(Written in September 2008)
Over the last few years India has had one of the highest GDP growth rates, across the world, and consistently. In the last two years GDP growth is estimated to have been 9.6 per cent (2006-07) and 9 per cent (2007-08).
A combination of private and public investments in recent years, as well as steady liberalisation of regulations, has created a situation that is unique in India’s history as an independent country, where business growth has lead to individual prosperity which is, in turn, leading to explosive growth of further business opportunities. Although India’s per capita income still places it in the list of “developing countries”, a significant population has emerged that is truly middle-class.
Rising incomes have created visible shifts in consumption patterns. Certainly, more Indians regularly consume cereal flakes, processed cheese and fruit-based drinks for breakfast than did ten years ago. A generation has grown to adulthood wrapped in ready-to-wear clothing (with visits to the tailor mainly for wedding trousseaux). And, yes, Indian consumers are increasingly welcoming modern retail environments over the traditional
These economic developments have attracted the attention of both domestic and international consumer-goods companies and retailers, and several of these companies have seen annual growth rates 20-50 per cent in the current decade. Many of the new entrants into the retail sector are large business groups that have set up modern retail chains whose share, although still small, is growing year-upon-year.
This growth of modern retailing is also having an impact on the processes and the infrastructure deployed for the retail sector. These businesses are run as true chains which require processes and systems similar to any chain-store business anywhere else in the world including merchandising, sourcing, human resource management, logistics and store operations. These modern retail stores demand Grade-A buildings for shopping centres, with associated infrastructure and services within them.
Therefore this, in turn, has created a growing opportunity for companies that are manufacturers or vendors of consumer products, suppliers of other goods that are used within a retail business or companies providing services to the retail sector.
In the rush to grow, while challenges have been acknowledged, none of them have appeared seriously debilitating in the long term, until possibly now.
During the years 2003 through 2007, news headlines mainly focussed on joint-ventures or strategic alliances, new store openings, new format launches, and mega-investment plans. If human resources were mentioned, it was about the apparent domestic shortage, about the expatriate talent being pulled in, and about incredible salaries. If shopping centres and retail space was studied, it was the phenomenal growth in square footage and the increasing scale of the new malls that was the focus.
Suddenly, however, the tide in the press seems to have turned. There’s mention of “slow” growth plans of major retail joint ventures. There’s whisperings and denials about lay-offs, accompanied by some high-visibility exits.
It would be tempting to read the signs as evidence that the previous growth was based on hype, which has run out of steam. It would be tempting, and it would also be too simplistic.
The fact is that macroeconomic factors are also acting as dampeners in 2008, and the year may be marked in the recent history of India’s modern retail sector for the dawn of realism. Just as the growth of the retail sector was reaching into the not so profitable geographies and beginning to ride on not very efficient structures, economic growth has begun to slow down dramatically. From a 9 per cent-plus growth rate in previous years, a variety of agencies expect GDP to grow between 7.5 and 7.9 per cent in 2008-09. Further, the Prime Minister’s Economic Advisory Council forecasts a GDP growth rate of 6.8 per cent in 2009-10.
What’s more, 2006 and 2007 have brought about phenomenal increases in two critical cost heads: real estate and human resource.
So on the one hand, retailers are facing dramatically higher operating costs, and on the other hand demand seems to be weaker than they have expected. For businesses that have been launched in the last 5-7 years, such a situation is completely new. Read the rest of this entry »
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