Indian Retail Industry Facing Heat, What Is Causing The Trouble?

The Indian retail space has been going through a lot of ups and downs in the recent times. On one hand, there is hope and optimism for foreign retailers as the government mulls scrapping the 30% local sourcing clause. On the other hand, rising real estate costs, cut throat price competition and policy challenges are hindering both Indian as well as foreign retailer’s growth plans in the country. Trouble in Indian retail has impacted both the Indian as well as the international players. In fact, according to a report by ratings agency Crisil, the top 10 retailers in India are estimated to have a total loss of Rs 13,000 crore in the financial year 2013-14.

The trouble waves
The French retailer Carrefour’s decision (that came in July this year) to exit the country due to failure of viable business is one of the major upsetting news for the retail industry. The company will close all five of its cash and carry stores in India by September 2014, with subsequently winding up its business. Carrefour is one of the largest retailer, next only to WalMart, and it had big plans for India. But unfortunately, it has now decided to wind up its cash and carry business in the country. The company, led by chief executive Georges Plassat, has been closing its operations in countries that have shown sluggish performance over the years such as those in Singapore, Malaysia, Greece and Colombia.

What is worse is that the heat is faced not just by the international retailers but also by the indigenous ones like Reliance Retail. The company which has about 550 Reliance Fresh stores across the country is shutting down about 100 of these stores. This is not the first time that an Indian supermarket retail company is shutting down stores. Just couple of years back Aditya Birla Retail which has the ‘More’ brand shut down all its store in Mumbai due to being unable to manage the rising real estate costs. Another retailer Spencer’s too have cut down on its number of stores.

Rising real estate costs as challenges
One of the biggest troubles for retailers in the country, both foreign as well as Indian chains, has been the rising real estate costs. The cost of renting space for supermarkets have been on a crazy upward trend and with the margins in the retail business, most of the retailers are not able to make business sense with these high rocketing real estate costs and this has been a big downer for the retail industry discouraging brands not just from expansion, but also leading them to shut shops in question of viability. The real estate costs need to be worked to out to give a boost to retail segment.

The challenge of logistics
Another big hurdle that is faced by retailers is managing the logistics for perishable items like food. Food and groceries contribute largest to the consumption pie with a huge 60% share but the problem is that the margin on food items for retailers is pretty low. At the same time the cost to store them and manage their inventory goes high due to their perishable nature. This has been big challenge retailers have not been able crack well and thus are struggling.

Policy trouble
The 30% local sourcing mandate of raw materials is a big challenge, especially for luxury and premium foreign retailers in the country. The policy, where state governments are given the power on whether to allow an international retailer to enter their state or not, creates a big hurdle for these players. They have to go through the bureaucracy web multiple times (each state) to work their way in India. That’s quite a challenge and is restricting growth plans of many international players.

Going ahead, the road seems to be shaky for the retail industry but it is expected to soon shape well with certain policy changes expected round the corner. Well, these changes should happen soon to ensure the industry doesn’t go through too much of turmoil.