Hilfiger took advantage of this opportunity. The cash-and-carry format has proved to be an entry route for global multichannel retailing giants like Metro, Wal-Mart and Tesco.

Challenges and risks of the organized retail sector :

The organised retail sector in India has been witnessing various issues and challenges which are proving to be a hurdle for its fast-paced growth. Even though the organised retail sector is in a very nascent stage in India, it provides ample opportunities for

Page 4: Impact of Recession on Organised Retail Sector in India

retailers, and mitigation of a few challenges will help the sector attain higher economies of scale and growth. Elucidated below are the challenges and risks that the sector faces:

1. Global economic slowdown2. Competition from the unorganised sector3. Retail sector has no recognition as an industry4. High real-estate costs5. Lack of basic infrastructure6. Supply-chain inefficiencies7. Challenges with respect to human resources8. Margin Pressure

Global economic slowdown impacting consumer demand

The current contraction in overall growth has not been so severe ever since the one witnessed during World War II. The sub prime-triggered crisis in the US during end of 2007 gradually spread across other parts of the world; as a the fallout of this crisis, credit availability dropped sharply in advanced economies and their GDP growth contracted incessantly during the last quarter of 2008. The financial crisis continued to trouble advanced and developing economies in spite of policymakers’ attempts to replenish liquidity in these markets. Many financial institutions collapsed and filed for bankruptcy, as the situation got from bad to worse. Many banks/institutions made massive write-downs following this turn of events. During 2007-10, the write-downs on global exposures are expected to be worth US$ 4 trillion while the write downs on the US-originated assets alone are likely to be worth US$ 2.7 trillion11. Such massive write-down will affect the financial system to a grave extent, as it is likely to further strain banks’ funding capabilities. Already these write-downs are turning into a major challenge for banks/financial institutions because of solvency issues, and deepening risk of failure of banks/ financial institutions. Failure of the US investment bank Lehman Brothers, for instance, has had an enormous impact on the overall global financial system, and has consequently shaken the confidence of banks, investors, households etc.

According to IMF’s World Economic Outlook (Apr 2009), the global GDP contracted by 1.8% in the first quarter of 2009 as compared with the 4.5% growth recorded during the same period in the previous year. Likewise, the advanced economies witnessed contraction in GDP growth (by 1.7%) during the last quarter of 2008 while the US, Euro area and Japan witnessed a recessionary trend12. According to IMF estimates, the world GDP will continue to contract by 2.4% during the third quarter of 2009. Going ahead, policymakers face a daunting task as they need to put back things as early as possible; according to IMF’s World Economic Outlook (Apr 2009), the world economy is expected to recover gradually only in 2010 by 1.9% , by corroborating demand, with appropriate monetary and fiscal measures.

The financial crisis and global economic slowdown resulted in job losses around the world, which weakened consumer demand. The unemployment rate remained high in the US during first quarter of 2009, Europe and emerging economies like Brazil; for instance,

Page 5: Impact of Recession on Organised Retail Sector in India

the annual unemployment rate in the US reached 5.8% in 2008 from 4.6% in 2007, which further went up to 9.4% in May 2009. In future, the rising unemployment rates in advanced economies as well as economies that are heavily export-oriented will further dampen consumer spending; as a result, the retail sectors growth will remain under threat. In the US, the retail trade sales growth (both retail and food services) contracted by 0.7% in 2008 from 3.3% growth in 2007. The downward trend in retail trade sales continued during the first six months of 2009 (Jan- June), as it went down by 9.3%13 as compared with the previous year. In EU27 countries, the total retail trade in volume terms continued to contract during the first five months of 2009; for instance, during May 2009, the retail trade in volume terms in EU27 contracted by 3.1% against the same period in the previous year.

Consumption declines in the advanced economies

Private consumption expenditure is an important indicator of overall economic growth. In the last couple of quarters, the decline in consumption has further affected the global economic downturn. Moreover, widespread financial crisis severely hit credit availability and household disposable income. For instance, US households lost 20% (US$ 13 trillion)14 of their net worth as a percentage of disposable income from the second quarter of 2007 to the fourth quarter of 2008. The stock prices across the world started falling during the second quarter of 2007 and continued its losses throughout 2008; the global stock markets lost between 40-60% in dollar terms that translated to a huge loss of global wealth in 2008. The personal disposable income (at current prices) in the US registered negative growth (3.9% and 2.1%) during the last two quarters of 2008, respectively. The consumer demand situation was aggravated further by reduced capital availability and consequent fall in investments.

