A Comparative Study of Organized and Unorganized Retail Sectors in Bangalore

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1 1 SIT Journal of Management Abstract A Comparative Study of Organized and Unorganized Retail Sectors in Bangalore Mihir Dash* & Sam Chandy** This study analyzes the challenges and opportunities faced by organized and unorganized retail players in Bangalore. It was found that organized retailers see competition from the unorganized sector as their biggest challenge, followed by competition between organized retailers and the inefficiency of distribution channels, internal logistical problem and retail shrinkage, while unorganized retailers see organized retailing as their major challenge, followed by cost of operation, logistical problems, competition between other kirana retailers and inefficient distribution channels. It was also found that organized retailers see Bangalore s growing middle class as their greatest opportunity followed by large number of earning youth customers, Bangalore having people from all over India, proportionate increase in spending with earnings and India s booming economy, while the kirana retailers see Bangalore having people from all over India as their biggest opportunity, followed by Bangalore s growing middle class, India s booming economy, large number of educational institutions in Bangalore and proportionate increase in spending with earnings. Thus, the study found that the major challenges as well as opportunities of organized and unorganized retail are almost the same. This means that mitigating the challenges and leveraging on the opportunities could benefit both sectors. Keywords: retailing, organized and unorganized retailing, competition, distribution channels, logistics, retail shrinkage, cost of operation. *Mihir Dash, School of Business, Alliance UniversityChikkahagade Cross, Chandapura-Anekal Road,Anekal, Bangalore mihirda@rediffmail.com, M: **Sam Chandy, Vice President, Operations, Supercold Refrigeration Systems Pvt. Ltd. Industrial Estate, Manvila, Kulathur P.O.Trivandrum, Kerala

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3 3 SIT Journal of Management Introduction Indian retail is expected to experience tremendous growth in coming years, and is already labeled as the sunshine sector in India. The Indian retail sector can be broadly classified into the organized and the unorganized retail sectors. The unorganized retail sector typically consists of small-time family-run retail outlets popularly known as mom and pop stores or kirana stores. The organized retail sector typically consists of large retailers with large numbers of outlets, product assortment, customer convenience, and so on. The organized retail industry in India is estimated to be an impressive US $518 billion in 2012, and has been growing at 10.6% over However, the retail market in India is the most fragmented in the world. Only 8% of the entire retailing business in India is in the organized sector, and this share is expected to grow to 20% by However, this growth may be impossible without overcoming the numerous challenges faced by the industry. Organized retail is in the stages of finding its feet in India even now. Organized retail trade makes up over 70-80% of total trade in developed economies. India s retail contribution is quite low even when compared to other developing Asian economies like China, Thailand, South Korea and Philippines, all of which have retail contributions close to 20-35%. These figures quite clearly reveal the relative underdevelopment of the Indian organized retail sector. Challenges faced by Organized Retail Sector in India The organized retail sector in India is still at a developmental stage, characterized by a very small number of players trying to create a new paradigm. To become a flourishing industry, the Indian retail sector has to attract leading Indian and foreign players to make substantial investments. In addition to this, a number of challenges which organized retailing faces are identified

4 4 SIT Journal of Management Technology is one of the major challenges faced by organized retailers; specifically, the availability, feasibility, and adoption of technology. Technology is already being widely used for a host of activities including theft prevention, logistics, billing & payment. The scope of technology is much wider, and can be used for other functions like understanding customer preference using RFID, keeping track of customers using CRM packages, enterprise management tools (ERP), and so on. In particular, technology can be leveraged to alleviate internal logistical problems and to make distribution channels more efficient. Retail majors are under serious pressure to improve their supply chain systems and distribution channels and reach the levels of quality and service desired by customers. This is coupled with the challenge of recruiting and retaining specialized talent to manage the technology. Another challenge is that of lack of adequate infrastructure, including proper pliable roads, airports and railway stations capable of handling large consignments on a daily basis, proper warehouses, cold storage systems, roads with less traffic, proper connectivity etc. This is coupled with the problems of power supply. The lack of proper infrastructure and distribution channels in the country results in inefficient processes. Another challenge is that of cost of operation, arising from: higher labor costs, social security to employees, high quality real estate, rentals, security, maintenance, much bigger premises, comfort facilities such as air-conditioning, back-up power supply, higher electricity tariffs, taxes, and so on. This is added to the increasing cost of land and increasing rental rates. Competition is another major challenge, from unorganized sector, from other organized sector players, and from international players. Traditional retailing in the form of kirana stores, with its low cost structure, has adapted to the advent of organized retail, becoming more customer friendly by offering credit, home deliveries, and so on, adding a personal touch to shopping that organized retailers may find impossible to emulate. Organized retail players also compete, with loyalty programs, home delivery of goods, customer retention strategies, offers, and discounts. International players are also in the scene. Currently, FDI in retail is restricted to 51%, but it is expected to be thrown open to international competition.

