The Hindu Business Line : The retail boom spin-offs

As the retail story unfolds, a whole gamut of allied sectors are gearing up to capitalise on the opportunities that are rapidly arising from the boom. The $ 412 billion investment which is projected to flow in to the Indian retail sector by 2011 has the potential to turn around the fortunes of many a industry. Not surprisingly, a gamut of players (both Indian and foreign) from sectors as varied as airlines to commercial refrigeration/air-conditioning to logistics to smart card manufacturers are busy drawing up expansion plans and have initiated discussions with retailers to capitalise on this opportunity.

Take, for instance, the commercial refrigeration and air-conditioning industry. With most retailers stocking perishable items, they will need to invest to maintain cold storages as well as the correct temperature at all points of the supply chain. This combined with the requirement of installing large-scale air conditioning systems at the front-end spells opportunity for big players such as Blue Star and Carrier. So much so that these companies now expect a change in their sales ratio with the bulk of sales coming from the commercial segment in the next few years.

In fact, on a recent visit to India, the Carrier Corporation chief Geraud Darnis hinted that the company was bullish about its cold storage business in India and would partner with companies that are looking to invest in retail in India. "We expect the commercial air-conditioning segment to grow at a higher rate than the residential segment in the coming years," says Krishan Sachdev, Director, Marketing, Product Management and Engineering, Carrier Air-conditioning and Refrigeration Ltd, adding that the company has already initiated discussions with companies entering the retail space such as Reliance and Bharti to tie up with them for their retail projects.

The company would further look to leverage upon its global tie-ups with big retailers when they do come in to India. "We see substantial growth for products such as commercial ACs and refrigeration and transportation. Currently, the commercial air-conditioning segment accounts for 35-40 per cent of our equipment sales and we see the contribution of this segment going up in the coming years," points out Sachdev.

The biggest opportunity in retail, of course, is for specialist logistics providers. Several logistics companies are already looking to expand their operations in India, including American logistics major Bax Global, Prologis and PWC Logistics along with a clutch of others. An indication of the potential could be had from the recent trend of increased private equity investments in logistics companies, says Dipankar Sanwalka, Executive Director, Consumer Markets, KPMG.

Analysts too expect a large number of retailers to outsource their logistics activities to service providers in order to better manage complex supply chains and focus on their core business. In fact, for a retailer who has to present the customer with fresh food-items every day, efficiency in logistics can make or break a brand's image. As of now logistics is primarily controlled by transporters who have tied up with warehouses. However, now organized logistics firms such as Safexpress are able to provide better services and look set to encash on the retail boom.

The Tata Group, for instance, has tied up with DHL to provide logistics support for its Croma Stores, which have been launched in a tie-up with Woolworth. The opportunity in retail seems to have caught the attention of the loss-making airline industry as well. Several airlines are believed to in the process of expanding their cargo businesses in anticipation of higher future demand. Sources say that low-cost players such as Air Deccan have already initiated discussions with several domestic retailers and are working out a strategy to cater to this demand. Jeh Wadia's GoAir is also learnt to be in the process of launching its cargo business. According to Asitava Sen, Principal Consultant at PricewaterhouseCoopers, while the benefits of investment in retail will percolate down to several sectors, the demand for various types of services will generate huge employment opportunities as well. In fact, the level of investment envisaged in the near future is predicted to generate an additional 8 million jobs. This includes indirect job generation across associated areas such as security services, logistics, Further disintermediation in the supply chain alone will result in various new job opportunities for the rural youth as well, which didn't exist earlier, such as in packaging. "In fact the retail sector, directly and indirectly is the largest employer in the economy simply due to the amount of different services that it requires," says Sanwalka.

The Reliance group alone, which plans to invest $5.6 billion to set up retail formats, estimates that its initiative will provide jobs for five lakh people. According to Sen, the development and growth of modern trade in India will result in the disintermediation of the food supply chain as well as investments in upgrading the technology and practices in the entire value chain. This will reduce wastage and duplication of efforts resulting in farmers realising both higher productivity and better price. It will also help farmers to find a ready market for their products both domestic and overseas.

Meanwhile, the opportunities are set to span across sectors with most retailers planning to source products from contract manufacturers for their private labels. While there are no clear estimates available about the kind of opportunity this will create in value terms, an indication can be had from the experience of Wal-Mart in China.

According to a PwC report, Wal-Mart, which entered the Chinese market in1996, procures over 95 per cent of the products it stocks locally whenever a store is opened. It has developed about 20,000 local suppliers in China. It further provides training and other assistance to Chinese suppliers to meet Wal-Mart's quality specifications and eventually makes them compliant with export specifications for the US market, through Wal-Mart's procurement procedure. As a result, combined direct and indirect procurements from China have increased rapidly over the years, from $ 10 billion in 2001 to $ 18 billion in 2004. Similarly, the opportunity for the IT sector can be gauged from the fact that Wal-Mart is able to track each item in every SKU, which helps the company to minimise losses, explains Sanwalka.

Summing it up Naresh Priyadarshi, Business Group Director & Head, Synovate Business Consulting, says, "A boom in retail will impact quite a few sectors...there will be more need for goods to be procured; hence, more need of logistics services, need for better inventory management; hence, better IT, need for construction/high-end interiors, telecom, transport, water treatment/ pollution control, security services, credit facility and so on." Surely the retail boom looks set to carry other sectors of the economy along with it.