The rise of organized retail is spawning a string of allied businesses in a manner that is reminiscent of the ancillary network that shadowed the growth of the manufacturing industry in the 1980s.
These businesses—ranging from retail design to brand consultancy, sales force training, store space utilization and customer loyalty generation to warehouse and logistics services—are set to emerge as independent entities as the share of the organized sector in the country’s retail industry increases rapidly in the next few years.
Photo: Harikrishna Katragadda / Mint
By 2012, the organized retail sector will account for 16% of the estimated $590 billion (approx. Rs27.3 trillion) retail market, a more than threefold increase from the current 5% share in a retail market valued at $322 billion, according to a report by the Indian Council for Research on International Economic Relations in May.
“As companies expand their scale of operations in a rapidly growing market, they will need to outsource certain aspects of the business that are beyond their core competence,” says Rishi Navani of Matrix Partners, a venture capital fund that invests in start-up companies, including those in the retail sector. Even established retailers such as the Kishore Biyani-led Future Group are outsourcing non-core functions. This company outsourced, for instance, the design and execution of the roll-out of its Home Town stores to Bangalore-based design consultancy firm Idiom Design and Consulting Ltd.
Apart from the pressures of having to scale up operations, the inflationary effect on consumer spending is also driving retailers to seek the advice of experts to refurbish brands and improve back-end functions. In the week ended 30 August, the inflation rate stood at 12.1% compared with 4.24% in August 2007.
“These are good times for support services as relentless cost pressure pushes retailers to invest in improving supply chain and logistics at the back-end, while also offering a differentiated product to customers at the store,” says Anish Tripathi, partner, markets and strategic services, Grant Thornton, a consulting firm.
And as these allied service and support businesses gain traction, more investors are looking to buy in to their potential success. “Some of these businesses can grow to a revenue base of Rs50 crore or Rs80 crore but those that operate in the supply chain and warehousing space can easily scale up to revenues of Rs500 crore and above— these are the businesses that we look to invest in,” says Navani, whose fund has invested in food retailing start-up Yo! China.