As mentioned earlier in the section, the financial crisis triggered massive layoffs globally, which pushed up the unemployment rates. Further, uncertain future market conditions raised precautionary household savings that curtailed investments and consumer demand. The investment activities in 27 high income countries out of 30 countries fell by 4.4% (at a 16.5% annualized rate) during the fourth quarter of 200815. On the other hand, in an

Page 6: Impact of Recession on Organised Retail Sector in India

uncertain situation like this, the household savings would go up as a precautionary measure with the global economy trying hard to rebuild in the coming months. For instance the household savings rate (not seasonally adjusted) in EU27 jumped to 12.5% during Q4-2008 from 8.6% in Q1-2008, while investments dipped to 9.0% from 9.9% during the same period.

The personal consumption expenditure in the US registered merely 0.2% y-o-y growth in 2008, down from 2.8% growth in 2007. Further, the personal consumption expenditure growth turned negative during the second half of 2008 and first quarter of 2009. The personal consumption expenditure in the US contributes over 70% of its GDP at constant prices. The severity of the current recession (slowdown) can also further be measured from previous recessions in 1975, 1982 and 199116. For example, the average per capita consumption in the previous three recessions (1975, 1982 and 1991) grew by 0.28%, while in 2009, it is estimated that the per capita consumption will contract by 1.1% as compared with the previous year. India is not entirely insulated from this weakening demand. For example, during the first half (H1) of FY09, PFCE (at constant prices) grew by 3.3%, which was less than half (7.9%) of that witnessed in the corresponding period of previous year. During the second half (H2 FY09), the trend continued as PFCE further slowed down to 2.5% as compared with 9.0% in the corresponding period in the previous year. An interesting observation on the economic slowdown and its effects on consumption in India can be made from the volume of credit card transactions growth, which declined from 34.6% in FY08 to 13.7% in FY09.

Competition from the unorganised sector

Organised retailers face immense competition from the unorganised retailers or kirana stores (mom-and-pop stores) that generally cater to the customers within their neighbourhood. The unorganised retail sector constitutes over 94% of India’s total retail sector and thus, poses a serious hurdle for organised retailers. If put numerically, the organised retailers are facing stiff competition from over 13 million kirana stores that offer personalised services such as direct credit to customers, free home delivery services,

Page 7: Impact of Recession on Organised Retail Sector in India

apart from the loyalty benefits. During the current economic slowdown, the traditional kirana stores adopted various measures to retain their customers, which directly affected organised retailers. Generally, it has been observed that customers shop impulsively and end up spending more than what they need at organised retail outlets; however, in kirana stores, they stick to their needs because of the limited variety. During a downturn, many customers may not like to spend more as is evident from the past few months’ trend that shoppers are increasingly switching from organised retail stores to kiranas.

Retail sector yet to be recognized as an industry

The retail sector is not recognized as an industry by the government even though it is the second-largest employer after agriculture. Lack of recognition as an industry affects the retail sector in the following ways:

1. Due to the lack of established lending norms and consequent delay in financing activity, the existing and new players have lesser access to credit, which affects their growth and expansion plans

2. The absence of a single nodal agency leads to chaos, as retailers have to oblige to multiple authorities to get clearances and for regular operations

High real estate costs

Even though the real estate prices have subsided recently due to the slowdown in economies and the financial crises, these prices are expected to go up again in the near future. Presently the sector faces high stamp duties, pro-tenancy acts, the rigid Urban Land Ceiling Act and the Rent Control Act and time-consuming legal processes, which causes delays in opening stores.

Earlier on the lease or rents on properties were very high (among the highest in the world) at some prominent locations in major cities. The profitability of retail companies were affected severely because real estate costs constituted a major part of their operating expenses. Now companies are moving out from prominent malls of tier I cities and are re-negotiating the rental agreements with landlords to reduce costs. Some are even focussing on setting up shops in tier II and tier III cities.

Lack of basic infrastructure

Poor roads and lack of cold chain infrastructure hampers the development of food retail in India. The existing players have to invest substantial amounts of money and time in building a cold-chain network.

Supply-chain inefficiencies

Supply chain needs to be efficiently-managed because it has a direct impact on the company’s bottomlines. Presently the Indian organised retail has an efficient supply chain but it appears efficient only when compared with the unorganised sector. On an

Page 8: Impact of Recession on Organised Retail Sector in India

international level the Indian organised retailers fall short of international retailers like Wal-Mart and Carrefour in terms of efficiencies in supply chain. In the following paragraphs some key challenges that the retailers face during procuring goods from suppliers to delivering the same to end-customers are discussed.

