The Hindu Business Line : `Talent: Key to successful retailing'

The great Indian retail landscape has been changing by the day, what with global biggies marching in, one after the other, as if they were all waiting in the wings. To decode what has been happening, BrandLine connects with Shyamak R. Tata, Partner with Deloitte Haskins & Sells, Mumbai. He is a Fellow chartered accountant, in the profession for over 20 years. More importantly, Tata has been keenly following and tracking the emergence of the Indian economy since its 1991, primarily in the consumer business. Here is his take on a few questions.

When did the big stirrings begin in our retail?

The Indian retailing story is linked to the current phase of economic reforms coupled with the country's continued economic boom. Global interest grew on release of a Press Note 3 in February 2006, which permitted, although on a very selective basis, FDI (foreign direct investment) up to 51 per cent, in single brand retail trade. This meant possibility of entrance by international retailers, earlier present largely through franchise/ licensing arrangements.

What are the significant opportunities and threats to Indian retail?

Currently, low organised retail penetration coupled with an ineffective supply chain characterises the retail industry. These, along with country's reforms programme, give rise to the risks and opportunities facing retailing in India. Although varied statistics are often quoted, the growth in the Indian market has been driven by selective sectoral growth, the rapid rise in disposable incomes, the availability of easy consumable credit and a large proposition, in sheer numbers, of consumers in 20-40 age groups. This is expected to convert India from a supply constrained to a demand economy.

Domestic interest too has been fanned by the retail gust.

Interest in retailing has fuelled both domestic and international interest. On the domestic front, there are significant strikes by Indian players to enter, consolidate, and grow their presence in this segment. This is partially fuelled by the possible positive changes in the infrastructure and real estate markets, and the potential to participate in organised retailing, which is merely 2-3 per cent of the larger retail sector, by most assessments.

How would you classify the risks that retail faces?

The challenges, and consequently the risks, that face the retailing sector, could be classified under the following broad categories: Macro economic factors and operational factors.

Macro economic factors? Any examples?

One example of macro economic factor of relevance is economic policy. India's economic reforms and policy are on steady implementation, appropriately keeping in mind the socio-economic factors that affect India. The political environment could change the pace of reform though, in all probability, not affect the direction. Today, as India integrates with the world economy, the pace of reform is as critical as its direction. This has been a matter of continuous deliberation between industry, economists and the political establishment.

Another approach to determine the pace of reform is its relative pace compared to other globally competing economies, namely, China, Russia and even Brazil. Such international comparisons create an investment environment. India stands high on the investment horizon of many global players. It is key that this standing is protected, nay bettered. The significance of this to retailing is almost immediate, as retailing is at the end of the distribution chain and any adverse impact on these factors could lead to large-scale redeployment of resources including capital.

Are our policies understandable enough for overseas investors?

Being of relative nascent origin, the opening up of the retailing sector has caused cautious strides to be taken by international players. These, in part, are due to the lack of adequate understanding of government policy and the road ahead. For example, the 51 per cent FDI retailing option encourages joint venture formation, but recent media reports on allowing 100 per cent FDI in certain sectors is likely to push international retailers `back to the drawing board' to find a quick fix. We are also aware of solutions in this sphere that have been structuring so as to ensure full compliance of current policy without the formation of joint venture entities.

For the numbers we talk about in organised retail, do we have the talent?

Talent management is another macro economic factor. With the growth in organised retail, both in metros and second-level cities/towns there is an increase in need for talented people to plan for merchandise, in logistics, and to manage the supply chain, information and stores. Retailing in the organised sector is likely to be the next biggest employment vehicle after BPO (business process outsourcing).

India's struggle in providing job opportunities to its growing youth will be partially met by organised retailing. India's demographics works in favour of meeting such demands relative to the aging population in other economies. However, India's challenge will be training and retention in an environment of growing opportunities.

Training and retention - aren't these problems common to many industries?

However, given the economies of retailing - high volume with low margin and differentiating service - with its relatively low level of compensation, talent management is a high priority. Compensation will undoubtedly rise, but productivity (also linked to size) will need to increase - a challenge that must be met by focused and quality training.

Today, in the retailing segment at the managerial level, what is witnessed is high compensation partially due to a dearth in supply. This adds pressure to an already competitive industry and, therefore, could lead to significant churn in the short term.

So, what should be the strategy of retailers on this front?

Continuous training and talent management would undoubtedly be a relative advantage over those organisations that choose to forego these as costs (rather than investments) because of pressures on resources or the need for immediate operating results. For the international retailers, it will be necessary to ensure that Indian operations imbibe Indian cultures and that local managers get involved with the management of Indian operations at the highest level at the earliest. This creates a sense of bonding and a corporate culture that encourages retention along with significant career opportunities.

You had mentioned operational factors, among risks.

Take, for example, supply chain effectiveness, collapse of intermediate processes and thus costs, volume purchasing, and logistics. One of the key economic logistics, which governs retailing, could well be stated as the desire to connect producer companies to consumers. This enables the effectiveness of the broader supply chain to improve as significant intermediate processes are collapsed resulting in saved costs.

What will be the impact of organised retail on producer companies?

Producer companies are currently organised to interact with numerous smaller entities/parties often running into thousands. These customers will continue to thrive on many businesses and modern trade will create other avenues for producer companies. This means determination of appropriate strategies, which cover a wide spectrum from logistics, pricing, to terms of trade. International retailers work on standardised terms often impacting the way producer companies manage inventories, receivables etc. Large retailers will also gain from centralised buying, which in itself will create opportunities for improved infrastructure. Since the financial success of retailing business is strongly dependent on an effective supply chain, the relative bargaining power of retailers in transaction structuring with producer companies is bound to increase with size of retail and performance over a sustained period.

Are there risks in partner selection?

In respect of international retailing, the current policy restricts FDI to 51 per cent. This in effect translates to joint ventures and arrangements with local partners. Real estate is probably the single largest operating cost for retailers; and strategies to acquire, corner and position themselves at places of advantage are key to successful retailing. Indian real estate ventures have seized the opportunity to partner retailing enterprises. The choice of a partner is critical to the ultimate success of the venture. It may be important to note that India's joint ventured experiment in other sectors has not met with overwhelming success.

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