India and the Big Retailers - Research Paper Example

? India and the Big Retailers India and the Big Retailers This paper discusses about the recently debated question whether the international big retailers should be allowed to operate and expand in the Indian market or not? The paper briefly describes the retail sector in India and discusses about its reasons of growth. Later we will highlight the importance of retail sector and how the international big retailers can play an important role in India’s economy and what threats they can impose for the local competition. Introduction: After the agricultural industry, retailing is the largest private and employing industry in India. This sector has a major contribution in India’s economy that is 10% of GDP and 6-7% of employment is derived from this sector. Much reorganization is seen in this sector in the past decade from small unorganized family owned retailers developed to organized retailing mainly by liberalization of the economy, expansion in consumerism, investment in retail infrastructure, entrance of many foreign retailers through cash and carry, franchising, local manufacturing, test marketing etc. India has been seen as a very attractive destination for the flow of FDIs and many foreign companies are willing to benefit from the advantages India has to offer. (MUKHERJEE & PATEL. 2005) On the other hand, resistance and protest against the entrance of the FDIs in retailing in India have been seen by the local trading associations and other stakeholders. Due to entrance of foreign competition in the retail market local trade is affected too and it has an effect on the employment, prices, technology, and efficiencies etc in Indian economy and market which have been the topic of debate recently. (MUKHERJEE & PATEL. 2005; GURUSWAM, SHARMA, MOHANTY, & KORAH. 2005) India and the Retail Industry: There are many different types of retail formats which include super stores/ hyper markets, departmental stores, specialty chains, discount stores, wholesale cash-and-carry and convenience store etc. Our study will focus on the super stores/ hyper stores which are large retail markets that covers an area of around 20,000 sq. feet plus. The big names in these chains are Tesco (UK), Wal-Mart (USA), Carrefour (France), Metro (Germany) etc. These super markets are usually situated main markets, malls and localities and due to economies of scale achieved in the purchasing and logistics, they offer highly competitive prices to the customers. The key local players in this segment in India are Nilgiris, FoodWorld, Big Baazar, and Subhiksha, these are comparatively smaller in sizes as compared to international super markets covering around an area of 3,000 to 4,000 sq. feet which is not even the half of what international super markets offer. (MUKHERJEE & PATEL. 2005; HOLLENSEN. 2011) Most of the retail stores internationally have reached at saturation points which has made them look towards the emerging markets like India, many of them has entered and many plans the expansion. Though after liberalization it isn’t easy for the international chains to enter Indian economy because foreign retailers are restricted to open single brand store with 51% ownership and to operate as a wholesaler they have to operate as 100%. The first one to enter Indian market was Metro Group of Germany which established with a cash and carry format in 2003. Other big names Wal-Mart of USA and Tesco from UK also followed with their wholesale retail division. Apart from these giant wholesale retail companies other big names in retail like Nike, ZARA and Adidas established themselves in the Indian market. (MORSCHETT ET AL.2011; PLUNKETT.2008) Growth in the Retail Industry: In the past few years immense growth is seen in the retail sector due to liberalization in the 1990s when reduction in custom duties and a shift from quota to tariff based system. Due to the removal of barriers for entrance in the market, many multinationals entered India. Because of the increase in product base in Indian markets the retailers have better options of sourcing and margins are higher. India due to its advantage of availability of cheap labour and easy availability of raw material is considered as an attractive country to invest and many companies which include Wal-Mart are sourcing their products from India. Some of the companies have opened retail outlets while others are working on franchising option and supplying of goods. (MUKHERJEE & PATEL. 2005; AHLSTROM & BRUTON. 2009) Demand in the Indian Markets and its Reasons: India has undergone many changes in the demand side of the products. An increase in the levels of incomes of different classes of people have been seen in India which have increased the standards of living ultimately which has increased the demand of consumer goods of high quality and high price. A drastic change in the taste and fashion sense have also been seen in the Indian market due to the overseas exposure given to them recently which have made them brand conscious and raised their aspirations and demand for shopping. The big retail chains provide much variety of products as compared to the stores in the local markets and thus can attract more customers of high level income who had to go abroad for shopping. Further the demographic and socio economic factors add to the scenario of increased demand of these stores as the traditional joint families system is replaced by the nuclear families and women are now more empowered and actively participate in decision making, for their convenience the super store/hypermarkets are the best choice to shop where they can purchase high quality products at reasonable prices. India has a large number of young population, which is much higher than present in any country of the world makes India an attractive market to invest due to high fashion sense, taste and demand of such products. On the other hand immense growth is seen in the urbanization of society in India where towns are converting into cities which is expected to increase till 40% in 2020. An up gradation in the infrastructure and advancements in technology and communication have also been marked in Indian society, economy and markets. (MUKHERJEE & PATEL. 2005; MADAAN. 2009) Impact on Employment: Employment in this matter has been a topic for debate for many in the retail sector. In Wal-Mart employs 1.8 million of workforce all over the world, out of which in India its 7-8% and in USA it is 17% of the total workforce. Therefore there seems to be a lot of opportunity of employment generation in India which can be achieved due to expansion of these retail chains in India. On the other hand a strong retail sector can generate millions of other jobs on the back end in order to supply to the retail sector for e.g. hospitality, manufacturing enterprises, food processing etc. (MADAAN. 