Increased Investment in Retailing

The prospects for significant modernization and development in retailing will depend on the nature of investment in this sector. The investment will be of two types-foreign and domestic. The quantum and nature of investment will depend on the factors outlined earlier namely economic development; civic situation; consumer needs; attitudes and behavior; and government policies.

Although FDI is not yet permitted in retailing, a number of global retailers are testing the waters by signing technical agreements and franchises with Indian firms. Fast food chains like McDonald‘s and Pizza Hut are already operating in the metros. A Marks and Spencer store is already operational in Mumbai. Several global retailers are awaiting a change in policy. However, the development of the Indian retail sector is dependent not just on foreign investment but on Indian investment as well. Since the 1980s, industrial groups such as Reliance and Raymonds have been active in encouraging development of well-appointed exclusive showrooms for their textile brands. In the 1990s, industrial houses like Rahejas, Piramals, and Tatas have entered retailing. Several Indian and foreign brands have used franchising to establish exclusive outlets for their brands.

At present the new format stores cater mostly to households belonging to the higher income families. The catchments area for these modern stores has to be fairly large as the number of such households is small in relation to the total population. This limits the number of stores and constrains the growth of chains. The modern stores have also been plagued by low conversion in relation to the number of footfalls. This means that although a large number of people visit the store, the number of buyers and the average bill amount is small. Due to low sales, the bargaining power of the retailers with suppliers and manufactures is low and this restricts their average gross margin. On the other hand, the expenses involved in setting up and maintaining a modern format store tend‘ to be much higher than the traditional store due to the additional expenses on larger size, better locations and superior ambiance. Therefore, if the returns on investment in the new formats have to be attractive, modern retailers have to develop a strong supply chain that would provide them significant gross margins while delivering merchandise at attractive prices to customers. In order to do this, modern retailers would have to eliminate middlemen and buy directly from suppliers and make use of technology to control the inventory. These developments will impact the survival and existence of middlemen such as wholesalers and agents who will have to find new business models to survive. The manufacturing firms will also face pressure from strong buyers on price, delivery and service terms.


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