The Hindu Business Line : `Time to unleash latent value'

Reporting on Reliance Retail's launch of outlets in Hyderabad earlier this month, The Sydney Morning Herald's Daniel Pepper described `the traditional marketplace ubiquitous through India' thus: "One small shop offers canned goods, lentils and biscuits, while another has clothing and bedsheets, a third has sporting goods and a fourth video games."

Till recently, the Indian retail landscape was dotted with various `mom-and-pop' shops that were fragmented, offered limited retail space and were arguably price-inefficient, concedes Deepankar Sanwalka, Executive Director, KPMG. "However, today, a range of policy and market developments are realigning the structure of Indian retail space, with organised retailing attracting intense domestic and foreign interest," he adds. On the hotting up of the retail scene, Sanwalka takes on a few questions from BrandLine.

What are the numbers that weigh in favour of organised retail?

An economy expanding at an average of 7.5 per cent for the past three years (next only to China), private consumption contributing nearly 60 per cent to the GDP (compared to 42 per cent for China), impressive demographic profile with favourable age structure (the median age here is 24 while China's is 32) and a 300-million-strong middle class that is expected to rise 14 times in a decade. And a retail market that has the highest density (15 million) of outlets, even as organised retailing accounts for a mere 2-3 per cent of the $300-billion market. These are some of the underlying statistics of Indian retail market that weigh in favour of growth prospects.

Your reading of the shifts in the retail landscape?

Some of the existing pan-Indian, organised retail chains (including Pantaloons and Shoppers' Stop) that were set up recently have shown impressive growth and are on an aggressive expansion spree. A lot of Indian industry bigwigs - including Reliance, Tatas, ITC, A.V. Birla and Bharti - are also throwing their weight behind this sector. Moreover, in a bid to expand into new formats and offer a wider range of product categories, retailers today are actively seeking inorganic growth opportunities.

Is retail growth putting pressure on real estate?

Yes. Inspired by retail boom, there is a rush of property development across urban India, with shopping malls springing up in every big town. Some 450 malls are estimated to be at various stages of development.

How have foreign players coped with the controls?

As retail trading was out of bounds for foreign investors, foreign retailers have been operating in India through non-conventional formats such as franchises or wholesale cash-and-carry system. But the potential and dynamism of this sector has resulted in global retailers evincing keen interest in the Indian retail marketplace. For instance, the German giant Metro, which at present has two cash-and-carry distribution centres in Bangalore, plans to expand into a dozen more cities in the next three to five years. Bulge-bracket retailers, such as Tesco, Wal-Mart, and Carrefour are using India as a large sourcing hub for their international operations.

We have had some relaxation in retail policy lately.

In January 2006, the Government relaxed FDI (foreign direct investment) controls on retailing to allow foreign retailers to participate directly in the Indian market for the first time by allowing equity ownership in `single brand' retailing. Thus, foreign entities are now allowed to operate their stores, but only if they are single-brand stores and only up to 51 per cent ownership. The impact of the consequent increase in FDI, in Indian retail, is expected to not just develop strong backward linkages but also create a domestic supply chain of international standards. What is encouraging now for these global majors is the new policy thrust, which intends to further liberalise the FDI regime in Indian retail.

Why is retail important for the economy?

Modern retail is considered a reflection of the progress of a nation. It is a growth and efficiency driver that could benefit both the producers and consumers and create immense job opportunities. To transform this sector effectively, India will require huge investments, technology and knowhow across the retail value chain.

But isn't organised retail a mixed blessing?

Research has shown that large-scale organised retail often leads to substantive structural changes and labour displacements. However, organised retail also provides a fillip to logistics, domestic manufacturing and agriculture.

How do you see Indian players perform vis-à-vis the global retailers?

The trend of more Indian and global retailers setting up shop is a healthy development that can shape the face of Indian retail. As Indian retailers in the organised store category continue to make efforts to build scale and improve efficiencies, foreign entrants are likely to face well-entrenched competition. Surely, the time has come to unleash the latent value of the Indian retail sector.