How big is the retail market in India and what is the share of organised retail?

India?s retail market is an annual $471 billion business and it is expected to swell to $1,248 by 2020. The share of organised retailing in India is currently at $35 billion and is expected to grow to $262 billion by 2020.

Will FDI kill kiranas?

To begin with, let us note that there are various Indian players operating in big, organised retail. Since 2006, several Indian corporate houses, including Reliance, Bharti and Aditya Birla, have entered the sector. In 2007, a McKinsey study said that branded stores would capture 10% of the total retail market by 2010, by when the segment would become a $43 billion business. But even in 2011, modern retailers are only 8% of the total market, with the size of the current market being $35 billion.

Of course, the global economic slowdown and competition from kirana stores spelled trouble for corporate retailing. Over the last three years, modern retailers have closed at least 3,000 stores nationwide, including the 1,600 stores shut by Subhiksha, which went bust in late 2009. Fellow discount store operator Vishal Retail was rescued by a takeover by an alliance of private equity TPG Capital and Chennai-based Shriram Group as Vishal?s debt piled up, while Koutons Retail has undergone debt restructuring. According to the Boston Consulting Group, kiranas would still hold about 89% of the country?s retail business in 2020 when the current size of the market would almost treble to $1,248 billion.

What are the other factors that modern retailers in India need to keep in mind?

Availability of real estate in big cities is one of the major challenges in India. When available, the cost of properties is so high that in most cases it makes the business nonviable. For example, Metro Cash-and-Carry was forced to open its wholesale store in a mall in Mumbai as it could not get a suitable space for its own store there. Similarly, Carrefour also opened its first cash-and-carry store in India in a Delhi mall.

Why do we need big retail anyway?

We need modern retailers in India as they tend to spend heavily on the back-end infrastructure?from the farm to store shelves. This would help minimise the country?s notorious wastage of farm produce, which is estimated to be as high as 30%. Although India is the second largest producer of fresh produce, about R1 trillion worth of production is lost in wastage and 57% of this is avoidable wastage. Also, a huge gap between retail and wholesale prices means that removing intermediaries will cut retail prices. An Ernst & Young report said that India has 6-7 intermediaries in the farm-to-fork supply chain compared to 2-3 in the countries that have developed a retail ecosystem. Modern retailers will invest in supply chains and reduce wastage. Also, retailers will source directly from farmers as well as small and medium enterprises. Organised retailers will help improve the incomes of farmers as the latter group?s realisation is expected to go up anywhere between 10% to 30% when they work with modern retailers, according to the Boston Consulting Group.

Why do we need FDI?

Billions of dollars are required to invest in the cold chain and the overall farm-to-fork back-end infrastructure. Foreign retailers have not only deep pockets but also the expertise to build the whole retail ecosystem. The Boston Consulting Group says that modern retailers will create 3-4 million direct jobs, with 75% of these being for non-graduates and another 4-6 million being in indirect employment by 2020.

Will foreign retailers start investing in India now, since the Cabinet has cleared 51% FDI?

Retailers have to take permission from each state they are planning to enter as retail is a state matter. Also, most of the states have to amend their agriculture market Acts or Agriculture Produce Market Committee Acts to enable retailers to trade in foodgrains and fresh produce.

How will all this affect domestic organised retailers?

Indian organised retailers will be able to form joint ventures with global retailers and sell stakes so that they can not only expand but also reduce the mounting debts on their books. For example, the country?s largest listed retailer Pantaloon is saddled with a R4,200 crore debt. Its debt-to-equity ratio stands at an uncomfortable level of 1.31: 1.