A Tale of Two Industries: Retail in India

4/23/2014
The Indian retail market is estimated to be worth approximately $450 billion and accounts for 14 percent to 15 percent of India's GDP. It is one of the top five retail markets in the world by economic value and also one of the fastest growing global retail markets.

Yet despite its size and power, India's retailing industry remains dominated by owner-manned small shops. Indeed, Indian retail is in fact two separate industries — the "organized" retail of large chains, international brands and foreign investment and a more domestic "unorganized" or "shadow" retail that exerts huge economic and political influence. The tension between these two spheres is one of the most pressing issues facing international retailers, fashion manufacturers and textile-based businesses looking to capitalize on the Indian market.

The weight of history
To fully understand the Indian retail environment, it is necessary to revisit the history of fashion manufacturing and retail. India is undergoing a "compressed evolution" of this history. Fashion began as a bespoke tailored and low-volume industry supplied by the textile manufacturers; then, power shifted to the manufacturers, who would make  products, place them on display or promote them, and customers would then be attracted to purchase the more standard product.
   
However, with the progress from the industrial revolution and the advent of mass scale production, this all changed dramatically. Manufacturers were no longer focused on making really small volumes of product for the window, but 10 or more for the shelf. Standardization drove economies of scale; however the retail of these products remained fragmented.

This is similar to the history of UK or U.S. retailers — the likes of Woolworths, Selfridges and Marks & Spencer. It is also the story of retail evolution within a confined urban development. Standardized products drive consistency and need, growing demand and an economic backdrop that favors mass production.

By comparison, within India you have pronounced diversity and regional differences. The huge variation in climate across the country and the federation of regional states, deep regional pride and poor infrastructure have led to a business climate that favors smaller, independent retailers and manufacturers that focus on and address local needs.  Instead of a rapid evolution to an organized, consolidated retail sector, India has remained a two-tier market.

Lessons from a global perspective
Though not exclusive to India, this large "shadow" retail industry of smaller, independent retailers has such a strong identity of its own that it is hard to find similar examples elsewhere in the world. Perhaps the closest would be Brazil, where the government made a concerted political decision to protect itself, creating the ideal environment for domestic producers and retailers to work in concert — and deliver to the local demand without dependence on external production.

Where Brazil imposed a closed domestic focus, India is keen to open itself up as a market, as both producer and consumer. This has led to retail becoming a real battleground as big, foreign retail giants look to enter the market but find themselves in the midst of a system that is based around a far more fragmented retail ecosystem than they are accustomed to.

Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets.

On 14 September 2012, the government of India announced liberalization allowing the opening for FDI in multi-brand retail, subject to approvals by individual states. This decision was welcomed by economists, but caused protests and an upheaval in India's central government's political coalition. On Sep.r 20, 2012, the government of India formally notified the FDI reforms for single- and multi-brand retail, making it effective under Indian law. These changes have brought the gap between "organized" and "unorganized" retail to the fore.

The main concern is how this split affects consumer spending behavior and shopping patterns. In many cases, the organized retailers cannot get access to goods that are freely available via unorganized retailers. A classic example is that you cannot get a Pepsi Max in a 7-Eleven in India but can easily get one from a vendor just over the road.

Elsewhere there is concern that the unstructured, independent retail market damages the productivity of retail overall. A McKinsey study claimed retail productivity in India is very low. For example, the labor productivity in Indian retail in 2012 was just 6 percent of the productivity in the United States in 2010. This hinders a lot of investment and is often viewed as supporting an inflated retail employment market in India (currently about 6 percent of the Indian workforce). Training and development of labor and the development of management skills for higher retail productivity are expected to be challenges.

Neighbors of necessity
So, can organized and unorganized retail ever co-exist across such differences and tensions? The simple truth is they may have to learn to get along; many commentators point to the size and breadth of the evolving organized retail and say that it's inevitable that it will eclipse its unorganized counterpart. However, the fact is that this should have been well underway by now and realistically, given the political pressures, social demographics and culture within India, this "death of unorganized retail" is very unlikely at least in the short to medium term.

There is, however, good reason for organized retail to enjoy the presence of the "unorganized" alternative.  The smaller shops are often very creative and assess local requirements with unerring accuracy: a sari shop in Chennai will carry different cuts and fabrics than one in Jaipur, but they will both be keenly targeted to the local market. There clearly are lessons to be learned. Indeed, the unorganized retail market may well be the best market testing facility many organized retailers and upcoming fashion designers could wish for.

Collaboration may well be rare. There is a profound lack of trust on both sides and no obvious third party to fill the gap. Some smaller, more collaborative brands such as Zara may be able to explore the unorganized outlets but these occasions will be few and far between. It is likely that for those fashion brands that can contain the organized/unorganized tension and find favor with both, the are huge rewards. Interestingly, Walmart has a strong track record of local adaptation.

Indian retail is a huge potential opportunity for fashion brands and there undoubtedly will be huge change over the coming months and years as the new, more investment-friendly regime takes effect. But those international brands will enter a market that is not only unique, but fraught with regional differences, unique product requirements and customer expectations. It will not just be a case of caveat emptor (let the buyer beware) but also, manufacturers and retailers beware.

Bob McKee is director of global fashion strategy for Infor.
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