5 5 SIT Journal of Management Opportunities for the Organized Retail Sector in India These are factors which are, to an extent, opportunities, and which have the potential to leave a positive impact on the retail landscape if effectively tapped. India s economy is a major source of opportunity. India s economy is currently the third largest in the world, with a GDP of US $4.735 trillion in 2012, and growing at 6.7% p.a. This has been accompanied with a huge growth in incomes, and a proportionate increase in spending. The Indian middle class is fast-growing, expected to reach 267 million by Also, there has been a shift in the age profile of spenders - a new set of young earners, in their mid-twenties, has emerged - the Gen Y - and over seven million people are entering this category every year. India is a very young nation, with two-thirds of its population is below the age of 35, and nearly 50 % is below 25. Another source of opportunity is the tremendous growth in recent years of metropolitan cities such as Bangalore. The top six metropolitan cities of Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad are at the centre of India s booming economy, representing 6% of the population yet contributing 14% of India s GDP; also, 85% of India s urban retail market is concentrated in these cities. In particular, Bangalore s position as India s major economic hub has consolidated over the years. Bangalore's US$ 60.5 billion economy makes it a major economic centre in India, housing many industries, including heavy industries, education, software companies, aerospace, telecommunications, machine tools, heavy equipment, and defense establishments. In particular, Bangalore is the Silicon Valley of India, the leading contributor to India's IT industry. This has attracted many non-bangaloreans to come to Bangalore for reasons like job, higher education, training, and so on. This has lead to increased diversity and a cosmopolitan culture, with a growing consumer/mall culture. Bangalore s fast developing infrastructure also plays a role in attracting the organized retail sector. Bangalore is undoubtedly one of the fastest growing cities in Asia and also one of the most sought after cities in India by people, companies, multinationals and tourists. Bangalore

6 6 SIT Journal of Management city has also seen great improvements in its roads, highways and other infrastructure, including several flyovers, road projects, and the Bangalore Metro project. The present study focuses on the challenges and opportunities faced by organized retail players. The objectives of the study include identifying the factors promoting or restricting the growth of organized retailing in Bangalore, comparing the extent of impact of the identified factors (both challenges and opportunities) within different product-based shop formats across organized retailers, comparing the organized and unorganized retailing scenario in Bangalore in order to understand these segments and to find out if they share the same challenge and opportunity factors, and comparing the organized and kirana sectors to understand their individual strengths and weaknesses. Organized retailing, if at all it should grow to its expected levels, will grow from urban areas like Bangalore, Mumbai, Delhi, Kochi, Kolkata and Chennai where it already has a presence. The future of organized retailing depends on the performance of this sector in the above mentioned cities. For this reason, the study was carried out in the city of Bangalore among organized retailers. Since this study deals with the challenges faced by organized retailers, it could, to an extent be generalized for the other major cities in India. However, this generalization may vary depending on factors like presence of airports, ports, proper infrastructure, availability and adoption of technology, availability of skilled labor, mindset of state governments, mindset of people, and other local factors across states. Data and Methodology: The data for the study was collected from a sample of one hundred managers of organized retail outlets and one hundred unorganized retail outlets in order to assess the impact of the challenge and opportunity factors. The sample retail outlets were selected by convenience sampling methods. The respondents were administered a structured questionnaire in which they were asked to rate the extent to which they were affected by each challenge factor and each opportunity factor on a seven-point Likert scale. Data was also collected from retailers to assess the extent of impact of each factor on the different product formats.