Inventory management is the first challenge that retailers face at the local store level as well as at the warehouse level. Excess inventory often leads to an increase in inventory costs, and then to lower profits, so retailers like Pantaloons and Shoppers Stop have IT systems in place for inventory management. SCM-IT has helped retailers to plan their stock outs, replenish their stock on time, move stock from warehouse to stores, maintain adequate stock at a store to match consumer preferences etc. However, the retailer may still face a big challenge in terms of efficiently implementing the supply-chain software across stores and integrating it with the central warehouse, which can be a time-consuming process, requiring trained personnel.

Logistics is another challenge related to the supply chain. It is imperative for any organised food and grocery retailer to establish a robust cold chain. Amul is the best example of this scenario, as it has developed a cold storage chain across India. Until and unless organised retailers like Reliance and Food Bazaar fully develop integrated-cold chains, they would continue to incur loss of considerable amount of money through wastages of perishable items while moving huge quantities from one place to another.

The third challenge related to the supply chain is procurement. Big organised retailers enjoy economies of scale based on their size and expansion plans. The economical benefits of scale in procurement are achieved when procurement is made in thousands or millions of units; however, the main challenge here is to procure adequate amount of stock according to customer requirements, failing which the resultant rise in inventory can affect bottomlines.

Challenges with respect to human resources

The Indian organised retail players shell out more than 7% of sales towards personnel costs. The high HR costs are essentially the costs incurred on training employees as there is a severe scarcity for skilled labour in India. The retail industry faces attrition rates as high as 50%, which is high when compared to other sectors also. Changes in career path, employee benefits offered by competitors of similar industries, flexible and better working hours and conditions contribute to the high attrition.

Shrinkage

Retail shrinkage is the difference between the book value of stock and the actual stock or the unaccounted loss of retail goods. These losses include theft by employees, administrative errors, shoplifting by customers or vendor fraud. According to industry estimates, nearly 3-4% of the Indian chain’s turnover is lost on account of shrinkage. The organised industry players have invested IT, CCTV and antennas to overcome the problem of shrinkage.

Page 9: Impact of Recession on Organised Retail Sector in India

The Proximate Cause

The genesis of the current crisis is US Subprime mortgages. For well over a decade, lenders have been making mortgage loans available to literally anybody with a pulse who wanted to own a house. Several times in the mid-.90s lenders were loaning more than 100% of the appraised value of a house. Even back then, it seemed that was the top of the housing bubble. This leads to one of the more interesting distortions arising from a really big credit-driven boom. All those new homeowners are already having trouble paying their mortgages. As rates go up, their ranks will swell since they.re almost all on floating-rate mortgages. Higher rates and more distress sales will take housing prices lower, which, in turn, will encourage more people to leave their keys in the mailbox and walk away.Now the question arises that why did a country like India, with a billion population, 10000 miles away from US suffering for a mistake commited by some one whom we dont even know.Are these the adverse effects of Globalisation???There are mainly 5 areas that could really feel the heat because of the American economic slowdown...1. Information Technology2. Real Estate3. Banking4. Insurance and5. Retail.Why is IT important in the first place? - Any slowdown in this sector will straight away hit the new generation working class of India who are the biggest spenders in the current day. So obviously this will inturn effect all the other dependent sectors like Real Estate, Retail, Consulting and the list never ends.. So the equation works like this.Large US corporations  => Indian IT Companies =>Indian Real Estate, Retail, Telecom etc.

Impact of Recession on Retail

As Wall Street unravels and the economy confronts its crucial holiday spending season, consumers cannot be expected to prop up retailers as they did in past downturns. Even luxury stores, whose customers have been immune in recent years to retail price sticker shock, are expected to take a hit this time, most consumers were already struggling with high food and energy prices, shrinking home equity and concerns about their jobs even before the financial crisis hit.

Deloitte Research forecasts a 2.5% increase in spending for the period between October and January , but . after accounting for inflation of more than 4.5% . that’s actually a decline, and puts this holiday season on par with downturns in 2002, 1991 and 1981. Chief economist at Deloitte Research, says that in recent years, luxury retailers had been able to sustain strong growth by developing new entry-level brands and products to draw in .aspirational. shoppers with lower incomes than traditional customers. Now those aspirational spenders who helped support high-end retailers in recent years are more

Page 10: Impact of Recession on Organised Retail Sector in India

susceptible to the economic downdraft than longtime clientele. The most vulnerable retailers are department and specialty stores in the middle market. These retailers offer a product mix that is highly discretionary and affected sharply by the loss of income or layoffs. Small, independent retailers will also struggle Locally owned shops usually can’t offer the lowest price because they are too small to buy directly from manufacturers and must cover the costs of their wholesale supply network. .They are going to get hit like everybody else,.

