C MY K

Retail in India: Getting organized to drive growth

Retail in India:
Getting organized to drive growth
A CII – A.T. Kearney report

C MY K
Retail in India:
Getting organized to drive growth
Retail in India:
Getting organized to drive growth

A CII – A.T. Kearney Report

Confederation of Indian Industry

November 2006

Confederation of Indian Industry

23, Institutional Area
Lodhi Road
New Delhi 110 003, India.
Tel: 91 11 2462 9994-7
Fax: 91 11 2462 6149/2463 3168
Contact: Chandrajit Banerjee, Senior Director, Anindya Acharya, Deputy Director

A.T. Kearney Limited

IL&FS Financial Centre
3rd Floor, Quadrant A
Bandra-Kurla Complex
Bandra (E), Mumbai 400051.
Tel: +91-22 - 2653 3299/75/76
Fax: +91-22-2653 0199

14th Floor, Tower D

Global Business Park
M G Road
Gurgaon 122002.
Tel: +91-124-4090700
Tel: +91-124-4069725
Contact: Raman Mangalorkar, Principal, Consumer Industries and Retail Practice,
Hemant Kalbag, Principal, Consumer Industries and Retail Practice

To the extent this report relates to information prepared by A.T. Kearney Limited for the Confederation of Indian
Industry (CII), it is furnished to the recipient for information purposes only. Each recipient should conduct its own
investigation and analysis of any such information contained in this report. No recipient is entitled to rely on the
work of A.T. Kearney Limited contained in this report for any purpose. A.T. Kearney Limited makes no representa-
tions or warranties regarding the accuracy or completeness of such information and expressly disclaims any and
all liabilities based on such information or on omissions thereof.

The recipient must not reproduce, disclose or distribute the information contained herein without the prior writ-
ten consent of CII and A.T. Kearney Limited.

iv Retail in India: Getting organized to drive growth

Contents
Foreword vii

Executive summary ix

1. Retail landscape in India 1

2. Key issues in the way of retail growth in India 9

3. Key imperatives 19

4. Conclusion 31

Appendix 1: Study methodology 35

Appendix 2: State-wise analysis 41

Appendix 3: Recommended initiatives for six select states 63

Appendix 4: Cluster-wise analysis 71

Contents v
vi Retail in India: Getting organized to drive growth
Foreword
ndia is currently facing the world's most dynamic
I combination, of highly informed and demanding
consumers on one hand, and of rapidly increasing
consumption levels across various retail product cate-
gories and geographies on the other. Growing con-
sumer demands and the consequent response of lead-
ing businesses have created a more complex and com-
petitive marketplace - one that requires each firm to
be more adaptive to customer needs and more
aggressive at exploiting their unique capabilities to
meet those needs. In the context of Indian consumer
products and retail companies, this spells multiple
challenges and opportunities for them.
Having emerged as the world's most attractive market
for global retailers, India still faces alarming issues that
pose a serious hurdle to the growth opportunity that
the retail industry promises for the country's econom-
ic progress. The overall positive outlook of the present
business conditions is tempered by the fact that the
country is grappling with severe infrastructure and
policy issues. Cold chain, warehousing and logistics
infrastructure will fast become unmanageable chal-
lenges for India, if pro-active action is not taken soon.
The critical challenges facing the Indian retail industry
in its quest to continually add value to the consumer
are twofold. First, unlike many other countries, India is
a fragmented market in terms of policy and economic
laws at the state level, and dealing with varying regu-
lations affects the industry's competitiveness adverse-
ly. And secondly, India is way behind the US, Western
European and other developed nations in implement-
ing best practices across its industries. Issues like inad-
equate quality control and the lack of skilled workforce
continue to drag our economy down.
In this context, the Confederation of Indian Industry
(CII), requested A.T. Kearney to identify key issues and
challenges that Organized Retail faces in India today,
and to develop specific, 'actionable' recommendations
that will propel the industry on a growth path.
The report has analysed several areas of concern for
growth of retailing in India. These issues were detailed
out for generic Indian industry, for retail sector specif-
ic and also across seven Indian states and union terri-
tories that were selected based on their geographic
representation of India. The report has assessed best
practices in policy and infrastructure facilities and ana-
lyzed case studies from China and South Africa that
highlight the catalyst role regulatory bodies can play
in promoting retail and the related economic benefits
(employment, tax revenue, etc.).
It has also identified and analyzed, by issue and by
state, what specific actions can be taken to foster
organized retail, and observed key initiatives that need
to be driven by the retail industry to foster its own suc-
cess and strength.
We strongly believe this report will help us achieve sig-
nificant progress in enhancing the share of organized
retail in the industry.
Many people contributed to this effort. Several CII
members (both Indian companies and MNCs), overseas
MNC managers, industry experts and government offi-
cials spent time with the A.T. Kearney engagement
team, sharing experiences and debating ideas.
Foreword vii
A.T. Kearney partners and principals, including Raman and preparing the report.
Mangalorkar, Hemant Kalbag, Vivek R. Gupta, Kaustav
Mukherjee and Saurine Doshi provided overall direc- We would like to extend our appreciation to everyone
tion for this study. Subhendu Roy, Manas Majumdar, who helped us in our effort.
Namit Garg, Saurabh Singh, Jasraj Singh Virdi,
Supratim Banerjee, Munir Suri and Divya Sahay were
involved on a day-to-day basis in conducting the study Confederation of Indian Industry

