A day after the Aditya Birla Group made public its retail consolidation plans, Future Retail announced its merger with the retail wing of Bharati. Post merger, the combined entity would be the second largest conventional retailer by number of stores as well as revenue. The organised retail industry has been under pressure, squeezed from both sides: by e-tailers as well as unorganised sector mom-and-pop stores.
And given that the entry of global retailers has been restricted because of policy issues — Carrefour has exited the Indian market, Walmart is restricting itself to cash-and-carry operations and Tesco is laying low — as well as the funding problems faced by the sector, growth through consolidation and mergers and acquisitions seems inevitable. Indeed, this seems to be the only route to expansion. Over the next few months, more such announcements — as well as the entry of conventional retailers into the e-commerce segment — can be expected.
The prospects of conventional organised retail can be summed up by one statistic: at Rs 60,000 crore, Flipkart is more valuable than all the listed brick-and-mortar retailers put together. Though e-commerce accounts for only approximately 8 per cent (2012-13) of organised retail, it is expected to grow at a compound annual growth rate of 50-55 per cent between 2013-14 and 2015-16 and has been eating into the financials of physical retailers — margins as well as operating parameters such as sales per square feet have been declining. Indeed, in product segments such as books, music and electronics, traditional sellers have been rolling back operations. And even though online shops initially only dealt in fashion, lifestyle, books and electronics, they are foraying into the grocery business as well.
By its very nature, conventional organised retail isn’t as nimble-footed or unencumbered as either e-commerce or unorganised-sector corner shops. Organised brick-and mortar shops have to contend with the high costs of maintaining inventory, lease rentals and labour. In contrast, e-tailers are asset light and their operations, easily scalable. They only have to deal with warehousing- and transportation-related costs. Similarly, the frugality and low overheads of kirana stores — as well as their well-developed networks — gives them an advantage. It is the big brick-and-mortar retailer who is caught between two stools.