Up until the Indian economy was liberalised in the 1990s, the retail industry more or less ran under its own steam. Unorganised mom-and-pop stores and corner shops met the needs of the average Indian, who didn’t spend much, given that they didn’t earn much. Although there were brands such as Raymond and Bata serving the upper-middle class with their limited shops scattered across the metros, they were few and far between.
As the country opened up and economic growth ensued, organised retail in its modern forms - malls, supermarkets and hypermarkets – began to take root, catering to the burgeoning middle class who suddenly had money to spare.
While unorganised retail chugs along, the organised sector - which makes up only 5 per cent of the industry - is set for high growth with the influx of foreign investment and higher disposable income for the middle class. “In 2016, the segment witnessed the entry of 19 new global brands as well as the completion of quality retail developments,” says Anshuman Magazine, Chairman, India and South East Asia, CBRE. “Private equity investments during the year was $700 million (Dh2.5 billion) and are expected to increase this year.”
The high-growth phase will continue for the next five years, boosted by the increase in annual disposable income, which is expected to grow at an average year-on-year rate of 7 per cent, says Shabori Das, Senior Analyst at Euromonitor International – India. “Awareness of global brands due to the presence of the internet and social media will also help drive growth of retail.”
While e-commerce is expected to touch $100 billion by 2020, it will co-exist with brick-and-mortar stores, which remains the backbone of Indian retail. “Large-format retail outlets, especially in the grocery and the apparel segment, are increasingly becoming popular as they seem to have a larger variety in terms of both brands and price range, preferred by many consumers,” says Magazine.
Here we look at five developments that spurred growth in the sector.
Opening up
Magazine believes the 1990s were the first defining period for the organised retail industry. As part of liberalisation, FDI regulations were introduced and new retail formats started to emerge. “FDI in cash and carry (wholesale) with 100 per cent ownership was permitted in 1997 with government approval,” he says. This was later made automatic in 2006.
The same year FDI up to 51 per cent was also allowed in single-brand retail.
FDI increases
In 2012, India permitted 100 per cent FDI in single-brand retail while capping it at 51 per cent in multi-brand retail.
“The decision permitting 100 per cent FDI in single-brand retail helped international companies that had already entered India through joint ventures and partnerships to buy back their stake and start their own ventures,” says Das.
But this regulation came with conditions to protect the local industry: foreign players should own the brands they intended to retail; the brand must be present in other countries; and the retailer should source 30 per cent of the products to be retailed from small industries in the country.
“The years 2011-12 were also critical from an e-commerce standpoint, with companies such as Flipkart, Snapdeal and Jabong witnessing heightened activity,” adds Magazine.
The next year the government eased regulations surrounding multi-brand retail. Under the new laws, multi-brand retail trading companies needed to invest 50 per cent of only the first $100 million invested in backend infrastructure, against 50 per cent of the total investment by the company as per the earlier regulation, explains Das. “Secondly, multi-brand retail companies were allowed to source their manufacturing and processing work from any company, as long as the investment of the latter in plant and machinery at the time of the tie-up was within $2 million. Earlier, international retailers were only allowed to source from small enterprises, where the latter had within $1 million investments in plant and machinery. Furthermore, if and when the valuation increased from $1 million, multi-brand companies were asked to end the tie-up.
“Finally, multi-brand retail trading companies were allowed to set up business in any state, if the state government permitted.”
Food flourishes
The retail food and beverage segment witnessed a boom from 2014 onwards. “It moved away from only having international quick service restaurants and saw the advent of home-grown brands that evolved into full-grown national chains.” Several international fine dining restaurants also entered the country during this period.
As the café culture became extremely popular across metros and smaller cities, he says, organised shopping centres also evolved from just having food courts to housing a diverse mix of F&B options.
Omnichannel rises
Retailers realised they had to be present in more than one channel in order to tap into the newly empowered consumer base with higher disposable income, who were primarily millennials, and those who weren’t brand loyal. “During 2012-14, Croma by Tata Group, Bata, Metro Shoes and Aditya Birla Retail launched their online portals to tap into the growing internet retailing channel sales,” says Das. “However, 2015 witnessed a large number of internet retailers going offline. That year retailers such as Pepperfry.com, Amazon.com and Flipkart.com, among many others, launched their click-and-mortar stores and pick-up stores. As consumers preferred one [channel] to another depending on the product and price, it made sense for retailers to have omnipresence.”
Online marketplace
Last year, the government defined the online marketplace as an e-commerce business that acts as a facilitator between the buyer and the seller who does not have any inventory of its own. “It was a milestone because this law not only defined the marketplace model but it also helped to stop any unregulated foreign product sales happening via the online channel in India,” says Das. “Since India still does not have 100 per cent FDI in multi-brand retail, this move was beneficial for store-based retailers, who were losing business to the online channel, as the latter was not defined and hence outside the purview of FDI regulations.”
After defining the marketplace, the government allowed 100 per cent FDI in multi-brand retail through this platform, but disallowed discounting or price cuts. Additionally, the marketplace company could only have 25 per cent of its total revenue coming from the same vendor.
“Prior to this law, most of the e-commerce companies offered heavy discounts and then paid the vendor the difference in kind," says Das. "This was no longer allowed, which brought down the discounting practice, one of the key attractions of the online channel.”