viii Retail in India: Getting organized to drive growth

Executive summary
he Indian retail sector is at an inflection point,
T with organized retail poised for an approximate-
ly 35 per cent compounded annual growth rate
(CAGR) for the next few years. However, valued at
around USD 320 billion, the Indian retail sector is still
relatively small by global standards, with retail giants
like Wal-mart alone reporting over USD 315 billion in
global sales.
But India is catching up and catching up fast. For two
years in a row, A.T. Kearney has ranked India at the top
of the Global Retail Development IndexTM. Several of
the major Indian conglomerates have announced and
are in the process of implementing major retail proj-
ects (Reliance, AV Birla Group, Tata, etc.), existing retail-
ers continue to experiment with new formats and con-
cepts (Pantaloon, Shopper's Stop, etc.), many of the
multi-national retailers are pacing the sidelines and
evaluating different ways to participate, and mall
development continues at a staggering pace.
What lies behind this euphoria is an omnipresent con-
fidence in the ability of organized retail to grow along
with the ongoing wealth generation amongst the mid-
dle class in India. The consumer class in India is esti-
mated at 400 million people with a rising disposable
income. About 29 per cent of the population is now
urban, compared to 26 per cent in 1991, and over 50
per cent of the population is below the age of 24, and
faces a job market more resilient than it is has ever
been before.
However, to sustain the type of double digit growth
we have seen in organized retail in the last two years
and to continue to deliver value to the consumer, sev-
eral issues need to be addressed. These issues vary
from core infrastructure challenges, to knowledge
management, to human resources.
There are issues that need to be addressed
A retail consumer in India today still does not enjoy the
value that organized retail has brought to the table in
some international settings. Groceries sold in hyper-
markets are still priced higher in comparison to those
sold by local street vendors, parking and traffic at large
format stores continues to be a challenge, and it is not
easy finding experienced and polished sales floor asso-
ciates. These symptoms are caused by some core
issues that are preventing the next level of maturation
in the Indian retail industry.
Based on the findings of this study, there are 10 over-
arching issues that most retailers view as major imped-
iments to growth and the associated escalation in
"consumerism". These issues are:
 Underdeveloped Supply Chain Capabilities
 Inadequate Utilities
 IT Infrastructure Hurdles
 Supply Base (Vendor) Hurdles
 Inadequate Human Resources
 Limited Consumer Insights
 Taxation Challenges
 Real Estate Hurdles
 Insufficient Government Incentives
 Policy Related Hurdles
These issues are somewhat universally experienced by
retailers in India, whether it is a fast food services
restaurant, a chain of movie theatres, a convenience
store, a department store or a hypermarket. Of course,
Executive summary ix
the magnitude of the issue varies by geography and by
cluster (metro, large city, small city, town or rural). For
example, supply chain issues such as a logistics infra-
structure, the availability of a cold chain network and
the presence of distribution hubs and networks is a
much bigger challenge in small towns and rural areas
than in the large metros such as Mumbai, Delhi or
Kolkata. On the other hand, real estate challenges are
proving to be a bigger impediment in metros than in
smaller cities such as Agra, Nasik or Amritsar.
Similarly, if we look at the organized retail challenges
across geographies within India, the differences are
quite stark. In this study, we specifically examined
seven distinct states and union territories: Andhra
Pradesh, Chandigarh, Delhi, Maharashtra, Tamil Nadu
and West Bengal. As an example, the road network in
Maharashtra at 93.9 kilometres per 100 square kilome-
tres, offers the best land (non-rail) connections
amongst all Indian states. But in terms of rail network,
Maharashtra only has 18 kilometres of rail lines per
1000 square kilometres, and substantially lags behind
Tamil Nadu which has 51 kilometres for the same area.
These differences manifest themselves in all areas that
impact the organized retail environment, from
Internet penetration to real estate costs to rent control
acts to taxes to corruption.
A retailer in India currently must navigate these issues,
try to make a profit, deliver value to its shareholders
and continue to add value to the consumer. A daunt-
ing task for the best of companies and doubly so for
most companies trying to start their retail venture. A
hypermarket in Mumbai must apply for 29 unique
licenses that could take up to six months, and then
when it opens the second store, it must apply for the
same 29 licenses all over again. So, what is the solution
and where will it come from?
As in most problems in the business world, there is no
simple solution and no single accountability. There are
however, two entities that can address the specific
issues identified: the Government and the Retail
Industry.
The government can play a meaningful role
Two specific case studies were developed - South
Africa and China, to highlight the important role gov-
ernment plays for the development of the retail sector.
x Retail in India: Getting organized to drive growth
In South Africa during the mid-1990s, the GEAR initia-
tive promoting FDI was started, a new Labour
Relations Act was adopted and substantial tax reduc-
tions were introduced. These changes substantially
grew the retail sales trend line by 50 per cent, touching
sales of almost 300 billion Rand in 2005 as compared
to the pre-reform trend of approximately 200 billion
Rand. Also, post reforms, the retail sector has become
the largest employment sector (followed by manufac-
turing, finance and agriculture) in South Africa, with a
workforce of over 3 million individuals. Similarly,
China's government has also played a critical role in
fostering organized retail, primarily through FDI. The
number of convenience stores grew from 899 in the
year 2000 to 7,371 in 2004. In the same time frame,
supermarkets grew from 1,690 to 4,654 and hypermar-
kets from 104 to 705.
While this kind of growth and results are within reach
in India, the type of support required from the Indian
government is quite different from the role the gov-
ernments in China and South Africa have played.
However, the benefits of state-led initiatives can be
substantial.
Some of the key changes that require the support of
the Central and State government are:
 Grant industry status to retail
 Expand rail network density and wagon capacity
 Reform the Urban Land Ceiling and Regulation Act
 Computerize land records and make information
available online
 Substantially reduce license requirements and
offer a "single window" facility
 Overcome power shortage through privatization
and infrastructure investment
 Improve management of city planning exercises,
with due attention to creating adequate commer-
cial space
 Amend labour laws to be more supportive of retail
requirements (24x7x365)
 Eliminate any remaining Octroi taxes
These and other policy changes are discussed in
greater detail in this document.
The retail industry must take some of the
responsibility
While the government must step up and play a sub-
stantial role, there is also quite a bit of self-help that
the retail industry can provide. Many companies are
already experimenting with and achieving success
with HR policies and talent development, analysis of
customer insights and supply chain development.
These innovations are still company-specific and have
yet to seep into the foundation of organized retail in
India.
The retail industry needs to invest in developing a
cadre of strong sales associates and middle manage-
ment that will be required to sustain the expansion
plans that are already on the table. While most compa-
nies are grappling with the issue of talent shortage,
few are investing significantly in a new generation of
retail managers. This investment must come in the
form of initiatives to drive training and re-retraining
programmes for staff. Beyond the immediate HR inter-
ventions, retailers must also drive development of
knowledge networks through sponsoring courses on
retail, as well as setting up retail institutes.
Two other shortcomings that the retail industry will
need to tackle are generation of Consumer Insights
and Supply Chain Development. Both of these are iter-
ative in nature and have to be anchored with the core
belief of continuously delivering value to the end con-
sumer. Product innovation coupled with localization
will come with the retail industry taking the lead in
sourcing products globally and offering a broader
assortment to Indian consumers. Research and con-
ventional wisdom may point towards cut vegetables
and mountain bikes not being products wanted by
Indian consumers, but both have been highly success-
ful at Hypercity, a cutting edge hypermarket set-up in
the suburbs of Mumbai. This kind of experimentation
with products and working with vendors to deliver
them at reasonable cost is the cornerstone of a retail
evolution that the Indian retail industry needs to
embrace.
The lack of Consumer Insight has also been identified
as a major shortcoming by the retail industry. There are
two initiatives that A.T. Kearney recommends:
 First, to establish a widely tracked and published
Consumer Confidence Index that accurately meas-
ures the degree of consumer optimism. This index
needs to be sponsored and supported by a central
body; for instance, the CII Retail Committee. Brazil
and China have both implemented such an index,
as have many of the developed retail economies.
 The second recommendation is for the retail indus-
try to cultivate third-parties that can effectively
mine and analyze consumer data. This will require
a degree of entrepreneurship, which is clearly not
lacking in the Indian environment today.
As far as Supply Chain Development is concerned,
much has been said about the absence of a cold chain
network. A.T. Kearney sees the greatest opportunity to
address this through an industry-sponsored consor-
tium. A group of retailers can tie up with transporta-
tion and refrigeration providers and invest in and fos-
ter a syndicated consortium that will create a step-
change in how perishable items are transported in
India today. This effort will not only impact a broad
vendor universe, but also have substantial positive
impact on the current supply chain capabilities in
India. A mutual commitment to further the cause of
retail in India, some investment, and an effectively
managed launch can in a short amount of time create
a much needed cold chain and deliver the much
desired value to the consumer.
* * *
There is no doubt that the Indian market and con-
sumers are eager to embrace organized retail in a big
way. The $320 billion market is likely to continue to
grow in a robust fashion. However, to continue to offer
consumers value, some of the core foundational
blocks like supply chain, infrastructure and real estate
need to be upgraded to keep up with the pace of
change.
The changes recommended here can fundamentally
change the trajectory of growth to create a 'step-up'
shift in the contribution of the retail sector to the
Indian economy.
Executive summary xi
xii Retail in India: Getting organized to drive growth
1. Retail landscape in India
2 Retail in India: Getting organized to drive growth
1. Retail landscape in India
etailing in India is emerging as one of the largest (GRDI) for 2006 (Fig. 1.2). The GRDI is conducted annu-

R industries, with a total market size of USD 320

billion in 2006 and growing at a healthy CAGR of
5 per cent till date. Rising incomes and increased con-
sumerism in urban areas along with an upswing in
rural consumption will further fuel this growth to
around 7-8 per cent. This driver is further illustrated in
the statistic (Fig. 1.1) that the percentage of people in
urban areas in India has been growing steadily to
reach 29 per cent from just 17 per cent fifty years ago.
In addition, India has been ranked as the most attrac-
tive market for global retailers to enter now, according
to A.T. Kearney's Global Retail Development Index
ally to follow the attractiveness of top emerging mar-
kets for retail. For the past five years, A.T. Kearney has
helped retailers prioritize their global development
strategies by publishing the GRDI. The Index ranks 30
emerging countries based on more than 25 macroeco-
nomic and retail-specific variables.1
Many factors contribute to India being the most attrac-
tive retail target market. A stable democracy provides
an economic and social background that comforts big
international organizations. On the economic front,
the country has seen over 7% GDP growth for the last
few years, driving increasing prosperity and con-

Fig. 1.1

Indian Retail sector is growing, driven by increasing urban population with

higher disposable incomes

The retail sector has been steadily …

… and
and is
is helped
helped by
by ever
ever growing
growing urban
urban
growing in India … population, with higher disposable incomes
India Total
Total Retail
RetailMarket
MarketSize,
Size,(USD
(USDBn)
Bn) Urban Populationas
Urban Population as%%of
ofTotal
TotalPopulation
Population

CAGR: 7-8% 27.8%

421 25.7%
368 23.3%
321
278 17.3% 18.0%
238
201 204

1998 2000 2002 2004 2006E 2008E 2010E 1951 1961 1981 1991 2001

Sources: Economist Intelligence Unit (EIU), Euromonitor, A.T. Kearney analysis

1. The GRDI study ranks countries on four parameters - country risk, market attractiveness, retail market saturation and retail entry timing.

Retail landscape in India 3

Fig. 1.2

Retail market attractiveness matrix based upon A.T. Kearney GRDI 2006

On the radar screen

Taiwan
Slovenia To Consider
Country Risk (Economic And Political)

80 Lower priority
Chile
Hungary Size of the bubble indicates
South Korea
Slovakia
0 = High Risk, 100 = Low Risk

retail sales of food, drink and

Malaysia China tobacco in US$ billions,
70 Lithuania
excluding taxes in 2005

Tunisia Latvia
Mexico
India
60 Saudi Croatia
Arabia Thailand
Bulgaria
Romania
Brazil Morocco
Egypt Russia
Turkey
50
Vietnam
Ukraine
Philippines
Pakistan
40 Indonesia
Bosnia &
Herzegovina

Macedonia
30
30 40 50
Market Potential(1)
0 = Low Potential, 100 = High Potential

sumerism. A look at India's demographics further more income available for spending rather than for
lends credibility to the retail story. India's consumer savings and investment. Can any retailer now afford to
market today encompasses over 400 million people miss this story?
with rising disposable incomes. Population shifts
towards urban areas and income shifts towards higher Another important factor announcing India's signifi-
income classes are key factors driving consumerism. cance for retailers is the current optimal stage of readi-
Also higher incomes are now in the hands of a younger ness within India for retail and for the entry of
population with lesser dependencies. This implies retailers.