Global meltdown has adversely affected growth of retail industry in India .Everyone in retail industry are postponing their expansion plans and are adopting a wait and watch strategy,. India.s retail industry is changing or putting on hold expansion plans largely due to the economic slowdown. The latest victims are Subhiksha and Spinach retail. R Subramanian, Founder and Managing Director of Subhiksha Retail, India’s largest retailer in terms of number of stores, feels that while global economic meltdown would cause some pain, it will in the long run help the industry lead a healthy life. .Fruits and vegetables have been de-emphasised in some stores. A few months back, Subhiksha had outlined a Rs 1,000-crore expansion plan. The number of Subhiksha outlets was to touch 2,200 by March 2009 up from 1,320 last fiscal. But now the company is more cautious. Subhiksha now hopes to roll out consumer-durable stores only post June-July next year by which time it expects rentals to fall further by about 40%. It has even asked some 700-odd employees from its 97 stores in Chennai, to pick up groceries in lieu of their outstanding dues against non-payment of salaries. Most of the employees, including two of its Vice Presidents, according to the Buzz, have not been paid their salaries for the past two months. Even this offer has created a piquant situation for the employees as they find store shelves almost empty as there are hardly any goods left to pick. The reason for disappearance of goods from the shelves is said to be the stoppage of supplies by many vendors, including the country’s largest FMCG player Unilever. These vendors, according to reports, have not been paid dues against earlier supplies. It has also shut down 90-odd convenience stores across the country in the last one month. The discount chain has withdrawn from fresh foods (fruits & vegetables) segment and also cut down on supplies of pharmaceutical products

Meanwhile, Wadhawan food retail had opened more than 200 convenience stores under its Spinach, Sabka Bazaar and Smart brands. But its hypermarket plans seems to have been put on the backburner. The company says it will focus on neighbor hood stores in the near future and is expecting a further correction in property prices. Inventory-to-sales ratios are at historic lows and retailers have been extremely cautious month-tomonth about hiring. Therefore in this distress situation the Retailers. top strategy should be to survive. While lower gasoline prices are a relief to consumers, the price decline will not be enough to override all the other challenges retailers face this holiday season noting that Wal-Mart has already taken a strong stand on toy pricing in an attempt to maintain its position. Retailers should take a hard look at every aspect of their operations. If a concept or location is not working, the current climate does not offer enough of a cushion to keep addressing the problem until it can be turned around for a payoff. .You have to cut your losses and focus on the core business and make sure that is performing well.. While, one cannot predict the extent of adverse impact that global financial meltdown will have on

Page 11: Impact of Recession on Organised Retail Sector in India

retail sector, there is one retail category in India, which irrespective of the difficult economic environment, is growing at a much faster rate than expected, which is .luxury. and .super luxury. cars.

Luxury car brand Mercedes Benz, achieved the record sales of over 3,000 cars in first nine months of the year, thereby, registering a growth of 56 per cent over the same period last year. Another super luxury car brand Bentley of the UK, has registered a growth of 20 per cent last year. Scott Hoyt, senior director of consumer economics at Moody’s Economy.com, says consumer spending this holiday season will be shaped by two forces. Faced with declining home prices, job worries and credit card debt, consumers simply are in no position to raise spending levels. In addition, they have lost confidence in the economic future, making them especially wary of spending. .Confidence is down in the doldrums,. states Hoyt. .While consumer spending and debt levels had reached unsustainable levels and were bound to come down, Hoyt says, the abrupt and painful collapse in housing prices and dramatic stock market losses have brutalized consumer psyches. As a result, the slowdown may be harsher than it would have been had the bubble deflated more gradually.

Economists expect consumers to face several years of retrenchment, but other elements of the economy, including business investment, trade, and energy productivity and investment will step forward to replace consumers in driving future growth. .We will have a recovery next year, probably late next year, but we’re going to have a very different economy,. they say. .We have had a consumer driven economy for 25 years. Now we will have an export and business-led economy.

Analysis of Growth in Organized retail sector by ASSOCHAM

1. Organized retail growing at estimated 25% 2. It is expected that retail in India could be worth US$ 175-200 billion by 2016.

3. 2007-08 Total retails contribution to GDP is between 8% which would further jump up to nearly 12% in next few years. By 2010, retails contribution to national GDP in totality is likely to be 22%.

