Retail Sector: An Insider’s View
Retail Sector of India, with gross revenue of more than $641 Billion (As per IBEF report), is one of the leading employment provider. It accounts for 8% (As per IBEF report) of the employment of India. It will cross $1.6 Trillion (As per IBEF report) by 2026. The numbers being churned out by retail sector could have been bigger, had government taken serious policy decisions related to this sector and had taken measures to implement that. ‘Make in India’ is good policy initiative, but it could have been great, had another policy initiative ‘How to sell Made in India Goods’ taken place.
I talked to Mr. Sanjeev Jha, Category Head-Staples with Vishal Megamart about the journey of modern retail in India, its challenges and future. He has worked for more than twelve years with top retailers of India, he is expert of this field, and he holds leadership role in the industry. Even prior to joining organized retail, he worked extensively in the field of commodity sourcing, trading and an innovative concept of retailing, i.e., Raytu Bazaar. You might have read lots of research reports, but we bring you the opinion of an insider:
Mukul: Modern retail has traveled quite a journey in last decade. Where do you see it going in next decade, say by 2025?
Sanjeev Jha: I would like to put my answer this way. Modern retail actually didn’t have ‘quite a journey’ in the last decade. Yes, it was a journey, but filled with uncertainty and unclarity in policy regarding FDI and other matters of concern, which were needed for the growth of retail sector. As FDI was allowed in automobile or IT sector, which led to their exponential growth, it should have also been allowed in retail. In absence of that, retail sector suffered the lack of funds to remove the bottlenecks of sourcing, storages and supply chain.
Regarding second part of your question, especially for brick and mortar retail, I see two or three strong players in the field with one or two new entrant. Consolidation has been the hallmark of this sector since beginning as you might have noticed. That is the scenario which is firming up. This is about the players.
Now, what shall be the strategy for incumbent players? In my opinion, they will have to grow horizontally, they will have to and they will be going to Tier-II and Tier-III cities, because organized retail is still more off an urban phenomenon. That’s the kind of compulsion will be in front of them. I am not talking rural India. Entry in rural India will take another 20-30 years due to many reasons. Let me tell why they will go there. Few good things have happened recently and one of them is GST. GST has made movement of goods and warehousing easy and these two things are very important for start and growth of retail. Earlier, they were facing challenges on these two counts in every city. But even GST can’t solve all the problems, unless there is policy support of state governments along with central government. A collective policy involving other aspects retail, such as, real estate, employment etc. is still to come up. Retail could have been even bigger employment provider and it has pointed out by Niti Ayog as well sometime back.
Clarity in policy initiatives and earnestness in its implementation by government brings in lots of other things with it, like institutional support, banking and financial support etc. and if that comes in, then the growth of this sector will be phenomenon.
Mukul: Taking a cue from what you just said, it seems funding is a major problem for the growth of this sector. So, do you want to say that retailers in India have found their success matrix and funding is the only problem, which can be achieved by FDI?
Sanjeev Jha: No, FDI won’t sort out problems of retail just like that. Foreign players have had their share of experience and whenever they decide to come back, they will surely employ their experience and learnings. I am talking about Pre-GST scenario, where moving goods from one city to another city was a challenge. GST is a good policy initiative which will boost retail, but a lot more than this is required. Government will have to take it as a project and give their more than 100%. Like in other sectors, take the example of mobile phones or pharmaceuticals or automobiles, state governments also chipped in as they gave land, gave tax holidays, made employment laws conducive for starting up the business, a full fledged coordinated support from state as well as central government is needed. And when this happens, it will be the biggest employment generator for the country. Lots of state governments still have their own reservations and lack of coordinated effort is pulling things back. These are the important points to bring in FDI, otherwise I see it more as a domestic player driven sector, where they will be consolidating. But this consolidation exercise must make their business viable. After consolidation, they will tap the market for their funding requirement.
Mukul: Online retail had serious impact on organized retail. Some of the sectors like electronics shifted majorly from organized retail to online retail. Do you see any course correction happening, because most of the small to medium online players are out of the market due to various reasons?
Sanjeev Jha: Very interesting thing has happened in India as far as retail sector is concerned. Both modern retail, the brick and mortar one and online retail has entered in India around same time, with just 5-6 years lag. As you have said that most of the small or medium online retailers have shut their shop; they were expanding at a very fast speed and as were their speed of growth, as were their speed of burning the cash. And I see online retail space as more consolidated one than modern retail.
There won’t be more than 2-3 national level players along with some niche players and they would also be prone to challenges of logistics and taxation like modern retail. Another area of challenge for them is IT infrastructure and internet speed. With 4G, things are looking better for them. Moreover in India, online retail is mobile driven and smartphone sales have seen exponential growth in recent times, which is bonus point for them.