Fig. 1.3

Window of opportunity for Retail entry in markets (based on GRDI rankings from 1995 2006)
Stage of the
market Opening Peaking Declining Closing
High Priority
Ukraine (2004)
Vietnam (2003)
Bulgaria (2003)

Russia (2006)
Russia (2004)
India (2006)

Hungary (2006)
China (2006)
China (2003)
Vietnam (2006)

Slovakia (2005)
China (1995)
Kazakhstan (2006)

India (2003)
Hungary (1995)

India (1995)

Bulgaria (2006)

Slovakia (2006)

GRDI
Ranking

Low Priority
Strategy • Monitor market; • Open sourcing office or step up retail stores; • Scale up opening to • Determine market position;
consider sending test the market capture market reevaluate strategy as needed
research team share
Formats • Not applicable • Consider supermarkets and hypermarkets, • Consider discounter • No pattern identified
cash and carry, and convenience stores over models
other formats as they have higher success
rates
Labor • Identify skilled labor • Hire and train local talent; create balance with • Switch balance from • No pattern identified
pool for market expatriate employees expatriate to local
staff

4 Retail in India: Getting organized to drive growth

Retail markets worldwide have been observed to
progress through four stages as they evolve from an
emerging to a mature market, usually over the course
of 5 to 10 years (Fig. 1.3). These stages are defined as:
1. Opening: A market that is just beginning its mod-
ern retail story, in all major cities.
2. Peaking: A market that is developing quickly and
is ready for modern retail.
3. Declining: A market that is still big and growing,
but space for new entrants is getting tighter.
4. Closing: A market having small window of oppor-
tunity for new entrants; such markets generally
have a very high penetration of modern retail.
The above figure shows that key Asian economies, viz.
India and Vietnam are in the peaking phase, while
China has just tipped into declining. This means that
the next one to three years are the best time for for-
eign retailers to enter India. They cannot wait for the
government to set things in order. While the govern-
ment has announced some benefits for foreign retail-
ers by allowing them to own up to 51 per cent of a sin-
gle brand retail company, the relaxed regulations do
not extend to retailers that sell a variety of brands.
India's government seems to be on a gradual but defi-
nite path towards allowing foreign retailers into the
country. And when it takes the final steps, the peak
time to enter will quickly pass, giving retailers that
enter now a distinct edge. Different global retailers are
in talks to identify the best mode of entry in India - we
believe it is time for them to enter, through means
allowed by the Indian government.
Already domestic retailers and conglomerates are ven-
turing into retail, e.g. Reliance and Birla, to stake out
ground in the emerging market prior to the entry of
international players. International retailers should
adopt the strategy undertaken by the likes of Metro
and Tesco in starting to test the market conditions and
initializing the process for an imminent deep dive.
Because if they wait any longer, they may see a repeti-
tion of the China story where many retailers missed
the bus, as the market saturated before they could get
their acts together.
Given the attractiveness of the Indian market for retail,
it is no wonder that retailing already accounts for 39
per cent of India's GDP, which is quite a significant pro-
portion if compared with other developed and devel-
oping economies. However the proportion of retailing
which is in the organized sector is still a very small por-
tion, with penetration at 6 per cent (Fig. 1.4).
Organized retail itself has been growing at a frenetic
pace and this growth is expected to continue at a blis-
tering rate of approximately 35 per cent per annum till
2010.
Retail as a whole can be broken into categories,

Fig. 1.4

Retail is a significant contributor to India's GDP;

however organized retail plays only a small role in that

Although retail
The retail is a significant
sector contributor
has been steadily …and
… organized retailing
is helped by everis growing
still at a urban
very
togrowing
India’s economy
in India …… population,nascent stage
with higher in India incomes
disposable
Retail % Contribution
India Total toSize,
Retail Market GDP(USD
(Yr 2005)
Bn) Organized Retail Penetration
Urban Population as % of Total(%)
Population

55
85
75
39
32

22 23
32
17
22 20

USA Brazil South Vietnam China India USA Brazil South Vietnam China India
Africa Africa

Sources: Economist Intelligence Unit (EIU), Euromonitor, A.T. Kearney analysis

Retail landscape in India 5

Fig. 1.5

Category-wise retail market shares and organized penetration

80% 25%
75.0%
70% 20.0%
20%
60%

50% 15%
40.0%
40%
10.0%
30% 8.0% 10%

19.0% 6.0%
20%
13.0% 3.0% 5%
10% 7.0% 7.0% 7.0%
1.0% 4.1% 4.1% 2.9% 2.1% 2.0%
0% 0%
Food and Groceries Clothing & Textile Consumers Durables Jewellery & Watches Home Decor & Beauty Care
Furnishings

Market Share Total Retail Market Share Organized Sector Penetration Organized Retail

Source: CRISINFAC

depending on the type of products serviced. For India,
food and groceries form the biggest category in the
retail pie (Fig. 1.5), accounting for close to 70%.
However this category has the lowest organized retail
penetration of 1%, which is indicative of the greater
opportunity available for organized retail and also
explains why so many retailers have plans for this cat-
egory in the pipeline. In comparison, footwear and
clothing segments boast the highest penetration of
organized retail, as international brands like Nike,
Reebok and Levis had started setting up shop almost a
decade ago. This segment may see further activity,

Fig. 1.6

Category-wise share in organized retail

Books, Music & Gifts Beauty Products

3% 2%
Home Decor
7%

Jewellery & Watches

7% Clothing, Textiles &
Fashion Accessories
40%
Footwear
9%

Durables
13%

Food & Grocery

19%

6 Retail in India: Getting organized to drive growth

Fig. 1.7

Organized retailers in India and the store formats being used

Format Key Players in Organised Retail Retailer Original Formats Recent formats

Food and Grocery Food Bazaar, Food World, Subhiksha, Nilgiris, Trinethra, Big Bazaar, Spencer’s RPG Retail Supermarket (Foodworld) Hypermarket (Spencer’s)
Specialty Store (Health & Glow)
Food and Beverage Barista, Café Coffee Day, Mc Donald's, Pizza Hut, Haldirams
Piramal’s Department Store (Piramyd Megastore) Discount Store (TruMart)
Mall (Crossroads)
Department Stores Shoppers Stop, Lifestyle, Westside, Globus, Piramyd

Pharmacy Health and Glow, CRS, 98.4, Apollo Pharmacy Pantaloon Department Store (Pantaloon) Supermarket (Food Bazaar)
Hypermarket (Big Bazaar)
Books, Music & Gifts Landmark, Crossword, Archies, Music World, Planet M Seamless Mall (Central)

K Raheja Group Department Store (Shoppers’ Stop) Home (Home Stop)

Speciality Store (Crossword) Hypermarket (Hypercity)

Tata/Trent Department Store (Westside) Hypermarket (Star India Bazaar)

Landmark Group Department Store (Lifestyle) Hypermarket (Max)

Others Supermarkets (Subhiksha, Trinethra,
Nilgiri’s etc)
Speciality Stores (Vivek’s, Vasanth's etc)

Source: A.T. Kearney research and analysis

given the recent government guideline allowing FDI Now if we look at the split of the organized retail mar-
up to 51 per cent for single brand retailing. ket of USD 15 billion for 2005 (Fig. 1.6), clothing and
textiles has the largest share at 40%. This is apparent

Fig. 1.8

Domestic retailers are expanding and International retailers have significant presence in India

Hypermarkets Number of Cities Number of Stores 2004 – 05 Turnover

(USD Mn)
Big Bazaar 12 21 80
Star India Bazaar 1 1 -
Spencer 4 4 70
Department Number of Cities Number of Stores 2004 – 05 Turnover
(USD Mn)
Shoppers Stop 10 20 112
Lifestyle 5 8 66
Westside 13 20 54
Pantaloon 11 17 47
Apparel Footwear
Globus 7 12 17
Vishal Megamart 18 24 33 Food & Beverage Others
Supermarkets Number of Cities Number of Stores 2004 – 05 Turnover
(USD Mn)
Spencer’s Retail Across India 54 70
Subhiksha Chennai 164 62
Food Bazaar 14 35 58
Nilgiri’s 15 30 36
Trinethra 8 80 34
Consumer Durables Number of Cities Number of Stores 2004 – 05 Turnover
(USD Mn)
Vivek’s 17 52 76
Samsung DigitAll 46 71 48
Vasanth 21 41 40
Vijay Sales 1 9 34

Source: A.T. Kearney research and analysis

Retail landscape in India 7

from the existence of exclusive brand stores as well as
specialty chains for apparel, other than the upcoming
hypermarkets and department stores which also stock
and sell apparel. Next is food and groceries which
occupies 19 per cent of the organized market share,
and with increased organized retail penetration, this
share is expected to move up.
While organized retail is possible in many categories
and in India there are organized retailers in the key cat-
egories, the retailers are currently operating using pri-
marily three types of store formats :
1. Specialty store: Catering to a particular specific
category
2. Department store / supermarket / hypermar-
ket: Catering to two-three or more categories of
retail. The distinction being in the sets of products
carried
3. Mall: An agglomeration of department stores,
hypermarkets and specialty stores. In addition,
this would have restaurants and food courts,
entertainment zones and multiplexes along with
8 Retail in India: Getting organized to drive growth
huge parking plazas
Retailers are also adapting their store concepts to fit
with the changing dynamics of the consumer market
(Fig. 1.7).
The players in the organized retail sector are currently
vying for a small chunk (6 per cent) of the overall retail
market. However, with retailer emphasis on geograph-
ical expansion, diversification into multiple retail for-
mats, product and price positioning and potential con-
solidation and scale benefits, the organized retail pie is
expected to grow (Fig. 1.8).
The retail landscape as portrayed is bustling with
opportunities and retailers trying to establish a
foothold in this exciting retail market; however there
are issues lurking within the business environment
which provide challenges to a smooth and easy entry
and uptake for retailers. In the following section we
aim to bring to light the key issues that ail the retail
sector and analyse the issues for relevance by city clus-
ters and states to prioritize them for suitable action.
2. Key issues in the way of retail
growth in India
10 Retail in India: Getting organized to drive growth
2. Key issues in the way of retail growth in India
hat Indian retailing is poised for growth is known Characteristics of retail will not be homogenous across

