Page 295 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Retail Business Environment

Notes In food and grocery, organized retail has not been able to make much of the mark
 Government Initiatives: Organized retail operates with several limitations: FDI not allowed
in multi-brand retail, poor infrastructure, high real estate costs, inefficient supply chain/
cold chain, complex taxation systems, and rigid labor laws. However, policy makers are
realizing the role that organized retail can play in improving farm practices and in ensuring
better price discovery. The growth of organized retail helps to reduce inefficiencies in
trade - a win-win situation for farmers and consumers. It can be a big source of employment,
more so for the unskilled workforce. We expect the following to be key upside triggers for
the sector

 APMC Act reforms: In food and grocery, organized retail has not been able to make much
of a mark. It accounts for just 1% of food and grocery sales in India; the ratio is even lower
for fresh foods like vegetables and fruits. The policy impediments are:
 Organized retailers cannot source the produce directly from farmers.
Marketing of agricultural products is governed by respective state APMC (Agricultural Products
Marketing Committee) Acts, which have created marketing monopolies.
 Contract farming is not prevalent and this limits the capacity of retailers to source products
of uniform quality or products that are in great demand.

 Intermediation cost is very high and the farmers’ share is just 40-60% of the final price at
which the products are finally sold to consumers.
One reason for this is that organized retailers are currently not permitted to source directly from farmers

Direct sourcing can reduce the consumer price by ~26%; organized retailers’ own distribution
and logistics systems can help reduce costs further. Government has formulated a model APMC
Act but implementation has been tardy. Players like Bharti Walmart and Reliance have begun
building relationships with the farming community, but the benefits would be reflected only in
the long-term.
The implementation of the GST can be a big trigger for organized retail
GST Implementation: The implementation the Goods and Services Tax (GST) can be a big trigger
for organized retail. It will reduce the tax incidence and complexities of doing business in India.
It will remove inefficiencies in the logistics and taxation system. Key benefits expected are:

 Organized retail suffers on account of VAT; unorganized players rarely pay VAT.
 Organized retail pays 10.3% service tax on lease rentals; this can be completely set off once
GST is implemented. Organized retail could benefit up to 0.5% of sales.

 Inter-state taxes like central sales tax (2%) result in retailers having multiple warehouses
to reduce taxes, and repeated loading and unloading of goods, which not only increases
the lead time but also the cost of goods. GST implementation will result in realignment of
the entire supply chain system, reducing storage, handling and transportation cost for
organized retail.

Infrastructure is the key to sustainable growth for retail industry
Urbanization/improvement in infrastructure: Organized retail in India is more of an urban
phenomenon; most retailers have so far been focusing on metros and tier-II cities. This is unlike
the US, where Walmart focused on smaller cities, having a population of 10,000-20,000, with a
strategy to enter city-by-city and state-by-state. Rural retail models are yet to stabilize in India
due to small ticket size, high real estate costs and tough competition from millions of small
mom-and-pop stores. However, the development of modern cities and townships is catching up
in India, and should boost organized retail.

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