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Will Retailers Survive the E-commerce Onslaught?

Monday, May 18, 2015
By Mayura Shanbaug

With 100% foreign direct investment (FDI) in multi-brand retail not on the horizon and e-commerce players throwing up tough competition goaded by venture capitalists swelling pockets, Indian retailers have no choice but to consolidate. The recent Bharati-Future merger and merger of two fashion apparel businesses by the Aditya Birla group is seen in the light of an advance survival strategy against rising costs and growing competition majorly by online retailers.

It is not that the pie is growing small, in fact the Indian consumer story holds true. According to a new report, India's retail market is expected to double to $1 trillion by 2020 from $600 billion now driven by income growth and more urbanization. While the overall retail market will grow at 12% per annum, the modern trade (hypermarkets & supermarkets) will grow twice as fast at 20% per annum, and traditional trade (Mom n Pop stores) at 10%, says a Boston Consulting Group and Retailers Association of India report titled Retail 2020: Retrospect, Reinvent, Rewrite.

Modern trade is expected to grow three times to $180 billion in 2020 from $60 billion in 2015 and e-commerce at an even faster clip to quadruple in the same time to become a $60-70 billion market, said the report.

By 2020, average household income will increase three times to $18,448 from $6393 in 2010. Moreover, urbanization will increase to 40% from 31% and over 200 million households will be nuclear, representing a 25-50% higher consumption per capita spend. Also, attitudinal shifts will be seen as 75% of the population will belong to generation I, that is they were below 14 years of age when the economy started opening and hence will have higher consumption levels, said the report.

However, the rapid growth of the e-commerce cannot be ignored. Everybody from Bhopal to Dehradun wants to buy everything from tickets to cars online. This phenomenal growth is what got the traders thinking of multiple ways to enhance their business. Every brand from Puma to Vero Moda now have an online presence along with being present at all the retailers. The retailers still do not have multi-channel presence that is what is making them lose against their online counterparts like Amazon & Flipkart.

As per the report, brick and mortar retail challenges remain. For instance, the sales per square foot at Indian retail stores at Rs. 1,500 - 2,000 per square foot is much lower than the international average of Rs. 8,000 - 12,000 per sq. ft. Even the gross margins are lower in India by 7-8% than the international standards and the rentals are higher by 1.5 - 3% on an average, added the report.

"E-commerce is driving thoughts of customers and retailers but that does not mean brick and mortar channel is going to be killed. Retailers will have to innovate their business model to reach the customers and to meet their aspirations," said Adesh Gupta, Chairman, CII Retail 2015 and Promoter, Liberty Group.

"It is expected that India's e-commerce market will grow from USD 2.9 billion in 2013 to over USD 100 billion by 2020...The online retail can reach smaller cities much better than offline channel, giving it a bigger advantage. Collaboration between both organized and unorganized retail companies could be the real game changer," he added.

Echoing similar sentiments, Somany Ceramics CMD Shreekant Somany said: "E-commerce is probably creating the biggest disruption in the retail industry and this trend will continue in the years to come...Partnering is the best way out."

Kishore Biyani, Founder & CEO of large Indian retailer Future Group while merging his $2.4 billion in revenues with Bharti said that consolidation is a logical step in the retail sector and the merged will grow and bring cost and supply chain efficiencies through scale.  

That is what experts believe that in absence of competition from foreign players Indian retailers have a chance to scale up and grow. According to a report titled 'The Indian Retail Medley' while organized and online retail will grow multi-fold, unorganized retail will continue to dominate the sector.

Retail Body Pitches For Level-Playing Field On FDI
The Retailers Association of India (RAI) which railed against the government's invitation for stakeholders' consultation meeting on FDI policy in e-commerce feels that retail business should not be classified based on channels like offline stores and online. The industry body and retailers stayed away from the meeting.

"There should be a level-playing field in respect of FDI across different retail formats. It's our concern that although the outcome of e-commerce and retail in physical world is the same, the treatment meted out by the government of India to the two players in the same market is inequitable," RAI said in a statement.

"The double standard of the government in allowing e-commerce with foreign investment in India while not allowing multi-brand retail in the physical world is discriminatory," the statement read, quoting RAI CEO Kumar Rajagopalan as saying.

At present, 100% FDI is allowed only in business-to-business (B2B) e-commerce and not in retail segment. Global retail giants like Amazon and the domestic industry want the government to relax the foreign investment norms in the e-commerce space.

Issues which came up for discussions include pros and cons of permitting foreign players in the e-commerce sector and allowing multi-national firms to do e-tailing, an industry source said. The industry officials said liberalizing the policy in the sector would help boost domestic manufacturing, particularly the interests of MSME entrepreneurs, and attract investments.

However, on the flip side, it may adversely affect the small brick-and-mortar shops as big companies may go for predatory pricing, the official added. Global e-commerce players are looking at India because the country is one of the fastest growing e-commerce markets in Asia-Pacific, along with China.

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