T to all. But that's not the whole story. We believe

there are infrastructure and policy bottlenecks
that need to be removed if Indian retailing needs to
get on a faster growth trajectory. These bottlenecks
become even more prominent in case of organized
retail development. In this section, we shall identify
and prioritize key issues in the way of retail growth in
India.
states - hence it becomes necessary to segment the
country into clusters with homogeneity across issues.
For this study, we have segmented India into five clus-
ters using economic and demographic indicators. The
demographic indicator used is population.2 As an eco-
nomic indicator, we have used Market Potential Value
(MPV). It is a comprehensive index that includes pur-
chasing power, consumption behaviour, media reach

Fig. 2.1

Segmentation of India into five clusters, with illustrative examples

Favourable Metros
Mumbai
Large Cities Delhi
Small Cities Kolkata
Market Potential Value

Ahmedabad
Chennai
Agra Jaipur
Nagpur
Amritsar
Pune
Asansol Nasik

Towns
Rural
Ujjain
Sidhpura Rohtak
Nellore
Jamna Hisar
Unfavourable
Low Population High

2. Other indicators could have been used, but population has been shown to be the most critical demographic indicator for the retail sector and has therefore been used in the
study

Key issues in the way of retail growth in India 11

and awareness. Fig. 2.1 shows the five clusters - met-
ros, large cities, small cities, towns and rural.
It must be noted that cluster analysis will be used to
identify issues and prioritize them - however while
some issues can be tackled at the cluster level; a major-
ity will need government intervention due to policy
impact.
Key issues identification
An analysis of the retail landscape across India high-
lights ten key issues that hinder development of the
sector. Since these issues can be pertinent for the retail
sector specifically or for the overall Indian industry,
they were rated based on their importance for the
retail sector and the Indian industrial sector. The origin
of these issues and hence their ownership lies with dif-
 Generic policy issues - They are issues affecting
the industrial sector that are shaped by govern-
ment policies. Some of these issues like real estate
hurdles can have significant impact on the growth
of the retail sector
 Specific infrastructure issues - Issues that are
specific to the retail sector and are also controlled
by it comprise this category. Since the retail indus-
try can affect these issues, they are very critical
from the industry perspective.
 Specific policy issues - Retail sector specific poli-
cies like sector incentives fall into this category.
Fig. 2.2 illustrates the categorization of ten key issues.
The key issues are outlined below:
 Underdeveloped Supply Chain - The country

ferent stakeholders. Therefore, these issues were also lacks quality logistics infrastructure which hinders
rated based on the extent to which government and scaling up of retailing operations.
industry could control them. A 2 x 2 matrix was subse-  Inadequate Utilities - Lack of basic infrastructure

quently created which used the two dimensions to like power, transport and communication creates
segment the issues. The issues were then classified difficulty in sustaining retail operations across the
into four categories: large geographical spread of country.
 Generic infrastructure issues - These are environ-  IT Infrastructure Hurdles - Reliable IT infrastruc-

mental challenges faced by the Indian industry as ture is important for managing modern supply
a whole and some of the issues like underdevel- chains which are the backbone of any retailing
oped supply chain are critical for retail sector. business and India faces a clear problem in this

Fig. 2.2

Key issues in the Indian retail sector

Indian Industry Generic Infrastructure Issues Generic Policy Issues

General

Underdeveloped
Supply Chain Taxation
Hurdles
Inadequate
Utilities Real Estate
Hurdles
IT Infrastructure
Hurdles

Specific Infrastructure Issues Specific Policy Issues

Supply Base
Hurdles Insufficient
Inadequate Government
Human Incentives
Resources
Limited Policy Related
Consumer Hurdles
Retail Sector Insights
Specific
Infrastructure/Market Issue Policy Issue

12 Retail in India: Getting organized to drive growth

 area as the non-urban areas have limited IT infra- tion especially in the vast rural hinterland.
structure.
 Real Estate Hurdles - Archaic laws prevent the There is also no reliable national cold chain system,
much needed growth in real estate development, leading to enormous wastages especially in rural India
which is imperative for retail growth. (unofficial loss estimates are over Rs 50,000 crore in
 Taxation Hurdles - The tax structure in India is still food products alone). There are multiple benefits of
complex and evolving, creating challenges for proper cold storage facilities. The financial benefits can
retailers.
 Supply Base
Underdeveloped logistics infrastructure
Hurdles -
The supply Underdeveloped
Supply Chain Absence of national cold chain networks
base for the
retail sector
Lack of national distribution networks and hubs
is fragment-
ed due to government policies and legacy issues be shared between the farmer, the consumer and the
which prevent economies of scale in retail sector. retailer, thereby making organized retailing more
 Inadequate Human Resources - There is hardly attractive for all stakeholders. Currently each retailer is
any systematic effort to train manpower for the required to set up individual cold chain facilities and
retail sector, which can create a bottleneck for this makes the cost of organized retailing of mass use
growth. consumer products prohibitive.
 Limited Consumer Insights - There is limited

knowledge about the consumer behavior due to India also lacks national level distribution networks
limited market research conducted on the huge and hubs. Fragmented supplier network in rural areas
population in towns and rural areas. lead to multiple levels of product handling. Also con-
 Insufficient Government Incentives - sumer product companies are more focused on front
Government is yet to create any major sector spe- end distribution and hence the distribution model is
cific policies to boost the retail sector. more robust in urban areas with high consumer con-
 Policy Related Hurdles - The policy environment centration.
in India is complex, creating challenges for growth
and establishment of new business. While studying Indian states, we found there are no
standard best practices in India - Maharashtra and
Generic infrastructure issues Tamil Nadu have the best road and rail network in
Supply chain, utilities and IT infrastructure hurdles are India respectively, while West Bengal has the maxi-
generic infrastructure issues that will be addressed by mum cold storage capacity in India. Globally, a better
the natural evolution of the industry. logistics infrastructure is sustained through road main-
tenance and capacity utilization of the rail network
Supply chain is a key bottleneck for retail sector and this is particularly true in developed countries like
growth. India lacks efficient and reliable logistics infra- the US. There are also several specialized refrigerated
warehousing and
Lack of adequate and reliable power, water and gas cold state trans-
sources portation compa-
Inadequate nies in the US and
Utilities Inadequate public transport facilities
UK that provide
professional serv-
Inadequate telecommunications and internet facilities
ices to the retail-
structure in roads, rail and ports. We also have a highly ing industry - Indian companies would do well to intro-
fragmented trucking industry and absence of reliable, duce such practices.
national service providers. Accordingly supply chain
management (SCM) systems have very low penetra- We believe that, while the supply chain will evolve

Key issues in the way of retail growth in India 13

over time, the retail sector needs to proactively seek
government help to develop the basic infrastructure -
as maximum benefits from supply chain development
will accrue to the rural cluster.
An acute shortage of power, clean water and natural
gas in urban areas are bottlenecks for large organized
Low automation level in supply chain and point of sale India and
IT Infrastructure No real time link between suppliers-warehouses-retail
Hurdles
Lack of online presence of retailers
retailers - at times they have to pay significantly for
these utilities and these additional costs are passed to
the consumer. Power shortage is a major problem
across India; implications range from absence of cold
chains to the need for alternative power source instal-
lations. The situation in rural India is even worse for
these utilities.
The underdeveloped transport system is another key
issue in smaller cities and towns. Local railway net-
works are also found mainly in the metros and large
cities, and they are usually congested and unsafe at
times. Unofficial estimates suggest freight facilities
need to be quadrupled to meet the entire national
demand.
Basic telecommunications and internet facilities are
reliable solely in metros and large cities - the available IT infrastructure, both urban and rural, to drive retail
infrastructure in rural India is grossly inadequate for
meeting requirements of organized retailers in India.
Among Indian states, Punjab has the best power and
gas, telecom and water infrastructure. Other states are
a l s o
develop-
ing - how-
ever the
Real Estate
Hurdles
pace of
develop-
m e n t
needs to accelerate substantially to meet industry
demand.
Currently, a high level of human involvement in supply
chain increases delays, shortages, and an inability to
meet contracts. Increased use of point of sale systems
will help speed up the consumer check-out process,
allow multiple payment options, minimize human
error and help create a consumer database. Use of IT
infrastructure is still very nascent in India. Only some
urban areas are equipped to use internet as a selling
medium - this prevents international standards from
entering
systems are a
m a j o r
stores deterrent
for large
s c a l e
organized retailing development.
Currently we see global benchmarks much higher than
Indian standards in IT infrastructure. New Zealand has
the highest internet penetration with over 76 per cent
of its population having access to the internet, com-
pared with a 4.5 per cent penetration rate in India.
Similarly US retailers lead the industry in Internet
retailing, with online sales in the US having jumped to
over US$86 billion in 2005 and forecast to reach
US$148 billion by 2010.
Among Indian states, we find that Maharashtra has the
best IT infrastructure, both from the retail industry per-
spective as well as for consumers. Accordingly Mumbai
accounts for a 24 per cent share in India's e-commerce
transactions. Other states need to proactively develop
sector growth.
Generic policy issues
Real estate and taxation hurdles are macro level gener-
ic policy issues that need to be addressed by the CII in
High real estate costs
Archaic and user-unfriendly land laws
Lack of proper city planning models
a broader forum.
Real estate is one of the most critical issues facing
organized retailers in India. This problem is particular-
ly severe in urban areas where a lack of transparency