7 7 SIT Journal of Management The challenge factors considered were: Technology, Internal Logistics, Skilled workforce, Retail Shrinkage, Understanding Customers (Behavior and Loyalty), Coping with Ever-Increasing Customer Demand, Inefficient Distribution Channels, Lack of infrastructure, Power Supply issues, Cost of operation, Land & Rental Rates, Competition from the other Sector, Competition between Retailers of same sector, and Government opposition to FDI. The opportunity factors considered were: India s booming economy, Large, earning youth customer base, Proportionate increase in spending with earnings, Increase in trend of Impulse buying, High bargaining power with suppliers, In house branding of goods, Bangalore's position as India's major economic hub, Bangalore s fast developing infrastructure, Bangalore's growing middle class, Bangalore has people from all over India, Large number of educational institutions, Bangalore developing as a tourist destination, and the Growing mall culture in Bangalore Findings The extent to which organized and unorganized retailers perceive the impact of the challenge factors is summarized in Table 1. Table 1: Table showing mean ratings of Challenge factors Organized Kirana Retailers Stores F value p-value Technology Availability, adoption and feasibility Internal Logistical Problem Availability of skilled workforce Retail Shrinkage Understanding Customers (Behavior and Loyalty) Ever Increasing Customer Demand Inefficient Distribution Channels Delays due to lack of infrastructure Power Supply Land & Rental Rates Competition from the other Sector Competition between Retailers of same sector Cost of operation Government opposition to FDI Source: Primary Data Organized retailers see competition from the unorganized sector as their biggest challenge, followed by competition between organized retailers and the inefficiency of distribution channels, internal logistical problem and retail shrinkage. For unorganized retailers, the major challenge they see ahead of them is organized retailing, followed by cost of operation, logistical problem, competition between other kirana retailers and inefficient distribution channels. Government s opposition to FDI does not seem to affect organized or unorganized sectors.

8 8 SIT Journal of Management Overall, it was found that the first few rankings are the same for organized and unorganized retailing. So it can be understood that the major challenges faced by organized and unorganized retailers are largely the same. Dealing with these challenges could lead to the benefit of both sides, and the co-existence of both kirana and organized retailing in the same retail landscape. The extent to which organized and unorganized retailers perceive different opportunity factors is summarized in Table 2. Table 2: Table showing mean ratings of Opportunity factors Organized Kirana Retailers Stores F value p-value India s booming economy Large, earning youth customers Bangalore developing as a tourist destination Increase in trend of Impulse buying Large number of educational institutions Bangalore has people from all over India Bangalore's growing middle class Bangalore's position as India's major economic hub Proportionate increase in spending with earnings Growing mall culture in Bangalore High bargaining power with suppliers In house branding of goods Bangalore s fast developing infrastructure Source: Primary Data Organized retailers see Bangalore s growing middle class as their greatest opportunity followed by large number of earning youth customers, Bangalore having people from all over India, proportionate increase in spending with earnings and India s booming economy. The kirana retailers on the other hand see Bangalore having people from all over India as their biggest opportunity followed by Bangalore s growing middle class, India s booming economy, large number of educational institutions in Bangalore and proportionate increase in spending with earnings. Organized retailers as well as unorganized retailers feel that higher bargaining power with suppliers and in-house branding of goods are not a huge opportunity. Comparing between the organized and unorganized sectors of retailing, it was found that even though there are differences in the extent to which organized retail and unorganized retail sector perceives a challenge or opportunity factor, the first few major factors are common for both segments.

9 9 SIT Journal of Management The extent to which the challenge and opportunity factors are perceived to affect different product segments is summarized in Tables 3 and 4. Table 3: Table showing Challenge factors in different product segments Health, Home Food & Beauty Books & General Decor & Beverage & Music Merchandise furnishing Wellness Technology Availability, adoption and feasibility Electronic Goods & Consumer Appliances Fashion (Clothing, Footwear & Accessories) Government opposition to FDI Internal Logistical Problem Availability of skilled workforce Retail Shrinkage Understanding Customers (Behavior and Loyalty) Ever Increasing Customer Demand Inefficient Distribution Channels Delays due to lack of infrastructure (Roads and Traffic, Airport, Railways, Ports) Power Supply Land & Rental Rates Competition from Unorganized Sector Competition between Retailers Cost of operation Source: Primary Data Table 4: Table showing Opportunity factors in different product segments Home decor & furnishing Food & beverage Health, beauty & wellness Books & music General merchandise Electronic goods & consumer appliances Fashion (clothing, footwear & accessories) India s booming economy Large, earning youth customers Bangalore developing as a tourist destination Increase in trend of Impulse buying Large number of educational institutions Bangalore has people from all over India Bangalore's growing middle class

