The retail boom that is being witnessed in the past few years is bound have a significant impact in the commercial real estate sector. The current size of the retail sector in India is around Rs. 8,10,000 crores (US $162 billion), of which only 2% is organised. Over 12 million retail outlets, mostly run by small shopkeepers, cover the remaining 98%. The retail sector is growing at the rate of 20% per annum and more important, the organised retail sector is estimated to grow from 2% of the total retail market in 2001 to 22% in 2005. Most of this rapid growth will be in the large metropolitan cities.
The latest McKinsey study titled “India’s Retailing Comes of Age” has predicted a definite retail revolution in India. This is turning out to be very true. India is the last among the large Asian economies to liberalise its retail sector. The “licensing raj” is long over. A number of Indian and international retailers are entering this nascent, though dynamic market. Market liberalisation and increasingly assertive consumers are sowing the seeds of a retail transformation that will bring bigger Indian and multinational players on to the scene. The market is huge at US $162 billion overall. The entry of multinational companies (MNC) has certainly transformed this sector. The supply chain, and consumer interest and awareness in branded products have been built from scratch.
Presently, global players are entering India, indirectly, via the licensee/franchisee route, since foreign direct investment (FDI) is not allowed in the retail sector. Allowing FDIs in this sector will not bring in investments, unless the FDI policies make it attractive for MNCs to pump in capital to fuel growth along with systems, expertise and know how that will also shorten the learning process in India. All the major Indian cities have major commercial projects under construction for retail purposes. In fact, the retail sector has provided the primary boost to the commercial property market all over India. Presently, there are over 55 large shopping malls under development all over India. The retail sector is also getting acceptance in the job market with more and more business schools focusing on the sector and large retailers setting up retail academies. This sector is estimated to create 50,000 jobs per year in the next five years.
The big Indian retail players include Shopper’s Stop, FoodWorld, Vivek’s, Nilgiris, Pantaloon, Subhiksha, Ebony, Crosswords, Lifestyle, Globus, Barista, Qwiky’s, Café Coffee Day, Wills Lifestyle, Titan, Raymond, Bata and Westside. Most of the Indian players have ready and easy access to prime real estate locations. The international players comprise McDonald’s, Pizza Hut, Dominos, Gautier, Spencer’s, Levis, Lee, Nike, Adidas, TGIF, Bennetton, Swarovski’s, Sony, Sharp, Kodak, and The Medicine Shoppe. Most of the foreign companies have to depend upon shopping malls and rentals for their outlets. This has been a deterrent, since such prime real estate is relatively expensive in Indian cities.
The Indian consumers are divided into two categories, viz., high-income urban consumers and low-income urban and rural consumers. The high-income urban consumers are willing to pay a higher price for having the choice of quality products and the complete shopping experience in the large retail stores. But, the low-income urban and rural consumers will go for the price sensitive products which are easily available in the smaller stores located nearby. The markets in both categories are very large and hence, there is little direct competition between the two retail sectors. As the awareness and disposable incomes increase in India, the two categories will merge slowly, before the competition actually begins. The minor players do not pose a major threat to the big retailers, because the target consumers are different and the Indian markets are very large. For the up-market client, who wants the experience, quality and choice, the shopping mall concept of the larger retail players is very well suited. However, for the less fortunate clients who prefer lower cost, personal service and home delivery, the smaller unorganised retail players are best suited. So, the threat is minimal in the urban areas for both the small and large retail players, since the markets are very large and varied. But in rural areas, competition will be present, and the minor players will prevail.
The rentals paid by the large retailer chains are relatively high in the organised sector. But, the unorganised retail sectors pay much lower rentals. The bigger players have to occupy larger spaces to get better rates. For instance, if they rent a large area, they will get the space for Rs. 75 per sq. ft. instead of Rs. 100 per sq. ft. The minor players rent small areas at Rs. 5 to 10 per sq. ft. per month. Therefore, the branded products in the large retail sector cost more and their clients are willing to pay the price for the experience. The retail rentals are generally 20% higher than the commercial (office) rates.
India remains one of the last frontiers of modern retailing. The complexities of the vast and varied market will be a challenge. But the retailer who can shape the nascent retail market as well as adapt to India’s unique characteristics will reap larger rewards over the long term. It is clear that the winner in this retail rush is going to be the consumers.
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