14 Retail in India: Getting organized to drive growth

 and corrupt practices increases land cost. Also Indian
stamp duty rates at the rate of 5-14 per cent are among
the highest in the world. Countries like the UK have
much lower stamp duties (0-4 per cent) on commercial
property needed for retailing.
Another key issue is Indian land laws that have out-
lived their utility. Obscure zoning laws cause confusion
over use of land for commercial purposes. The brunt is
borne by retailers and traders, as was shown in the
recent sealing drive in Delhi. Further, landowners are
likely to hike up rentals as the pro-tenant Rent Control
Act prevents them from evicting unlawful tenants or
illegal encroachers even after providing sufficient
notice.
Inconsistent octroi and entry tax structure
Another
issue in Taxation Hurdles
metros
and cities
is the lack
of proper
city planning. Inadequate planning coupled with mas-
sive influx of immigrant workers leaves them crippled
for space. Most developed countries have well
planned cities providing ample infrastructure for the
retail trade - this ensures availability of basic space and
utilities for the commercial sector. Compare this to
Delhi where the master plan provides for only 16 per
cent of commercial space, resulting in high speculative
prices and the use of residential properties for com-
mercial activities.
A combination of the above issues drives real estate
costs to as high as 10-20 per cent of net sales, forcing
retailers out of prime locations. Various states are in
different stages of evolution regarding real estate with
no definite best practices across states. Retail forums
need to drive government to remove real estate hur-
dles for development of organized retailing and indus-
try in general.
Even though there is a drive to standardize tax struc-
Fragmented Supply base
Supply Base Underdeveloped supplier relationship management
Hurdles Programs
Inadequate quality assurance processes
tures, currently there is inconsistency among states. So
while most states have abolished octroi and entry tax,
a few states like Karnataka, Maharashtra and Gujarat
still have them. These create delays in transportation
due to long queues at check posts, which is especially
harmful in case of perishable goods. There are other
taxation issues as well. Sales tax issues drive warehous-
ing location choice - many companies have one com-
pany-owned distribution centre in every state to avoid
paying central sales tax.
Similarly, there are issues linked to multiple points of
taxation in India. For example, sales tax is levied at
both central and state level. These prevent optimal
supply chain models being developed and act as
VAT and multiple taxation issues
Large grey market presence
deterrents for organized retailing in India. Similarly
non-uniform VAT regimes across states lead to differ-
ential pricing of goods and multiple taxation formats
for the same goods in different states.
Another issue, particularly in cities, is the presence of a
large grey market. This not only impacts the price of
goods, but also consumer perception, should there be
a quality issue. Very often the price is paid by retailers
and consumer product companies as consumers
switch loyalties.
We believe these are issues the government needs to
intervene and provide solutions to, urgently. Octroi
and entry tax has been abolished by almost all devel-
oped countries including the USA, UK, and EU; while
the EU has also implemented a compulsory common
VAT system among member countries. Political con-
sensus is needed to eradicate taxation hurdles for
industrial development in India.
Specific infra-
structure issues
Supply base, human
resources and limit-
ed consumer
insights are specific
Key issues in the way of retail growth in India 15
 Lack of trained personnel at all levels The inadequate
Inadequate availability of
Human Stringent employment and industry laws skilled person-
Resources nel is a key bot-
Fragmented industry approach to human resources tleneck, with lit-
tle help coming
issues that need to be tackled within the retail sector from government and academic institutions. The prob-
itself. lem is extremely severe in middle management levels
as historically there have been minimal skill develop-
A fragmented supply base prevents economy of scale ment programs. In contrast, the US has over 150 col-
benefits for organized retailing. Vendors are mostly leges and universities, such as Kent State, Indiana
small-time players with no economies of scale due to University, Texas A&M, etc. that offer programmes
SSI advantages, leading to higher cost of manufactur- ranging from associate to masters' degrees in retailing,
ing. Also, a large number of suppliers increase transac- retail management, retail merchandising, retail mar-
tion costs - so to set-up multi-category organized keting, retail sales, and fashion/apparel merchandis-
retailing is a cumbersome task as backend systems ing, developed in collaboration with industry leaders.
need to be developed from scratch. There are also very Another concern shared by employees is the lack of
few long-term contracts with suppliers in India com- adequate entry level training programs and career
pared to developed countries. The lack of supplier rela- progression plans. The problem is very acute in rural
tionship programmes
reduces supplier relia- Lack of detailed region-specific customer data
bility. As a result, retail- Limited
ers in both urban and Consumer Lack of adequate data on consumer spending patterns
rural India need to Insights
keep high inventory (as Absence of a central body to aggregate industry
information
high as two-three
weeks in some cases) due to the high average supply areas, where there is no availability of trained person-
time. Another issue is the lack of standardized quality nel across levels.
assurance programmes across the country. This not
only increases product returns and wastages across Labour laws in India prompt retailers to prefer the par-
the system, but also presents a major credibility issue tial employment model, due to the difficulty in laying
for retailers and consumer product companies. off employees. Retailers are therefore reluctant to
introduce training schedules for employees. This cre-
There is currently no Indian state exhibiting superior ates a vicious circle that can be resolved if labour laws
practices in supply base infrastructure. Large national are made more flexible. Retailers face constraints on
retailers need to develop supplier relationships and the number of working hours, seven day operations,
standardized quality
Lack of industry specific incentives
assurance processes in
conjunction with con- Insufficient
sumer product compa-
Government
nies to enable the sup-
Incentives
ply base becoming a Inconsistent agriculture and fertilizer subsidies
source of competitive
advantage. India can learn from the US example of working time for women - these constraints vary by
National Retail Federation (NRF) that provides certifi- states and are on the whole regressive for the develop-
cation for various retail related aspects, including qual- ment of organized retailing.
ity assurance, skills standards, customer service certifi-
cation, sales certification, management certification The retail industry itself has done little to tackle the
and testing of sites. issue. It is very fragmented and poaching within the

16 Retail in India: Getting organized to drive growth

industry is widespread across levels in an effort to hire
the best talent. This leads to a very high employee
turnover ratio (as high as 50 per cent in some cases)
and workforce movement occurs both within industry
as well as to other industries. Till date there is no signif-
icant effort to attract the best talent through active
participation in undergraduate and graduate institu-
tions.
We believe that retailers need to take the first step to
correct the situation. There is urgent need for large and
mid-size retailers to join hands in developing training
institutes to develop talent.
Limited consumer insights, especially in rural areas,
deter scientific norm setting for organized retailing
and is a competitive disadvantage. There is limited
knowledge about consumers and shoppers across cat-
egories. Advanced countries have a Consumer
Confidence Index that measures consumer sentiment
on various business and environmental issues. In India
there is limited data, implying that stores cannot be
easily customized for the particular local area. There is
inadequate data regarding consumption patterns that
could have led to significant savings in terms of store
operations, category management and merchandising
functions. This is a source of competitive advantage for
mom-and-pop stores, which through experience have
gained good understanding of the local consumer.
Also within the data generated, there is limited gov-
ernment and private sector knowledge transfer of
insights, leading to duplication of efforts nationally
and productivity losses.
Currently no region in India has made any significant
progress in capturing consumer insights relevant to
the retail sector that can be labelled as best practice.
Like human resources, we believe that retailers need to
join hands to develop best practices in generating
standing of the consumer will be a source of competi-
tive advantage for organized retailers who can then
spend dedicated time and resources on winning con-
sumers.
Specific policy issues
Insufficient government incentives and policy hurdles
are issues that need to be taken up by retail associa-
tions and government bodies for speedy and effective
resolution.
The government has still not granted industry status
to retail. This limits industry specific incentives to flow
to the sector. Lack of government incentives reduces
investor interest in the sector; the problem is worse in
rural areas where investment flows are already lower.
Another key issue arises from the fact that the bulk of
retailing in India is in food and grocery. Inconsistent
agriculture and fertilizer subsidies by states lead to
price anomalies and variations for the same product;
this leads to supply chain inefficiencies.
It is imperative that the government should grant
industry status to retail. Some of the world's largest
companies are retailers, Indian companies are also
entering the space and it is appropriate that the gov-
ernment should support them.
As stated earlier, the sector is facing hurdles due to lack
of industry status. Financing from banks does not
come by easily. This leads to extremely high interest
rates for retail, pushing up capital cost, and the prob-
lem is compounded in rural areas where financing is
anyway a cumbersome process. There is also no nodal
government agency to frame policy and provide clear-
ances. The retail sector has been given industry status
in numerous developed countries including the USA,
resulting in the formation of national government-
funded industry bodies.

