So, organised retail is good for one and all

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New Delhi, May 26 : Organised retail is good for consumers, producers and also the intermediaries. This is official now with the government-mandated economic think tank Icrier formally announcing the same through its study. The Icrier study report on the impact of organised retail on the unorganised sector, which was commissioned when the atmosphere in the country was explosive with the advent of big, organised retail chains being unveiled by corporate biggies like Reliance Retail and Aditya Birla group, has clearly made a case for growth in favour of organised retail, as unorganised retail will not be able to keep pace with the demand requirements.

FE was the first to report exclusively on the findings of the report in its edition dated May 24. The Icrier study did case studies on domestic retail chains like Subhiksha, Trent Ltd, Infiniti Retail, Future group, ITC Chaupal Sagar and Mother Dairy.

The study, which looks into the impact of organised retail on traditional retail stores, consumers and the farmers has spelt out a couple of interesting trends. Allaying fears that the modern trade would rob the unorganised sector, the report says in the Southern and Eastern parts of the country there was no such finding, on the contrary there was increase in the employment levels in the sector. The study further notes that the adverse impact of the organised retail on the unorganised sector was an 8-9% decline in the profitability. This too was seen to reduce over four to five years of operations. The Eastern region with 71% reported the maximum amount of decline in the profit while South saw the least decline with 30% reduction in the profit margins.

The report interestingly points out that the sample revealed that a mere 1.7% of traditional retailers were shutting shops down each year and were doing so on account of competition from the organised retailers. With the highest figure being 3.2% in the West and the lowest being 0.4% in the East.

Only 40% of the respondents admitted to a decline in their profits due to organised retail shops being in the vicinity. The results further suggest that a third of the retailers currently provide cash credit to their customers and the proportion is the highest at 44% in the East and the least in the South at 32%. The access to banking facilities has been found to be a limiting factor for the unorganised retailers, who at this point of time need access to institutionalised credit the most, if the adverse impact of organised retail has to be minimised. The sample reveals that 88% of retailers didn’t avail bank loans in the first year of operations.

A strong sentiment amongst the traditional retail fraternity was their willingness to continue in spite of a possible competition arising in the form of organised retail, with as high as 36% of the retailers wanting their children to continue in their business. While majority of the unorganised retailers snubbed the proposition of becoming a franchisee of the organised retailers, as low as 10% of the surveyed sample opting for a franchise route. The impact on the controlled sample (not in the vicinity of organised retail) revealed that while profit increased 5% for the controlled sample, it declined 10% for the retailers in the vicinity of retail chains.

The impact on consumers has been very mixed, with the most startling finding that it was the lowest income group of consumers who benefited the most from the modern retail since they were able to choose the cheapest discount store to make their purchases. The middle class with monthly income of Rs 10,000-100,000, is the mainstay for retail shop at both organised and unorganised outlets.

Location was seen as a comparative advantage for the unorganised retailers as the mean distance to the residence of consumers at unorganised outlet is 1.1 km as compared to 2.6 km for unorganised outlets.

In terms of the preference for organised versus unorganised retailers, those who shopped at organised outlets reported the main reason as better product quality, lower price and choice of more brands as the reason why those who shopped at unorganised outlets chose it due to proximity to residence, credit availability, possibility of bargaining as the causes.

The survey also reveals that shoppers shop at both outlets and the share of spending varied from product to product. Those interviewed at organised outlets declared that about 46% of their spending was on vegetables and fruits and non-staple food items, while other packaged items were from unorganised outlets.

The study notes that the arrival of organised retail has enhanced spending in general and the reasons are mainly purchase of larger quantities due to wider range of products, availability of attractive offers like discounts and promotional schemes. In terms of savings, shoppers who purchased at organised outlets save as much as 4%, while the saving is higher at 8% at discount stores and a low of 2% at hypermarkets. Households with a monthly income of up to Rs 10,000 save the highest amount at 10%.

Intermediaries reported an increase of 7.5% in their turnover in the last one year. However, there were some decline in turnover in the fruit, vegetables and apparel segment and the decline in the profit in vegetable and apparel. About 37% of the intermediaries reported an adverse impact of organised retail while 59% indicated no adverse impact. Around 19% also reported a shift in their business strategy as a response to retail chains such as improved services to customers, new product lines and increased credit sales.

With regard to future plans, 66% said that there were prepared to invest and expand business and remain competitive while 89% wanted to remain in the same business. Only 3% thought of changing it.

The report reveals that farmers benefit significantly by selling directly to retail chains. A study conducted on farmers selling cauliflower directly to retail chains saw an average price realisation of 25% more than their proceeds from sales to regulated government mandis. Profit realisation for farmers selling directly to retail chains is about 60% higher than that received from selling in the mandis. The study further points that the difference is even larger when the amount charged by the commission agent in the mandi is taken into account.