http://www.managementparadise.com/forums/THE RETAIL SUPPLY CHAIN REVOLUTION
Chetan Ahya
The Economic Times
Even as the government continues to delay the decision to allow FDI in multi-product retail chains, the fast-emerging Indian retail sector is becoming widely recognised amongst domestic entrepreneurs and investors as one of the biggest opportunities in India.
Apart from existing players (such as Pantaloon) ramping up their retail chain store operations, many large business groups, including Reliance Industries, Birla group, and Tata group have announced their intention to cumulatively invest over $10 billion over the next five years to capture a share in the fast-growing pie of the organised retail sector.
In addition, various foreign players like Wal-Mart are entering the market via a joint venture with a domestic Indian player. We estimate that India’s organised retail market is likely to grow from the current $4 billion (2.1 percent of total relevant consumer spending) to $64 billion (10.8 percent) by FY2015.
In the first phase of the retail revolution, the focus of entrepreneurs has been largely on capturing the consumers’ attention and providing them with a new shopping experience. However, the retail revolution is not just about the new shopping ambience. Going forward, the rising scale of organised retail distribution network and increasing competition will force players to focus on restructuring the whole supply chain to improve productivity and provide a better deal to customers.
The retail revolution will restructure the economy’s two lagging segments including agriculture and manufacturing by small- and medium-scale enterprises. For the first time since India initiated its liberalisation programme in 1991, there is now a potential for reforming these two important sectors of the economy which can increase productive job opportunities for the middle class.
The agriculture related supply chain segment suffers from maximum inefficiency. Cumulative wastage in this supply chain is estimated to be about $11 billion, or 9.8 percent of agriculture component of GDP. Over the years, owing to government intervention in the input and output pricing, there has been little incentive for farmers to improve efficiency.
Moreover, in the past few years, public investment in agriculture as a percentage of GDP has also been gradually declining. The archaic infrastructure for reaching the agricultural produce from farm-gate to consumers has meant huge losses in transit and large markups in pricing due to extra layers of intermediation.
However, the outlook for the agricultural sector is finally turning around. Thirteen states and three UTs have amended the laws allowing private sector participation in direct purchases of farm produce. The rise in presence of the organised retail sector will accelerate reform in the agriculture.
In the medium term, as the reach of chain stores increases, some adverse impact on mom-and-pop shops is inevitable. However, opposition to evolvement of organised sector retail chain stores is no less legitimate than opposition to removal of protection provided to many sectors in the early 1990s liberalisation programme. Restructuring of an economy that is still at a developing stage in today’s globalising, competitive world is inevitable.
(The author is economist, JP Morgan Stanley, Mumbai)
Chetan Ahya
The Economic Times
Even as the government continues to delay the decision to allow FDI in multi-product retail chains, the fast-emerging Indian retail sector is becoming widely recognised amongst domestic entrepreneurs and investors as one of the biggest opportunities in India.
Apart from existing players (such as Pantaloon) ramping up their retail chain store operations, many large business groups, including Reliance Industries, Birla group, and Tata group have announced their intention to cumulatively invest over $10 billion over the next five years to capture a share in the fast-growing pie of the organised retail sector.
In addition, various foreign players like Wal-Mart are entering the market via a joint venture with a domestic Indian player. We estimate that India’s organised retail market is likely to grow from the current $4 billion (2.1 percent of total relevant consumer spending) to $64 billion (10.8 percent) by FY2015.
In the first phase of the retail revolution, the focus of entrepreneurs has been largely on capturing the consumers’ attention and providing them with a new shopping experience. However, the retail revolution is not just about the new shopping ambience. Going forward, the rising scale of organised retail distribution network and increasing competition will force players to focus on restructuring the whole supply chain to improve productivity and provide a better deal to customers.
The retail revolution will restructure the economy’s two lagging segments including agriculture and manufacturing by small- and medium-scale enterprises. For the first time since India initiated its liberalisation programme in 1991, there is now a potential for reforming these two important sectors of the economy which can increase productive job opportunities for the middle class.
The agriculture related supply chain segment suffers from maximum inefficiency. Cumulative wastage in this supply chain is estimated to be about $11 billion, or 9.8 percent of agriculture component of GDP. Over the years, owing to government intervention in the input and output pricing, there has been little incentive for farmers to improve efficiency.
Moreover, in the past few years, public investment in agriculture as a percentage of GDP has also been gradually declining. The archaic infrastructure for reaching the agricultural produce from farm-gate to consumers has meant huge losses in transit and large markups in pricing due to extra layers of intermediation.
However, the outlook for the agricultural sector is finally turning around. Thirteen states and three UTs have amended the laws allowing private sector participation in direct purchases of farm produce. The rise in presence of the organised retail sector will accelerate reform in the agriculture.
In the medium term, as the reach of chain stores increases, some adverse impact on mom-and-pop shops is inevitable. However, opposition to evolvement of organised sector retail chain stores is no less legitimate than opposition to removal of protection provided to many sectors in the early 1990s liberalisation programme. Restructuring of an economy that is still at a developing stage in today’s globalising, competitive world is inevitable.
(The author is economist, JP Morgan Stanley, Mumbai)