Lack of industry status for retail Another

issue is
Policy Related
Numerous license, permit and registration requirements t h a t
Hurdles ap proxi-
Farmer and retailer unfriendly APMC Act mately
3 7 - 4 5
consumer insights across regions. With increased com- licenses are required to start a retail operation; this
petition from both domestic and foreign players, causes considerable delays in starting a new store
retailer margins are bound to shrink. Good under- operation. Often, it leads to bad practices, as retailers

Key issues in the way of retail growth in India 17

Fig. 2.3

Criticality of issues across clusters

Cluster Large Small

Metros Towns Rural
Key Issues Cities Cities

Generic infrastructure Underdeveloped Supply Chain P

4 P
4 P
4 0
5 0
5
issues: To be
Inadequate Utilities P
4 P
4 P
4 0
5 5
0
addressed with natural
evolution IT infrastructure hurdles F F K K P

Generic policy issues: Real Estate Hurdles 0

5 0
5 P K F
Macro issues needing
CII intervention Taxation Hurdles 0
5 P
4 P
4 P
4 4
P

Supply Base Hurdles K K K P P

Specific infrastructure
issues: To be tackled Inadequate Human Resources P
4 P
4 P
4 0
5 5
0
within the retail sector
Limited Consumer Insights K K P 0
5 5
0
Specific policy issues: Insufficient Government Incentives F F K K K
Government and
association issues Policy Related Hurdles K K K P P

[ Non Critical Issue 0 Critical Issue

are at the mercy of government officials for clearances.
Within this, different states have different licensing
requirements. Even in the US, licenses for opening
retail operations are governed by individual states -
however the US (and China) follows single window
clearance models which makes it ideal for retailers, and
minimizes time lost in bureaucratic paperwork.
Also, as noted earlier, food and grocery is the largest
category within retailing. The APMC Act has proved a
deterrent in developing efficient practices, both for
the retailer as well as for the farmer. The Act provides a
monopoly status to the state-owned Agricultural
Produce Marketing Committee in the purchase of agri-
cultural produce from farmers. As a result, the supply
chain is lengthened, farmers are not able to realize
favourable prices due to the monopoly and consumers
have to pay higher prices since the APMC's are typical-
ly cartelized. For retailers, it becomes difficult to source
items directly from farmers. They are forced to rely on
intermediaries thus causing systemic inefficiencies.
Along with the long drawn process, there is also no
standardization across states. Retailer associations
need to consistently engage with governments to
bring standardization across policies.
Key issues prioritization
We see that ten key issues hinder development of
retailing in India. However not all issues are of equal
importance across clusters. Fig. 2.3 shows that while
supply chain, utilities, taxation and human resource
hurdles are the most critical issues across all clusters,
real estate and consumer insights are critical cluster
specific issues.
Our analysis shows that while there are issues that
need government intervention across state and cen-
tral levels, retailers need to proactively develop their
own solutions as well. We believe Indian retailers are
currently fragmented - they need to cohesively gener-
ate solutions to retail issues and present their case to
the government, as and when needed.

A look at Indian states suggests there is no best prac- In the next section, we shall highlight specific impera-
tice in license, permit and registration requirements, tives for retailers and the government to accelerate
and the procedure is cumbersome across the country. growth in the retail sector.

18 Retail in India: Getting organized to drive growth

3. Key imperatives
20 Retail in India: Getting organized to drive growth
3. Key imperatives
ased on the study of the Indian retail sector, a
B comprehensive set of actionable recommenda-
tions were developed for the Central govern-
ment, State governments and the Retail Industry in
India. These recommendations cover both infrastruc-
ture as well as policy-related issues pertaining to the
retail sector in India.
Depending on their relative importance, the initiatives
have been prioritized so as to ensure that the most
critical ones are taken up by the concerned stakehold-
er at the earliest.
Imperatives for the Retail Industry
The Indian retail industry needs to act as a unified
body and drive the following initiatives with immedi-
ate effect to facilitate the development of the retail
sector in India:
 Invest in human resource development
 Develop mechanisms for understanding consumer
behavior and satisfying customer needs
 Improve supply chain infrastructure
All the above mentioned initiatives have been accord-
ed the highest priority and should be taken up togeth-
er in right earnest by the retail industry.
Invest in human resource development
The retail industry should actively work towards devel-
oping training programs, both in-house and in associ-
ation with schools, to provide training on retail man-
agement, operations, merchandising, marketing, sales,
etc. They should actively participate in the design of
customized retailing courses and also in their delivery
in classrooms by teaching some classes. For example,
the US has over 150 colleges and universities, such as
Texas A&M, Indiana University, etc. that offer pro-
grammes ranging from associate to masters' degrees
in retailing, developed in collaboration with industry
leaders in retail.
At the same time, it should also work towards develop-
ing a trained middle management layer by providing
effective career guidance to entry level managers. This
is aptly supported by India's score on A.T. Kearney's
Retail Labour Index (Table 3.1), which is just average,
reflecting an inadequate availability of required work-
force and increasing salary levels. Appropriate career
path and personnel management techniques need to
be adopted to ensure a steady supply of senior man-
agers from within the company by honing skills at jun-
ior levels. Retailers should widen the net of the quali-
fied labour pool, by also looking at people with rele-
vant functional experience in similar sectors but not
necessarily from retail.
In terms of criticality, both these initiatives are impor-
tant in today's context considering that India does not
have a well developed pool of trained retail executives
and there aren't many specialized programmes on
retail management in most Indian universities.
Develop mechanisms for understanding
consumer behaviour and satisfying cus-
tomer needs
The retail industry needs to better understand the
Indian customer and his or her behaviour. Retailers
should together develop a fact-base on Indian cus-
tomer trends across regions and city clusters that
should be updated at regular frequencies so that it can
Key imperatives 21
Table 3.1

A.T Kearney Retail Labor Index and India’s Rank

2006 Retail Talent Talent Labor

2006 GDRI Country Retail Labor
Labor Index Availability Development Economies
Rank Index Score
Rank Weight 50% 30% 20%
1 19 Slovakia 100 79 77 100
2 14 Malaysia 66 96 100 75
3 8 Slovenia 69 62 65 66
4 7 Latvia 61 65 82 65
5 23 Hungary 61 64 86 65
6 26 Lithuania 62 64 78 64
7 22 Romania 50 50 81 50
8 1 India 43 100 28 50
9 4 Ukraine 55 49 59 49
10 5 China 48 55 70 48
11 9 Croatia 56 29 58 43
12 27 Brazil 34 80 45 40
13 2 Russia 54 6 83 39
14 15 Macedonia 61 10 44 37
15 18 Bulgaria 54 0 69 34

0 = Low Talent 0 = Low Talent

Legend 0 = High Cost of Labor
Availability Development
100 = Low Cost of
100 = High Talent 100 = High Talent
Labor
Availability Availability

Source: World Bank “Doing Business”, 2005 World Economic Forum, “Global Competitiveness Report 2005-06”, International Labor
Organization’s LABORSTA Database, A.T. Kearney

serve as a common starting point for customer needs
analysis (Fig. 3.1). Further, specific customer insights
should be gleaned from PoS data analysis, CRM tools
and analytics by retailers, so as to be the basis for pro-
viding customers with an ideal shopping experience.
Based on customer data and analysis, retailers should
segment customers and target products/ service offer-
ings to satisfy their specific needs. This will ensure opti-
mal utilization of investments and resources in meet-
ing actual customer needs leading to enhanced pro-
ductivity and cost savings and improved RoIs, as
opposed to adopting a generic and broad-based
approach that attempts to meet all customer require-
ments and satisfies none.
Indian retailers should also take the lead in setting up
a Consumer Confidence Index similar to the ones in
the US, China and Brazil, to track consumer behaviour
and spending patterns. The index should then be ana-
lyzed using scientific techniques and the results can be
used to guide pricing and promotions-related deci-
sions and other category management issues.
Retailers should also explore appropriate store man-
agement practices to enhance the customer experi-
ence and induce further spend by better presentation,
good product assortment and availability. Adopting
category management techniques in handling specif-
ic product categories in terms of packaging, pricing,
demand fulfilment and replenishment will also serve
to present a positive shopping outlook to consumers,
resulting in greater sales.
Improve on supply chain infrastructure
The current transport infrastructure in terms of road
and rail network is being improved but an accelerated
track should be taken to realize the benefits of having
streamlined supply chain - fresher products and
reduced logistics costs leading to increased sales and
better margins. For example, in the US, 75 per cent of
the national road budget is spent in upkeep and main-
tenance of roads as travel-worthy, as opposed to 50
per cent for India. Similarly, rail capacity utilization is
better in the US with 3.3 kilo tons per wagon per year
as versus 2.3 kilo tons per wagon per year for India. The
retail industry should take it upon itself to develop the
stakeholders in the logistics process - transport com-
panies, warehouse providers and build long-term rela-
tions with them to leverage the benefits of a supply
chain running like clockwork.