Now coming back to your question, I don’t have the specific data, but it seems, mobile and its accessory’s sales has shifted to some extent from organized or pop and mom store to online retail, but the extent can be debated. Eating up the market share or having pole position will depend on many more things like what value proposition they are bringing in for the end consumers and how they are involving the consumers in their sales process. Innovation in customer acquisition and customer retention strategy will be key for them, because they are not seeing their customers face to face. Simply replicating the strategy of pop-n-mom stores or modern trade won’t bring them success in the long run.
In the present market scenario, everyone is growing; general trade is growing, modern trade is growing and so is online retail and every sector will continue to see consolidation. Don’t you think that general trade is also consolidating? There is hidden unemployment in general trade as well and unviable players are exiting the business. Either those businesses are acquired or those spaces are filled but consolidation is happening there as well. In my opinion, all three spheres of retail are growing and will continue to grow because India is growing.
Mukul: While talking to you right now, one thing came to my mind that mobile phones with complete packet do not weigh more than 500 grams, which makes transportation easy from one location to another. Does this mean, weight of the product play a role in growth of online sales of the product?
Sanjeev Jha: Look, online retail provides the instant reach to millions of customer with less hassles of distribution network. Taking the same product to consumers through pop-n-mom store or modern trade will take more time, more investment and more effort than online retail. Yes, size does matter in logistics, which brings the cost of logistics down and so the overall cost to the end consumer. In this age of smartphone and technological advancement, consumers are well aware in advance about the product. Product companies are also going a great length in making the details of product reach to the consumers. So, what is left for consumers is saving of money in their hand.
Mukul: Government is pushing for digitization of payments. Demonetization, payment apps, UPIs etc. and incentivisation by the government to promote digital payments can be seen as actions in that direction. Amid slow adoption of technology and not so good penetration of real banking, what is the future of digital payments in next 5-7 years time?
Sanjeev Jha: I will put it this way. India is a unique country and people are very smart here. They like to squeeze as much benefit as possible from anything. Simply because something is changing and that change is promoted by government, they won’t accept it. For digital payments to succeed, government will have to eliminate the cost of digital payment. Right now, either merchant or the customer, or ultimately the customer is footing the bill of digital payments. Unless this anomaly is corrected, digital payments won’t succeed. In whatever way possible, government should incentivize the digital payment, not charge it. Though I have heard that ADHAR based payment system, which is on the anvil, will have this benefit. Otherwise, cashless payments will take its own time to grow than present growth rate of 16-17%, which may increase by 2-3% more, but phenomenal growth can’t be expected.
Mukul: Multichannel sales is picking up. By multichannel sales, I mean to say that organized retailers have come up with online portals as well as mobile apps and some of the online retailers have started having their physical presence. Do you see it as a sales model for future or these are one off cases?
Sanjeev Jha: See, one size fits all doesn’t work. Just because someone has adopted one sales model, doesn’t mean others have to adopt it as well and they will succeed is also not guaranteed. If an online retailer is starting its operation in organized modern retail, then they will have to be as invested and as efficient like them, otherwise they will fail. Similarly, if a brick and mortar retailer is entering into online retail, then they are entering into the domain of FlipKart and Amazon and they will have to be as good as these online retailers, which is very unlikely to happen. Unless any of the players decides to have a specific plan for multichannel sales, I don’t see it is future of retail. This space is very ruthless and people won’t go and buy from you just because you are good at one thing or in one sphere. Customers go to different sphere due to different requirements and different mindset.
Mukul: What will be challenges in front of retail sector per se in next decade?
Sanjeev Jha: Part of answers of this question I have given in your first question. I will bifurcate challenges into two parts. One part in government policy, because I believe that government is still not very convinced what this sector can do. Even if they are, it is not visible from their actions. And if that does not happen, the market scenario will mostly be domestic player driven.
Next point is, as I have discussed earlier, growth of this sector will come from Tier-II & III cities. Though GST has set the ball rolling, but retailers will have to move to these towns with finding the viability of business. Steps have been taken by incumbent players and Tier-II & III cities to some extent are being served but speed is what matters. But again I would say that these players don’t have leverage of huge cash to burn for speedy expansion in these smaller cities. So, we will have to see how everything pans out in the light of two things which I have mentioned earlier as well as now.
Mukul: One last question; do you see modern retail replacing pop-n-mom store completely in India, may be in 20, 30, 40 years?
Sanjeev Jha: Never. No company has wherewithal to reach every nook and corner of India with all the product consumer needs. Moreover, pop-n-mom store comes with their own set of advantages like location, speed in decision making, connect with locality etc., which can’t be matched by big modern trade retailers. Again, as I have mentioned earlier during our conversation, all three spheres of retail will grow, because India is a huge market and it is growing.
Disclaimer
1) Figures of revenue from retail in 2016 and 2026 and percentage of total employment provided by retail sector has been taken from the website of Indian Brand Equity Foundation (IBEF).
2) Opinion expressed by Mr. Sanjeev Jha is strictly his personal and does not reflect the opinion of his present or past employers.