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Business News/ Industry / Retail/  Policy, e-commerce, consumer sentiment batter offline retail
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Policy, e-commerce, consumer sentiment batter offline retail

But year brings cheer to some single-brand retailers as they move closer to launching their operations in India

American retailer Wal-Mart put on hold its plans to open supermarkets in India. Instead, it focused on building more wholesale stores where the government allows 100% FDI. Photo: Ramesh Pathania/MintPremium
American retailer Wal-Mart put on hold its plans to open supermarkets in India. Instead, it focused on building more wholesale stores where the government allows 100% FDI. Photo: Ramesh Pathania/Mint

New Delhi: In 2014, political events cast their shadow on the organized retail sector as the new Narendra Modi government did not allow foreign direct investment (FDI) in supermarkets to protect small shops.

For domestic retailers, too, the market wasn’t buoyant as consumer sentiment remained weak and the sector was battered by steep discounts offered by online marketplaces.

The year, however, brought some cheer to single-brand retailers such as Gap Inc., Ikea and Hennes & Mauritz (H&M) as they moved closer to launching their operations in India. The government allows 100% FDI in single-brand retail provided 30% of the company’s products sold here is sourced locally.

For a start, the India-specific plans of several foreign supermarket chains suffered as the government refused to open up multi-brand retail to foreign investors. Although the existing policy, which is yet to be scrapped, allows 51% FDI in multi-brand, many ministers of the Modi government have reiterated many times that it will not entertain FDI in the sector. The Bharatiya Janata Party (BJP) was opposed to overseas investment in multi-brand retail in its election manifesto.

In July, soon after BJP swept the polls, French retailer Carrefour SA rolled down shutters on its five wholesale stores in the country which were seen as precursors to a supermarket chain for retail consumers.

Carrefour entered the market five years ago expecting the policy to be liberalized at some stage. However, the pressure to exit an underperforming market such as India and to focus on markets closer home was immense.

“There is enough clarity from the government now that multi-brand retail will be difficult to do over a short- and long-term scenario in the country," said Vikash Agarwalla, a partner at consulting company Strategy&, which was formerly known as Booz and Co.

In another move, American retailer Wal-Mart Stores Inc. put on hold its plans to open supermarkets in India. Instead, it focused on building more wholesale stores where the government allows 100% FDI. In August, Max Hypermarket India Pvt. Ltd, a part of the Dubai-based Landmark Group, and French retailer Auchan group ended their partnership due to difficulty in complying with India’s foreign investment rules as well as the differences between the partners.

Wal-Mart, however, said it will invest in India by adding another 50 stores in five years to its existing 20. The company said it continues to view India as a long-term market.

“For us, India is a long-term commitment and we have been growing our B2B (business-to-business) cash-and-carry business," said a Wal-Mart India spokesperson. The company that launched its B2B e-commerce service in Hyderabad and Lucknow said it will extend it to multiple stores in a phased manner in 2015.

India is one of the fastest growing retail markets in the world. The country’s retail industry could see a compounded annual growth rate of 10% over 2012-2020, growing from $500 million to $1 trillion, according to a December report by consulting firm PricewaterhouseCoopers. However, organized retail accounts for less than 8% of the country’s overall retail trade.

The next year will thus see foreign retailers such as H&M and Gap establish a presence on the country even as domestic retailers focus on improving profitability and await revival in consumer demand.

A less than buoyant domestic demand and retailer focus on rationalizing costs remained a concern in 2014, even as brick-and-mortar retailers continued to squabble with electronic retailers over deep discounting.

“There was a definitely softness in demand in 2014," said J. Suresh, managing director and chief executive officer at Arvind Lifestyle Brands Ltd and Arvind Retail Ltd, which sells brands such as Flying Machine, Ed Hardy and Tommy Hilfiger.

In May 2015, the company, through a franchisee agreement with Gap, will open the brand’s first store in the Capital.

“Even though festive season was to see an uptick in demand, it didn’t match up to our expectation," he said. Compared with previous years, consumer footfalls remained low, indicating conservative spending by consumers, Suresh said. Sales for some key brands in stores that have been open for at least a year oscillated between 8% and 10%, well below the companies’ expectations of 15%.

“The year started off very well, but the last quarter demand has been below expectation," said Rakesh Biyani, director at Mumbai-based Future Group that runs the Big Bazaar chain.

In the quarter ended 30, Future Retail Ltd, operator of retail chains such as Big Bazaar, Food Bazaar, eZone and HomeTown, reported a stand-alone net loss of 8.04 crore. Net sales for the same period stood at 2,484.85 crore.

Relentless discounting supported by online marketplaces have slowed down market recovery, Biyani said. Flush with funds, online retailers such as Flipkart and Snapdeal offered heavy discounts across product categories, denting demand for some brick-and-mortar stores.

“It was clearly the year of e-commerce," said Rachna Nath, executive director at PricewaterhouseCoopers. Demand at domestic retailers, especially in popular categories such as electronics and fashion, was impacted.

The spat between brick-and-mortar retailers and online retailers will continue in 2015 as offline firms invest in omni-channel trade to capture demand. Omni-channel retail helps connect consumers via different channels such as mobile, online and physical stores.

“Offline retailers are focusing on ways to counter the impact from e-tailing," said Nath. Biyani said the Future Group will focus on omni-channel, and expand its customer reach beyond its current stores. Arvind, too, is shoring up its omni-channel presence, said Suresh.

Consumer confidence in urban India dropped by two points to an index score of 126 in the third quarter of 2014, according to a October report by researcher Nielsen in India.

Retailers expect demand to bounce back in 2015. India’s economy is expected to rise to around 5.5% in the current financial year, up from 4.7% growth it saw last year, according to the mid-year economic review released by the finance ministry last week. With tapering inflation and a better economic environment, the government is projecting better growth rates in the near future.

“Considering the macroeconomic indicators, 2015 will see good growth in demand," said Biyani. Suresh also expects buoyancy both in consumer demand and sentiment in the second half of 2015.

“We won’t see any action from domestic retailers up until Q1 of 2015. said Agarwalla of Strategy&. “They are also awaiting some stability in sentiment before they go on an expansion drive."

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ABOUT THE AUTHOR
Suneera Tandon
Suneera Tandon is a New Delhi based reporter covering consumer goods for Mint. Suneera reports on fast moving consumer goods makers, retailers as well as other consumer-facing businesses such as restaurants and malls. She is deeply interested in what consumers across urban and rural India buy, wear and eat. Suneera holds a masters degree in English Literature from the University of Delhi.
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Published: 23 Dec 2014, 12:41 AM IST
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