22 Retail in India: Getting organized to drive growth

More relevant for retailers is the development of a sus-
tainable cold chain infrastructure. An effective cold
storage infrastructure would be extremely beneficial
for the overall retail sector and would be helpful in cut-
ting down supply chain losses.
A.T. Kearney sees the greatest opportunity to capture
these benefits through an industry-sponsored consor-
tium. The consortium should promote the entry and
growth of specialized companies providing refrigerat-
ed warehousing and cold storage transportation, fol-
lowing the US and UK model. The industry leaders
should also lobby with the government to allow glob-
al cold storage majors into India or set up their own
consolidated cold storage network.
Following this, retailers can tie up with suitable cold
storage transportation providers and invest in and fos-
ter the consortium to create a step-change in how per-
ishable items are transported in India today. A mutual
commitment to further the cause of retail in India,
some investment, and an effectively managed launch
can in a short amount of time create a much-needed
Fig. 3.1
Illustrative customer insight analysis - Market clusters in India
North India: 30 – 35%
of total market;
Key States: Haryana,
Punjab, Uttar Pradesh
West India: 25 – 30% of
total market;
Key States: Maharashtra,
Gujarat, Madhya Pradesh
Legend
Population Density
(people / sq km)
< 100
100 – 300
300 – 500
> 500
Source: Census 2001 & A.T. Kearney Analysis
cold chain and deliver the much desired value to the
consumer.
Imperatives for the Government
Retail is the single largest sector in India at USD 320 bn
and has strongly emerged as a leading economic
transformation driver. We all know that only 6 per cent
penetration of organized retail clearly signifies a huge
opportunity in India - and organized retail is expected
to explode at close to 35 per cent growth rates for the
next few years, even without major structural changes
in the economy.
What does this mean for Indian Governments at both
state and central levels? It calls for a strong recognition
and support to the fast-growing necessities of this sec-
tor for sustaining growth. Governments at the centre
and states need to engage with the sector and utilize
its potential for overall economic development. This
sector begins and ends with the consumer.
Governments and economies that focus on the con-
sumer are the ones that will derive maximum benefits
from the growth opportunity in Indian retailing.
East India: 10 – 15% of
total market;
Key States: West
Bengal, Orissa, Bihar
South India: 15 – 20% of
total market;
Key States: Kerala, Tamil
Nadu, Andhra Pradesh
Key imperatives 23
Before laying-out the action plan for Indian State and
Central Governments, we analysed strategies adopted
by other governments - South Africa and China. For
South Africa it was observed that significant positive
changes in retail sales and in overall economy were
propelled by substantial tax reductions and a new
Labour Relations Act - shown in Figure 3.2. These
reforms enabled retail sector to become the largest
employment sector in South Africa, with a workforce
of over three million individuals - shown in Figure 3.3.
China's government played a vital role in promoting
development of organized retail, primarily through
FDI. The number of convenience stores grew from 899

Fig. 3.2

Changes in policy led to retail growth and growth in related sectors in South Africa

Policy changes throughout the 1990s catalyzed growth in the retail sector which in turn had its
impact on agriculture and the construction sector amongst others

Impact on the Economy

Agricultural Produce GDP vs. Retail Sales Construction Industry
20
R 53.3 b 15 R 100.4 b
10
R 38.8 b
5
0
-5
-10
R 19.7 b
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005

1993 2002 1994 2004

— % change in GDP — % change in retail sales

• Repeal of the agro-marketing policies allowed retailers to source products directly from producers and both sectors benefited
greatly; as 55% of supermarkets sales come in food and grocery
• Demand for retail real estate boomed as a result of the growth in the retail sector and favourable economic conditions
• A look at the pattern of movement in retail sales and GDP shows that while the impact is greater on retail sales, it is a leading
variable and shows the impact that an increase in sales has on the economy in the future
Sources: Statistics South Africa, Food and Agriculture Organization of the UN, A.T. Kearney Research

Fig. 3.3

South Africa Retail sector - employment growth in sector

3,500

3,000 CAGR: 7.5%

2,500

2,000

1,500

1,000

500

0
1994 1995 1996 1997 2001 2002 2003 2004 2005
Agriculture Manufacturing Retailing Finance
Employment in the retail sector grew at a CAGR of 7.5% just lower than employment in Finance and Construction

In 1994 retailing accounted for 17.2% of all employment; however by 2005 the
retail sector accounted for with 24.6% of all employment in South Africa

Sources:Statistics South Africa, A.T. Kearney Research

24 Retail in India: Getting organized to drive growth

Fig. 3.4

China's policy intervention on FDI has driven retail sector growth

Retail Sales grew at a CAGR of 19.8% for the next five years after the introduction of FDI in 1992

Retail Sales (USD bn)

100% FDI allowed Growth of Modern Retail Formats
600 All major restrictions removed

Foreign shareholding in 2000 2004

500 JV could exceed 50%
Convenience
Provincial and regional 899 7,371
Stores
capitals opened for FDI
400 FDI CAP: 49% Supermarkets 1,690 4,654

Hypermarkets 104 705

300 FDI allowed in 11 cities with
minority stake in JVs Other non-
358 738
FDI CAP: 26% food formats
200

Organized retail which

100 Sales trend line had there been accounts for 20% of
no policy intervention China’s total retail sales is
expected to go up with
0 deregulation
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Sources: Economist Intelligence Unit, A.T. Kearney analysis

in the year 2000 to 7,371 in 2004. And, in parallel,
supermarkets grew from 1,690 to 4,654 and hypermar-
kets from 104 to 705. It is shown in Fig. 3.4.
The strategy in the Indian context has been articulated
in a set of key initiatives that need to be driven by the
central and state governments in order to facilitate the
growth of the retail sector in India. The initiatives have
been separated, based on whether they fall under the
ambit of the central or the state government.
Central Government
The Central Government is a key stakeholder in the
development of the retail sector in India. It has to
review some of its existing policies to ensure that all
bottlenecks in the path of growth of the retail sector
are removed and an appropriate environment is pro-
vided to facilitate the growth of the Indian retail sector.
The Central Government needs to take up the follow-
ing initiatives to achieve this goal:
 Grant industry status to the retail sector
 Establish minimum quality assurance standards
 Reformulate the Small Scale Industries policy
The first two initiatives have been accorded the high-
est priority while the third initiative has been given
medium priority. As much has been written and said
about FDI in the retail sector, this report has not delved
into its implications. FDI in retail has become a political
issue and will require political strength to pass it
through.
Grant industry status to the retail sector
Granting industry status to the retail sector should be
the first initiative on the part of the Central
Government to ensure growth of the retail sector in
the country. A regulatory body, on the lines of TRAI -
the telecom regulator, should be set up to legislate on
industry norms, tax enforcement and consumer pro-
tection.
A related step would be to ease up bank financing for
the sector, including insurance norms that do not exist
currently.
This action would facilitate financing options that
would enable the retail industry to expand and grow
rapidly. It would also result in a much-needed nodal
agency for business aspirants in the retail space that will
help in simplifying the processes and procedures. Going
forward, this step is extremely critical in strengthening
the sector's competitiveness and building a platform for
the growth the retail industry promises.

