IN the beginning of the 21st century, when India was more than a decade into its economic liberalization process, organized retail in the country began to take root. Organized retail chains like Pantaloons, Shoppers Stop and Westside etc began setting up their showrooms across major cities in India. India had become a hot destination for global capital, which was freely flowing across many emerging markets, after the US Federal Reserve went on a loose monetary policy to boost its own sagging economy which was reeling under the shocks of the post dotcom recession. India was experiencing the growth of outsourcing industry, which created employment opportunities for hundreds of thousands of youngsters, most of them fresh out of their college. With dispensable incomes suddenly growing and the Indian middle class expanding, the stage was set for organized retail to take root in Urban India.
In the heady days of the first decade of 21st century, India began to experience the birth and subsequent expansion of an aspirational class, which wanted to have all the good things that money could buy. If ones means didnt suffice, there was always the friendly lender to help tide over the cash shortfall. An expanding aspirational middle class was the perfect platform for the organized retail to launch itself. It was helped in a big way by the sudden boom in the growth of shopping malls throughout urban India. Massive shopping malls started coming up in every city in India where these retail companies began to set up shop. In an era of loose monetary policy and heightened expectations, nothing seemed to go wrong. The retail companies in India went on an aggressive expansion, often sacrificing profitability against more footfalls and increased revenue. Most of these retail companies hardly ever made profits. In their desire to catch the fancy of aspirational India, they often resorted to discount offers which resulted in a continuous strain on their ability to generate any cash. These businesses were essentially cash guzzlers and dependent on regular external sources of funding to keep them going. Once the game of musical chairs stopped, during the recession that started in 2008, these businesses began to feel the heat. Not only did their revenues drop, they simultaneously began to find the huge rentals and overheads difficult to manage. As a result, some of the smaller players like Vishal Retail, Kuotons Retail etc were forced to shut shop. The bigger players like Pantaloons, the poster boy of organised Indian Retail, now rechristened Future Retail, weighed down by huge borrowings and high operational and overhead costs started to revamp and reorganize its business operations. It sold its flagship brand Pantaloons to the Aditya Birla Group to trim its huge borrowings.
It was the Kirana shop format across India that was the most affected by this onslaught of the organized retail. Given the scale of these companies, the Kirana stores began to feel threatened for survival. But while these small shops recognized the threat posed to their business and accordingly realigned their business, the bigger retail companies made a lot of excesses during the good times. But their biggest nemesis appeared in the form of e-commerce in India. The emergence of e commerce began to rewrite the whole retail script in India. In 2009, Flipkart, now Indias biggest e-retailer, began its operations. With a modest beginning, Flipkart soon rose in the valuation game and was valued at approximately $11 billion, at the time of its last round of funding. It expects this valuation to jump to $15 billion at the time of the next round of funding. Compared to this massive valuation, all listed retail companies in India command a total value of $2.5 billion. E-commerce has seriously rocked the boat of the organized brick and mortar retail players like Future Retail, Aditya Birla Group and Reliance Retail. Realizing the growing threat to their businesses, the Aditya Birla Group, in the beginning of May, merged two of its retail formats –Pantaloons and Madura Garments. Bharti Retail has also been acquired by Future Retail. This merger will make Future Retail the No 2 retailer in India, just behind Reliance retail, which estimates to achieve a turnover of RS 18000 crore by the end of March 2016. The realignment and mergers and acquisitions within the retail space are supposed to provide scale and efficiency to these entities, so that they may be able to take on the challenges posed by the e-retailers.
Several factors have contributed to this new thinking on part of the older organized retail players in India. The long awaited FDI in multi brand retail in India has not yet fully materialized, coupled with huge debt that these companies have accumulated, the high operational costs these companies incur and most importantly, the spread of e commerce have all combined to force these companies to rethink their strategies. Online retail in India is at the cusp of a huge upward surge. Its convenience, better pricing, higher usage of debit and credit cards among consumers and the penetration of smart phones, all combine to help the ecommerce business in India grow at exponential rates for many years to come. E commerce has also been the flavour of the venture capitalists and private equity players who have invested substantial amount of money in these businesses in India in the last few years.
Not that the funding will keep coming for eternity. At some point, the Indian e-commerce players like Flipkart, Myntra, Snapdeal et al will have to pause and start thinking about profitability. Right now, they have forced the brick and mortar retailers on the defensive. The old retail businesses have realized their business models are not sustainable and feel vulnerable and threatened by the onslaught of e retailers. At present, the organized brick and retail companies account for approximately 17% of sales, the online retailers 2%, with the unorganized retail accounting for the rest. As per a recent study, by 2019, 11% of the retail sales will be contributed by the online retailers and the share of the brick and mortar retail companies will decline to 13%.
Given that the entry of global retail giants like Wall Mart, Tesco and Carrefour etc into India has been delayed, these old retail companies, most of whom expected to exit by offloading their business to these multinationals, have to survive longer and under difficult business environment. Not that the online retail companies are making any profits right now. Their complete focus right now is on customer acquisition and the easiest way of doing that has been to drop prices and give attractive discounts to the consumers. As long as the investors are willing to loosen their purse strings, the online retailers will continue to grow revenues, often at the cost of the brick and mortar retailers. For any brick and mortar retailer, howsoever big, the biggest roadblock remains the high cost of real estate in Urban India. This is one area where the online retailers have a huge advantage over their rivals. For cash strapped and loss making Indian retailers, this is almost like a death knell.
Many e-retailers in India, like Big Basket, Local Banya etc have started taking online orders for delivery of grocery to the consumers. These online grocers are supplying almost all basic stuff that a family needs vegetables, toothpaste, toiletries, you name it and they will deliver. They are making it possible by tying up with local Kirana shops across cities. They keep their delivery boys in the vicinity of the Kirana stores, and when the order is received, they go and deliver it to the consumer. Online grocers are utilizing the infrastructure of the Kirana stores to make faster and effective deliveries.
With the onset of e commerce in India in a big way, the entire retail landscape is undergoing a dramatic change. Retail being a highly competitive industry, these new e retailers will not only be a threat to the old brick and mortar retailers, but even within them, only the best will survive. So like some of the old retail companies that had to shut shop, online retailers will also have their share of casualties. But right now, e commerce in India is on a roll and that is bad news for the likes of Future Retail, Reliance Retail and all the old brick and mortar retail companies in India.
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