10 10 SIT Journal of Management Bangalore's position as India's major economic hub Proportionate increase in spending with earnings Growing mall culture in Bangalore High bargaining power with suppliers Source: Primary Data According to the Technopak report on organized retailing in India (2007), the following table shows the share of each product segment in the total retailing scenario in India in 2006, and a projection for the year Table 5: Table showing the share of various segments in the Indian retail scenario Home decor & furnishing 3% 4% Food & beverage 60% 55% Health, beauty & wellness 7.4% 8% Books & music 1.6% 2% General merchandise 4% 5% Electronic goods & consumer appliances 5% 5% Fashion (clothing, footwear & accessories) 14% 15% Others 5% 6% Source: Technopak 2007 report on Organized Retailing in India The above figure shows a high 60% share for food and beverage segment in the year 2006, followed by fashion clothing, footwear and accessories at 14%. Since these segments collectively contribute to about 74% of the entire gamut of retailing in India, more emphasis should be made to negate the challenge factors and to leverage upon the opportunity factors faced by these two segments. Considering the top five challenges and opportunities in case of food & beverage segment, the following results are found. Table 6: Table showing ranks of challenges and opportunities for the food and beverage segment Challenges Opportunities Rank 1 Inefficient distribution channels Growing middle class Rank 2 Competition from unorganized sectors Bangalore s position as a major economic hub Rank 3 Retail Shrinkage Proportionate increase in spending with earnings Rank 4 Internal Logistical problem Bangalore has people from all over India Rank 5 Competition between organized retailers Large number of earning youth customers Source: Primary Data Since food and beverage alone add up to 60% of the entire retailing activities in India, the key to a successful organized retailing future lies in negating the above mentioned challenges and leveraging upon the above opportunities. Similarly, considering the top five challenges and

11 11 SIT Journal of Management opportunities in case of Fashion clothes, footwear and accessories segment, we get the following results. Table 7: Table showing ranks of challenges and opportunities for fashion clothing and footwear segment Challenges Opportunities Rank 1 Competition from the unorganized sector Growing middle class in Bangalore Rank 2 Competition from organized sector Increase in impulse buying behavior Rank 3 Retail Shrinkage Large number of earning youth customers Rank 4 Technology, availability and feasibility Proportionate increase in spending with earnings Rank 5 Cost of Operation Large number of educational institutions Source: Primary Data The fashion clothes, footwear and accessories segment is the biggest Indian retailing segment after food and beverage. The 2010 projection shows a substantial increase in the share of this segment over Therefore it is important to negate the above mentioned challenges and leverage upon the above opportunities in order to ensure a proper growth, not just of this segment, but of retailing as such. Discussion Both organized sector and the unorganized sector see each other as their biggest threat. But actually, it was found in the study that their major challenges as well as opportunities are almost the same. This means that mitigating the challenges and leveraging on the opportunities could benefit both sectors. This comes as a pacifier to the much talked about debate about organized retailers making unorganized retailers out of business. It is not possible to deal with all the challenge and opportunity factors all at once. The most popular product segment in the Indian retailing scenario is the food & beverage segment, followed by the fashion clothing, footwear and accessories segment. They together contribute to about 74% of the entire retailing revenue. Therefore dealing with the most critical challenge and opportunity factors of these two segments would definitely give a face lift to the entire organized retailing sector. Organized retail players must adopt strategies to enhance their growth. Without doubt, they have to make substantial investments in technology to ensure zero wastage of goods, time, effort, etc.; and in particular, they have to invest in supply chain infrastructure. On the other hand, the Government can to take several steps to help enhance organized retail growth. It can ensure single window clearance for retail chains, and can permit FDI in retail in phases, starting perhaps

12 12 SIT Journal of Management with food retailing. It can ensure flexibility of labor laws, ensuring availability of a skilled workforce for organized retail. It can ease distribution-infrastructure creation and Octroi. It can ease real estate and rent laws for retail outlets, and enforce zoning laws and city development plans. The present study has some mild limitations. The sample selection was judgmental and convenience-based and this may not be perfectly representative of the retail scenario. Also, the sample size for kirana retailers was low, and could have given a better representation if a higher sample size was considered. References 1) Aggarwal, S. (2008), Rising Mall Rentals in Major Cities Dampen Retailer s Early Euphoria, Indian Express, 6 th May ) Banerjee, R. and Balakrishnan, R. (2008), Second Tier Retailing is a Smart Idea, The Economic Times, 6 th February ) Berman, B. and Evans, J.R. (2003), Retail Management: A Strategic Approach, 9 th Ed, Prentice Hall Publ. 4) Chadha, A.S. (2008), India Most Attractive Retail Destination in the World, The Economic Times, 19 th March ) Freathy, P. (2003), The Retailing Book: Principles and Applications, Prentice Hall 6) Guha, R. and Jayaswal, R. (2008), Government may allow FDI in food retail, The Economic Times, 22 April ) Gupta, S.L. (2007), A Study on Trends in Retailing Industry in India - A Case Study on Shopping Malls, BVIMR-Management Edge Journal of Bharati Vidyapeeth University, January-June ) Singhal, A. (2007), Impending Economic Impact of a resurgent Indian retail sector, Technopak report on organized retailing in India 9) Writangar, M. (2008), Frauds steal retail show, The Economic Times, 22 January 2008