Challenges to Retail Development in India

Organized retail in India is little over a decade old. It is largely an urban phenomenon and the pace of growth is still slow. Some of the reasons for this slow growth are:

1) Retail not being recognized as an industry in India: Lack of recognition as an industry hampers the availability of finance to the existing and new players. This effects growth and expansions plans.
2) The high costs of real estate: Real estate prices in some cities in India are among the highest in the world. The lease or rent of the property is one of the major areas of expenditure; high lease rentals eat into the profitability of a project.
3) In addition to the high cost of real estate, the sector also faces very high stamp duties on transfer of property – it varies from state to state (12.5% in Gujarat and 8% in Delhi). The presence of strong pro-tenancy laws makes it difficult to evict tenants. The problem is compounded by problems of clear titles to ownership, while at the same time, land use conversion is time consuming and complex, as is the legal processes for setting of property disputes.
4) Lack of adequate infrastructure: Poor roads and the lack of a cold chain infrastructure hampers the development of food and fresh grocery retail in India. The existing supermarkets and food retailers have to invest a substantial amount of money and time in building a food chain network.
5) Multiple and complex taxation system: The sales tax rates vary from state to state. While organized players have to face a multiple point control and tax system, there is considerable sales tax evasion by small stores. In many locations, retailers have to face a multi point octroi. With the introduction of Value Added Tax (VAT) in 2005, certain anomalies in the existing sales tax system causing disruptions in the supply chain are likely to get corrected over a period of time.

Retail Snapshot Below focuses on an additional surcharge on retail proposed by the government of Kerala

The government of the state of Kerala said it would slap a 10 per cent surcharge on the profits of retail giants to discourage them from opening more outlets.

The state’s government known for taking on multinationals such as Microsoft Corp, and Coca – Cola Co, announced the tax in its annual budget. We have shown a red light by imposing a surcharge tax on the net profits of big retail companies.

The move was the latest salvo by the Kerala government against plans by domestic conglomerate to operate chain stores in the palm fringed coastal region, one of the country’s main tourist destinations.

The decisions underlined the obstacles facing big retailers in modernizing India’s small shopkeeper landscape of 15 million family run outlets which fear being forced out of business by lower priced, plastic wrapped produce.

The announcement came after a demonstration against big retail last month by tens of thousands of traders in Thrissur, 300km north of the state capital Thiruvananthapuram.

India’s largest private sector company, Reliance Ltd. (RIL) has already opened stores in Kerala and elsewhere but has been forced to scale back its plans for more retail openings because of the protests.

The Uttar Pradesh government last year ordered the closure of stores run by RIL and another chain after attacks by protesters. Lack of governments permits also forced RIL to put store openings on hold in West Bengal.

At this stage, we analyze the Indian retail industry by using the five forces framework created by Michael Porter. Michael Porter’s Five Force analysis is a tool for the structural analysis of industries. Understanding each of the five forces and how they interact with one another provides a clear picture of the degree of competition being faced within an industry, and therefore, its relative attractiveness. —