A Microeconomic Analysis of Indian Retail Industry

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MODERN RETAIL

MICRO ECONOMICS
PROJECT REPORT

ABSTRACT
The growing number of modern retail outlets in India on the one hand and frequent sale seasons and talks of underperformance on the other point to a mixed bag and make us wonder whether the sector is on the right growth trajectory. In this report, rather than providing with just the facts, we have tried to understand the modern retail sector from an economist’s point of view and visualize its future-whether it is in its expansion or contraction phase. Motivated by the rising per-capita incomes and increased spending on consumer goods, modern retail stores are coming up with new strategies and plans to unlock the Pandora box of the untapped and unorganized retail sector. In the course of the report, we try to find out – how the retail sector works, major regulations that affect its functioning and the challenges that await the sector and summarize with our analysis and recommendations.

Note: We have used where we’ve analyzed the situation from a micro-economic point of view.

INTRODUCTION

The retail sector in India can broadly be classified as organized and unorganized where the share of unorganized sector is more than 93% of the total and includes the kirana stores, mom and pop stores and the ilk. The organized or modern retail sector on the other hand captures a mere 7% of the total market share. Modern retail is defined as a form of retailing whereby consumers can buy goods from a similar purchase environment across more than one physical location and operates under three levels: Specialist stores catering to some particular category of product such as footwear, pharma & beauty, food and grocery etc. - classified under level I. Departmental stores that cater to a few categories of retail put under level II, and malls where we find an agglomeration of many departmental stores, hypermarkets etc - classified under level III retail. The figure 1 below shows the various players at different levels of retail. Retail stores can also be classified under ‘lifestyle’, ‘value’ and ‘luxury’ formats based upon the consumer income segment they target.

Figure : Players operating at different levels Figure: Organized Retail

Although, the sector boasts of covering almost all the verticals, a look at the markets under different verticals shows that Organized Retail Penetration is extremely low - 2.4 percent - for the food and grocery, which in contrast makes up for the biggest part of the total retail market. The apparels, foot wear and home décor are the major contributors under organized retail and have been prospering at a rapid pace.

The figures below depict the market share and Organized Retail Penetration in different verticals.

Figure: Market Share of Different Verticals in Organized Retail

Source: CRISIL

Figure: Organized retail penetration (%) in different verticals

Source: CRISIL

Retail almost accounts for around 15% of India’s GDP and thus plays an important role in determining the Indian economic indicators. Organized retail became the apple of everyone’s eye when Vishal Mega Mart profited from its operations in different parts of India. Soon, other players started with their own retail chains such as V-Mart, Big Bazaar, Subhiksha, Pantaloons et al and the market turned into a very competitive market, probably lowering the economic profits of the retailers, and consequently the situation now is that Vishal, Subhiksha and others stand nowhere compared to the biggies such as Reliance, Big Bazaar and others. The major reasons for this are the marketing mix of these brands and benefits from economies of scale. However, because a number of factors go into determining business profitability, it would not be correct to give all credit to the above mentioned factors. Let’s now look at the major player in organized retail in India....
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