4. 2007 – Retail Growth rate – 25-28%, Unorganized and organized retail size – 300 billion US$

5. Opening 10 to 15 outlets by 2015, it plans to employ about 5,000 people selling groceries, consumer goods, fruits and vegetables. India's retail industry is worth $300bn (£148bn)

6. Eg: Bharti is expected to invest 60 Billion with the largest retail Walmart

Road ahead for organised retailers

Page 12: Impact of Recession on Organised Retail Sector in India

Tough times lie ahead for the retail industry as consumers are holding on to their wallets due to job losses, stock markets are volatile and chances of a prolonged recession are increasing. Consumer spending is likely to contract further as banks are becoming overcautious in lending and are also tightening their rules on the credit card issues. Thus the retailers are witnessing an uphill task in terms of wooing consumers, despite offering big discounts. Also the organised retailers have been facing a difficult time to wean away customers from traditional kirana stores, especially in the food and grocery segment. The organised retail segment has to adopt various best practices to prevail in the current situation. They have to offer more convenience in terms of superior logistics and pricing or location. Moreover, inadequacies in the existing retail infrastructure and logistics is also denting the sector’s growth. An efficient retail supply chain is very critical for the retailers, particularly for agri commodities. Baring few leading big retail companies, the supply chain is not very efficient for most of the small and medium retailers. Retailers can therefore enhance their earnings by improving their supply chain with appropriate expertise. They therefore need to increase their investments in retail ancillaries and retail logistics to restrict the fall in margins. Moreover, many retailers are negotiating for better credit terms, boosting their supply chain, cutting inventories. Besides, few of them are even merging their stores to counter the current slowdown in retail sales.

Furthermore, in the liquidity crunch scenario, retail companies have been expanding their brands with minimum investments through the franchise route, which has received a major thrust in the economic downturn scenario. The franchise model constitutes 25-30% of the current organised retail pie, and is expected to reach 45-50% in the next couple of years.

In view of the changing economic landscape, the retailers are increasingly adopting measures to boost their top line as well as their bottom line by streamlining their existing supply chain, especially in terms of inventory control and cost control, and are also raising the share of private labels in the total revenue map. Globally, private labels constitute around 17% of total sales and in India private labels constitute 10-12% of the organised sector’s revenue20. Henceforth, the Indian retail companies will be looking at increasing the share of private labels from the current rate to 20-40%. Private labels can act as the saving grace for many retail companies since margins in this range between 30-40%21.

Consumer sentiments will be in a recuperating stage in the current year. As retail companies have not achieved the expected sales till now, inventory is likely to pile up and to get rid of this; companies are expected to slash prices by mark down in merchandise. For instance, in the fashion and accessories category, the product cycle is very short and retailers are expected to provide deep discounts to consumers to clear the inventory pile-up.

Real estate experienced huge reduction in costs in the third quarter of FY08 and to capitalise this opportunity, they started expanding their stores to viable locations. The companies are closing down their under-performing stores and are moving to viable areas to curtail losses. The real estate costs are expected to rise in the coming quarters due to

Page 13: Impact of Recession on Organised Retail Sector in India

expansion and relocation plans of retail companies. Despite the setbacks experienced this year, the retail sector is likely to flourish in the coming years.

Conclusion

The Indian economy posted a remarkable CAGR growth of 8.9% during FY04-FY08, which increased the per capita income and in turn, the disposable income of a large section of the population. Growth in the retail trade depends on the fundamentals of an economy. The Indian economy grew at a robust rate over the last five years, riding high on the high growth in the service sector (10.5%) and the manufacturing sector (9.4%) as compared with 7.4% and 4.1% during FY99-FY03. The rise in per capita income and the resultant rise in disposable income stimulated consumption during this five-year period, thereby resulting in a spurt in retail trade. Furthermore, according to the Mckinsey Global Institute (MGI), the average real household disposable income is likely to grow by 5.3% during 2005-2025 and reach Rs 318,896 per annum as compared with 3.6% in the previous 20 years, which indicates the huge potential for the retail sector in India.

References

1. IMF - Global Financial Stability Report – 20092. IMF - World Economic Outlook Apr 2009

3. Bureau of Economic Analysis

4. BIS Annual Report 2009

5. Global Development Finance - 2009

6. As per IMF – World Economic Outlook Apr 2009 edition

7. Anmol Soi, Delhi Business Review X Vol. 10, No. 1 (January - June 2009)

8. US Census Bureau

9. NCAER

10. Images Retail Report – 2009

Page 14: Impact of Recession on Organised Retail Sector in India

11. Summarized from various news articles