Key imperatives 25
Establish minimum quality assurance
standards
Another key step towards ensuring the development
of retail sector in India would be to mandate compul-
sory assurance for product and service quality. This
would help in establishing minimum quality assurance
standards for the entire industry.
The Central Government should also facilitate setting
up a system to provide certification on quality assur-
ance, skills standards, customer service, etc., to ensure
minimum best practices across the industry.
The element of quality is extremely crucial for the
future of the current retail boom in India. It would be
essential for the retail industry to spruce up quality
standards as they grow at a rapid pace. As and when
the FDI opens up, the challenge to meet world-class
quality standards in order to sustain the exhilarating
growth would only get tougher. Although the players
need to gear up now, the key to implementation of
'minimum quality assurance standards' lies with the
Central Government, and hence, the Government
should respond to this need, proactively.
Reformulate Small Scale Industries policy
The Central Government should periodically review its
small-scale industry policy and gradually remove
reservations on SSI manufacturing of 506 items to pro-
mote consolidation of supply base.
The government should also study the applicability of
China's TVE structure for India. TVEs or Township and
Village Enterprises are a form of rural cooperatives in
China that are partly subsidized by the government.
Although the SSI policy has been formulated to guard
the interest of small players in the industry, it's time we
looked at the long list of 506 items for serious revision,
urgently. Otherwise this policy would act as an unnec-
essary safeguard for categories which would actually
benefit from healthy competition, and thus, would
provide customers with more choice, better products
and better price.
State Governments
The respective state governments in various states
within India have a key role to play in the development
of the retail sector in the country, as many of the key
26 Retail in India: Getting organized to drive growth
policy formulation decisions fall in their domain. These
policy decisions will play a vital role in significantly eas-
ing the constraints under which the retail sector is cur-
rently operating in various Indian states. The state gov-
ernments need to take up the following initiatives to
facilitate the development of the Indian retail sector:
 Amend labour laws
 Undertake real estate reforms
 Undertake taxation reforms
 Amend state level policies to simplify retail opera-
tions set-up and supply chain practices
 Improve logistics and utilities infrastructure
 Develop IT infrastructure
Of the above mentioned initiatives, the first four have
been accorded the highest priority while the last two
have been given medium priority.
Amend labour laws
The government should amend the Shops and
Establishment Act to allow flexibility in working hours,
including seven-day operation of stores. It should also
simplify hiring / firing rules to promote at-will employ-
ment and performance measurement systems.
It is an area that directly controls industry's ability to
respond to growth opportunities, and hence, it
requires a transformation that recognizes the growth
opportunity and its impact on the country's economy.
Currently, the industry is struggling to capitalize on the
growth prospects and is unable to maximize its
resource potential. In an environment where the sec-
tor is leading the country's economic growth, this sce-
nario is alarming and should prompt the authorities to
urgently make the necessary amendments.
Undertake real estate reforms
A key initiative to be undertaken by the respective
state governments is to bring about reforms in the real
estate sector. This would entail reforming land use reg-
ulations, including Urban Land Control Ceiling and
Regulation Act and Rent Control Act to simplify usage
and increase transparency for retail operations in rent-
ing places and utilization of those premises.
It would also require the state governments to reduce
peak stamp duty on commercial property to 2 per cent
to promote healthy registration practices. There is def-
initely a case for reduction of stamp duty when one
compares that even the lowest Indian stamp duty is 5
per cent, whereas in countries like the UK, the stamp
duty for retail property ranges from 0 to 4 per cent.
Another step for easing registrations would be to com-
puterize land records so as to allow visibility of all reg-
istrations, thus clearing any potential issues in land
ownership and legality.
The governments should also undertake detailed city
planning exercises, with adequate commercial space
allocation. Currently, Indian cities lag behind in allocat-
ing dedicated space for commercial and retail activi-
ties. For example, in Delhi the future master-plan
keeps aside only 16 per cent of planned space for com-
mercial purposes, as compared to over 20 per cent in
markets like the UK and Hong Kong. Thus the govern-
ment would be taking a step in the right direction and
provide an incentive to retailers to set up shop by allo-
cating a substantial portion of city space for retail pur-
pose.
Undertake taxation reforms
The state governments should implement a uniform
VAT policy, and deploy resources to increase collection
efficiency. Also, octroi and entry tax should be abol-
ished across all states.
State level policies should be amended to simplify
retail operations set-up and supply chain practices.
They should rationalize license requirements from the
existing 37-45 licenses to moderate levels, reduce con-
tact points and permit license reuse; this will help
faster start-up of retail operations and release blocked
capital.
They should also amend the APMC act and adopt the
model act suggested by the Centre; this will improve
agricultural product pricing by allowing efficient mar-
ket driven practices.
The Government urgently needs to recognize the fact
that players in the industry leading the country's eco-
nomic transformation are plagued with different tax
structures across various states, which restricts them
from being competitive in their own country.
Simplification of tax structure and implementation of a
uniform VAT policy will not only help the retail players
achieve higher levels of competitiveness, but will also
have the government at state and central levels expe-
rience a next-level growth and transformation that will
lead India into a 'Developed Nations' league.
Improve logistics and utilities infrastruc-
ture
The state governments should consider the public-pri-
vate partnership model for road and rail infrastructure,
including construction and maintenance, thus sharing
the responsibility of improving logistics and infrastruc-
ture with the private sector. They should also increase
power generation capacity and transmission capabili-
ty in their respective states, thus creating a conducive
environment for businesses to flourish.
Another area of focus should be towards modernizing
airports and improving their freight handling capabili-
ty. Other infrastructure improvement avenues such as
promoting rain water harvesting and developing plans
for efficient water utilization should also be explored.
Infrastructure in India is a far cry from what one of the
world's fastest growing economies should ideally have.
And with the pace at which the retail industry in India
is growing, infrastructure issues are bound to pose a
significant challenge to growth prospects. The state
governments have no option but to make sincere
efforts towards improving the logistics and utilities
infrastructure. State governments' role will be extreme-
ly critical to support growth over the next few years.
Develop IT infrastructure
Developing IT infrastructure in their respective states
should be another area of priority for the state govern-
ments. This would entail increasing internet penetra-
tion and reducing access costs; developing a model
similar to the telecom sector.
The state governments should also promote real time
linkages throughout the retail supply chain to mini-
mize wastages and support faster decision-making.
It will not only ensure a much greater degree of effec-
tiveness and efficiency in processes, but will also take
the advantages and benefits of the retail boom to the
interiors of India. While the industry plays its part of
achieving higher levels of growth and competitive-
ness, Governments should make it accessible and
available to the masses - the impact will be positive
and twofold - firstly, an increase in the standard of liv-
Key imperatives 27
ing of the rural population, and secondly, the retail
industry will become even more competitive when it
has a broader market space.
Initiatives for select states
A series of initiatives has been proposed for seven
Indian states and Union Territories, (Andhra Pradesh,
Chandigarh, Delhi, Maharashtra, Tamil Nadu and West
Bengal) to facilitate the development of retail in these
regions. The key stakeholders responsible for each of
these initiatives have also been identified.
The initiatives have been proposed at the state level
rather than at the cluster level as many of the policies
relevant to retailing are typically formulated at the
state level.
Initiatives for Maharashtra
The following initiatives have been proposed for
Maharashtra to facilitate the growth of retail (See Fig.
3.5).
Retail industry driven initiatives
 Generating Consumer Insights - Urgent need to
develop a national Consumer Confidence Index,
similar to that used in the United States, China and
Brazil.
Central government driven initiatives
 Policy Framework Initiatives - Grant industry status
to retail. Reduce license requirements for starting
retail operations. Amend APMC Act to allow con-
tract farming. The policy framework initiatives
would also require the involvement of the state
government in some cases.
State government driven initiatives
 Supply Chain Development - Expand rail network
to increase reach and density, and increase capaci-
ty utilization per wagon. Also expand cold storage
facilities with the help of the retail industry to meet
the growing demand.
 Real Estate Reform - Urgent reform needed in the
Urban Land Ceiling and Regulation Act. The state
also needs to speed up computerization of land
records and online availability.
 Tax Regime Reform - Repeal octroi tax immedi-
ately to unite national markets.
 Utility Services Development - Urgent need to
address the power shortage in the state.
Similarly, initiatives have been suggested for the other
six states of the sample set. These initiatives have been
attached in Appendix under section 'Initiatives for
select states'.

Fig. 3.5

Maharashtra: Initiatives

Development Area Key Recommendations Ownership

1 • Expand rail network to increase reach and density, and State government
Supply Chain increase capacity utilization per wagon
Development and Retail industry
• Expand cold storage facilities to meet greater need

• Urgent reform needed in the Urban Land Ceiling and

2 Regulation Act
Real Estate Reform State government
• The state needs to speed up computerization of land records
and online availability

3 Generating • Urgent need to develop a Consumer Confidence Index

Consumer Insights Retail industry
• similar to that used in the United States, China or Brazil

4 Policy Framework • Grant industry status to retail Central and State

• Reduce license requirements for starting retail operations
Initiatives government
• Amend APMC Act to allow for contract farming

5
Tax Regime Reform • Repealoctroitax immediately to unite national markets State government

6 Utility Services
Development • Urgent need to address the power shortage in the state State government

28 Retail in India: Getting organized to drive growth

In summary, the belief is that, when all the initiatives
highlighted above are taken on board and implement-
ed by the respective stakeholders at various levels,
there is bound to be significant positive impact on the
Indian retail sector.

Key imperatives 29
30 Retail in India: Getting organized to drive growth
 4. Conclusion – The impact of
recommended changes will be significant
32 Retail in India: Getting organized to drive growth
4. Conclusion – The impact of recommended
changes will be significant
ome of the recommendations coming out of this Additionally and perhaps more importantly, there is an

S study are already on the path of implementation.

Maharashtra recently announced plans to phase
out Octroi charges, a few companies are already team-
ing up with education institutes, and some labour laws
are being modified to be more supportive of the retail
industry. Other changes will also come over the due
course of the industry's evolution. However, if retailers
want to succeed in today and tomorrow's environ-
ment, they will need to continuously focus on generat-
ing more value for the consumer. And until some of
the core fixes are implemented (supply chain, con-
sumer insight, etc.), much of that value is being lost in
the system.
opportunity for a step-change in the trajectory of retail
sales growth. As a consequence of all these founda-
tional issues being addressed, A.T. Kearney projects a
11-12 % CAGR (up from a historic 7-8%), which will
accelerate sales to $504 billion by the year 2010 (Fig.
4.1). This will add approximately, USD 80 billion in
incremental revenues over the current trajectory.
The future for organized retail in India is a bright one.
The demographics, the sense of optimism and the
deep rooted entrepreneurial culture are ready ingredi-
ents for success.

Fig. 4.1

Retail Growth Projections

India Total Retail Market Size, (USD Billion)

600
CAGR: 11-12%
$504 bn Revised Trajectory:
A.T. Kearney Projection
500
$421 bn
Current Trajectory
CAGR: 7-8%
400
$321 bn
300 $238 bn

200

100

0
2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E

Source: A.T. Kearney Analysis

Conclusion – The impact of recommended changes will be significant 33

The retail industry needs to get organized and drive its
own destiny. The government needs to be lobbied
with, to help create a conducive environment so that
the latent entrepreneurial spirit can get unleashed and
ultimately value can be delivered to consumers who
will push their shopping carts and participate actively
in this great retail boom.

34 Retail in India: Getting organized to drive growth