Prashant Salwan: Retail reality

With the changing consumption pattern and the emergence of a large middle class, some of the big Indian corporates are betting high on the retail sector, which is around $200 billion and just 3 per cent is organised. Experts feel that the industry has much more potential and we can expect the entry of foreign bigwigs like Wal-Mart in the near future.

According to the KPMG report, "Consumer markets in India "" the next big thing?", perhaps one of the most quoted research on the Indian retail sector's future, organised retail is expected to rise by 20-25 per cent by 2010 and the retail sector as such will grow faster than the GDP itself. Over the past few years, retail sales in India are hovering around 33-35 per cent of GDP as compared to around 20 per cent in the US. This suggests that even if the retail sector grows more than the GDP, the difference won't be much as the Indian consumer is already spending a sizeable amount on retail items. If we expect the compounded annual growth rate (CAGR) of the economy to be 6.5 per cent till 2025 (which in itself is an optimistic figure), we should not expect retail to grow by more than 7 per cent (at which time, retail sales will be 40 per cent of GDP). In addition to this, if we borrow KPMG's view that the organised retail sector will grow at 25 per cent till 2010 and further assume that it will grow by CAGR of 15 per cent till 2025, the organised Indian retail sector will be worth $159 billion in 2025 "" at this point, it will be a fifth of the total retail market in the country.

While this seems large enough to justify the entry of a Reliance, a Bharti and more, it's important to keep in mind that all the retail chains will be sharing this $159 billion. Even if the largest retailer has a market share of 10 per cent of the organised retail (which even Wal-Mart doesn't have in the US), its revenue will not be more than $16 billion.

Will it be worthwhile for Wal-Mart or Reliance to venture into Indian retail at this point of time? My two cents worth says "no" for Wal-Mart and "yes" for Reliance. It will not be prudent for a Wal-Mart to enter into a nascent market, that 20 years down the line, can at best offer a single-digit increase on its present revenues. A better strategy can be to wait for the sector to mature and consolidate, and then acquire a company that will be nearest to its philosophy. Wal-Mart has used acquisitions in the past to enter into new markets like Canada, the UK, Germany and Mexico. Starting on its own and becoming the largest retail chain in India will not be an easy task for Wal-Mart because Reliance and some other players are expected to be up and running with their operations before them.

Reliance, on the other hand, is expected to be the first big player into this sector and will certainly reap the first-mover benefits.

That apart, the large size of the unorganised retail sector and the nature of government's policies will give a tough time to any big retail chain. Considering the fact that retail is a volume game and profits for even the best managed chains in the world are less than 5 per cent of the revenue, Indian retail will not be a cakewalk for Reliance either. Certainly, the picture is not as rosy as it might appear.

The author teaches international marketing at IIM, Indore. The article was co-authored with Upjitpal Singh Ghuman, a second-year student.