Retail sector in India – far from runaway success

According to a Wall Street Journal article, the Indian retail sector is showing signs indicating that the retail boom is smaller than anticipated. (Read the WSJ article here )

After the Indian government allowed 49% FDI in retail in 2006, India has grabbed the attention of retailers worldwide. Since then many global players such Walmart and Tesco, as well as domestic players such as Reliance, Aditya Birla Group and Future Group have launched their own retail enterprises and several others are in the process of starting operations and establishing strategic alliances.

However, the road to success in the retail sector in India is still fraught with many challenges. To illustrate, the capital city and my hometown Delhi saw a huge surge in construction of malls and shopping complexes for the oncoming retail boom. There are several new malls in areas previously unoccupied and several under construction. The real estate prices have continued to go up making it more and more expensive for retailers to rent or buy outlets. But most of the newly sprouted retail outlets are struggling to break even. Competition has increased manifold and buyers are still fairly cost-conscious.

There is still a lack of infrastructure in the country. As an example, Delhi has the highest road density in the country and a huge network of highways and newly constructed roads, yet it presents significant ground transportation challenges for retailers such as Wal-Mart that will need to transport materials using huge trucks.

There are several supply chain issues in India. According to an interview by Raj Jain, Wal-Mart’s India President, lack of organized supply chain is among Wal-Mart’s biggest challenges. There are several inefficiencies that contribute to higher costs and prevent the retailers from gaining significant cost advantages.
(Read the Raj Jain’s interview here )

If the number of players in retail keeps on rising without a clear strategy or expansion plans, there is bound to be a string of failures, as the Wall Street Journal article pointed out.

In the midst of these challenges there are some great success stories such as Future Group’s Big Bazar that has become a household brand and continues its expansion across India. I still believe that this $ 350 billion industry has significant opportunities but tapping this huge potential will require deep pockets and ability to survive a few failures and losses, strong understanding of consumer needs and preferences, and ability to develop efficient supply chain systems that deliver cost savings. Like many others, I will be watching with interest to see how the story unfolds…

(Click here for an interesting blog on developments in the Indian retail sector)