Booming economy, favorable demographic patterns, increasing per capita income and urbanization gave rise to a new sector in India: Organized Retail. Gap of retail sector for FDI can be considered as the prime reason behind the blooming organized retail sector. Sensing this opportunity many corporations ventured into this sector, as well as Reliance, Bharti and Pantaloons.
Despite the Government allowing solely 51% of FDI in single format retail segment, international 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 chance during this sector can be judged by the actual fact that solely 3% of the entire retail sector is organized and ninety seven% of the sector still consists of native mom and pop stores.
Unfortunately, the growth strategy employed by all organized retail players of increasing their range of stores backfired when rentals dramatically shot up following the world economic soften down. Profitability is seriously hampered and virtually all major retailers are now struggling to keep up their bottom line. Average operating profit margin declined from 9.five% in 2007 to 7.nine% in 2008. The worst half is that such a drastic growth in the amount of stores was backed by important leverage that is anticipated 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 can review a number 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 most well-liked mode of enlargement was to increase their variety of outlets across metros. Retailers were designed wherever property was available and not where they were actually required, which led to 'Clustering'. Following credit crunch in 2008, several shops were cast strapped and had to be closed down simply as a result of they were operating in unfeasible locations.
Poor Offer Chain Management
One amongst the major challenges for retailers is to reduce shrinkage which includes short-weighing, pilferage and poor product handling. While the typical shrinking percentage of inventory in developed countries is 1% to two% of Price of Goods Sold, it's estimated to be a lot of higher for Indian retailers, primarily because of the shortage of concentrate on offer chain management. The present supply chain isn't devoid of inherent weakness of India's infrastructure, besides being corrupted along the entire chain. Tracing shrinkage could be a Hercules task as virtually all the transactions still continue to be primarily based on paper system. This offers rise to the need of third party logistics organizations which will give services at competitive prices. Third party logistics could be a concept still absent from the Indian retailers' value chain.
A large part of shrinkage takes place inside the retailer by its employees. Moreover, tracking an employee's chronicle 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.
Employee coaching and retention
The most common strategy applied by retailers to keep labor value at minimum was to employ recent graduates with no experience in retail sector. They have currently realized that in troublesome market things, experienced and talented employees that have sound understanding of ground realities might provide retailers a competitive advantage. Despite a downturn, need for skilled manpower still continues to be a significant concern across the sector.
Managing operating capital
One in all the foremost necessary factors affecting a retailer's profitability is the method it handles its working capital. Lower footfalls, resulting into lower sales has directly impacted Indian retailers' operating capital position. Discounting is currently the foremost common technique used to flip slow moving inventory.
Besides lower footfalls another factor which is hurting retailers' liquidity position is the many amount of leverage they're carrying that was used earlier for aggressive expansion. Banks are now reluctant to finance retailers given the falling demand and plummeting profitability. Retailers are thus finding it troublesome to finance their operating capital requirements.
Diversifying into untapped rural areas
Consultants believe that the subsequent part of growth for organized retail sector will come back from rural areas that account for 0.5 of the $three hundred billion domestic retail market. Retailers will have to target the previously untapped lower income strata by providing them access to credit facilities. On the back of souring commodity prices and improving productivity, rural economy is about to boom in the following decade.
Backward Integration
One means to enhance potency and profitability is to remove unwanted intermediaries that eat into the already stressed margins. To enhance rural economy, Indian Government approved Contract farming and Leasing. According to KPMG, this will bring regarding technology transfer, increase capital inflow and assure market for crop production, besides eliminating intermediaries. Pepsico and ITC's E-chaupal are already cashing in on contract farming in Northern India.
Despite the higher than mentioned challenges, future prospects of organized retailers are still very attractive. Vital consolidations and partnerships will be expected soon for improving operating and value efficiency. Specializing in provide chain management and partnering seem to be the requirement for an hour for organized retailers therefore on leverage their experience and financial muscle.
Author Resource:-
Bob has been writing articles online for nearly 2 years now. Not only does this author specialize in retail,you can also check out his latest website about:
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