2009) High Tax Collection: With the expansion of retail sector and entrance of international players in Indian markets there can be high level of tax collections in this sector. The revenues of government will increase due to set up of organized retailing by increase in the number of registered tax payer retailers, increase in the efficiency in the tax collections and payment of operational and entrance fees like tariffs, custom duties etc by the foreign players in the Indian market. (MADAAN. 2009) Impact on Infrastructure and Other Industries: Due to the establishment and expansion of foreign retailers in Indian markets higher productivity and economies of scale can be achieved. It was summarized in a recent study that with every spending of Rs. 100 in urban areas the rural income also increases by Rs. 39. Due to integration of both front and back ends, the supply chain can be strengthened which can benefit the people in the rural areas. Due to the investment of funds by the big international retailers technological advancements can take place in the at every step of value chain including harvesting, processing, storing, warehousing until it reaches the final consumer which can greatly benefit the infrastructure and others in the supply chain. The presence of international market chains can help improve local manufacturers. The local vendors can improve their practices of working by working closely with the international chains. It is important to note that larger retail chains are already procuring from India which includes Wal-Mart that sources around USD 1 billion, Tesco USD 100 million. The experiences of working with the MNC retailers can help the local suppliers in gaining the experience which can further help them to establish large stores of their own for e.g. SSIPL Retail Ltd. Initiated as a contract retailer of brands and later on started retailing its own products too. (MADAAN. 2009) Due to inefficiency in supply chain international chains like Wal-Mart has invested in the Indian infrastructure to deal with the inefficiencies in the system. For e.g. Wal-Mart directly purchases perishable items like fruits and vegetables, they have constructed toilets to prevent soil contamination and have educated farmers about the usage of high quality, low cost products and adopt such practices. They have further built distribution centers to supply products to the retail outlets. Retailers like Metro Group of Germany have started with purchasing with the suppliers directly and has made efforts to convince Indian Government and states government to allow the retailers to deal with the suppliers directly, which has all caused improvements in the structure. (MORSCHETT ET AL.2011) Impact on Economy: The operations of large retail stores have kept the level of inflation low throughout the world. In USA high leverage players like Wal-Mart enjoys vis-a-vis manufacturers have helped to keep the inflation level low. Large retailers are able to offer competitive prices due to their economies of scales and global efficient practices which can reduce prices of commodities. On the other hand it even forces other local competitors to offer such prices in order to compete. (MADAAN. 2009) Criticism: Despite of many advantages of operating in India as a big retail stores not many large stores had shown active interest in these markets until recently. Many critics commented that India is particularly raw territory for retail chain stores; there can be large time consuming issues related to logistics, lack of branding culture in India, expensive real estate costs and lack of capital from the financial institutions. On the other hand many concerns had been raised about the trade unions, political parties and other commentators regarding the expansion and operations of these retail chains in India. It is believed that these chains trigger severe competition in the market and due to their large global presence and highly efficient practices they can win the market making the local Indian retailers and suppliers lose which is unfair to the natives. (CHANDRA, RAU, & RYANS. 2002) Conclusion Despite of some socio-political problems and sensitivities present in Indian scenario, the large international retailers should be allowed to operate in India due to many advantages they can offer. These would not only provide employment and boost economy but collectively will be able to develop Indian industries for the competition in the international market in the long run. These big markets when will be allowed to expand and operate in India will provide benefits in many ways, to the Indian government they can be a means of strengthening their relations with the home country they belong to thus fostering international relations. On the other hand economically they increase FDIs in India which is a positive in any economy. Economically they can also benefit by providing employment opportunities in India and utilizing Indian resources in a much better way due to advanced technology they possess. They can further provide a wide range of variety and imported products to the highly demanding Indian markets and its people whose fashion awareness and demand of international products have increased over time. They can even help the Indian government and people in developing the infrastructure by investing in the areas which need attention and development like transportation, communication etc. which can benefit Indian economy, people and government in many ways. For the problems related to their operations that can affect the local retailers and affect the business of local retailer who won’t be able to compete with such giants of economies of scales, the government can adopt reforms and measures for their concerns that give protection to them. Bibliography HOLLENSEN, S. (2011). Global marketing: a decision-oriented approach. Harlow, England, Financial Times Prentice Hall. MADAAN, K. V. S. (2009). Fundamentals of retailing. New Delhi, Tata McGraw Hill Education Private Limited. CHANDRA, A., RAU, P. A., & RYANS, J. K. (2002). India business: finding opportunities in this big emerging market. Ithaca, NY, PMP. MUKHERJEE, A., & PATEL, N. (2005). FDI in retail sector, India. New Delhi, Academic Foundation MORSCHETT, D., FOSCHT, T., RUDOLPH, T., SCHNEDLITZ, P., SCHRAMM-KLEIN, H., & SWOBODA, B. (2011). European Retail Research. Wiesbaden, Gabler Verlag / Springer Fachmedien Wiesbaden GmbH, Wiesbaden. AHLSTROM, D., & BRUTON, G. D. (2009). International management: strategy and culture in the emerging world. Australia, South-Western. PRADHAN, S., & PRADHAN, S. (2009). Retailing management: text and cases. New Delhi, India, Tata Mcgraw-Hill Education Pvt. Ltd. PLUNKETT, J. W. (2008). Plunkett's retail industry almanac 2009. Houston, Tex, Plunkett Research. http://site.ebrary.com/id/10350192. GURUSWAMY, M., SHARMA, K., MOHANTY, J. P., & KORAH, T. J. (2005). PERSPECTIVES - FDI in India's Retail Sector: More Bad than Good? Economic and Political Weekly. 40, 619. Read More