The Indian retail sector can be broadly classified into organized and unorganized retail. The former has only just taken off with the advent of professionally managed departmental stores and malls, however, the bulk of Indian retailing is still dominated by unorganized retail stores comprising about 15 million shops.
The Indian retail sector is, nevertheless, undergoing a significant transformation from small family-owned units to organized retailing, pursuant to the influx of international retailers in the domestic market.
Organized retail rises
To accelerate the inflow of foreign direct investment (FDI), the Indian government, through Press Note 3 of 2006, has partially opened up the retail trade sector to foreign entities for the establishment of retail trade operations of “single brand” products. FDI of up to 51% is permitted for such operations, provided prior approval from the government has been sought.
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Due to increased FDI, the Indian retail sector has been flourishing and numerous local and international companies have been flocking to the organized segment. The rise in levels of disposable income has resulted in the catalytic growth of the retail sector, thereby creating a need for efficient and cost-effective logistics operations.
Taking this into consideration, third-party logistics providers (3PL) have received and are expected to continue receiving an enormous boost from the retail segment.
Hazardous roadblocks
Inefficient supply chain networks and a lack of adequate infrastructure are often cited as major impediments to the expansion and development of the Indian retail market, which otherwise has tremendous potential for growth.
The logistics market for the organized retail segment is currently pegged atUS$50 million, growing at a fast pace of 16% annually, and is expected to reach USD$120 to US$130 million by 2010.
But with the organized retail segment achieving monstrous growth rates of up to 400% along with expectations for revenues to consistently generate a US$30 billion industry by 2010, the demand for logistics services will continue to outstrip supply.
The agonizing state of India’s infrastructure has prompted most multinational corporations entering the Indian retail segment to develop and manage their own logistics services and operations rather than outsourcing it to 3PL providers. This is due mainly to the highly fragmented nature of the Indian logistics market and the lack of well developed national and international players in the segment.
Small players with limited resources cannot follow a model of developing their own in-house logistics arm and have little choice but to depend on the infrastructure available.
A recent report released by the Federation of Indian Chambers of Commerce and Industry highlights that India’s grossly inadequate infrastructure is a major obstacle impeding the growth and development of an efficient supply chain network in the country, which in turn is affecting the retail boom.
On the growth curve
With the opening up of India’s retail segment and because of its potential for substantial foreign capital inflows, domestic logistics firms are planning significant strategic investments to expand their portfolio of services. Although a few big players in the Indian retail segment have their own logistics arm, many others are working with 3PL providers.
The Indian logistics sector is on a strong growth curve driven through not only the retail sector, but also the booming fast-moving consumer goods, manufacturing and auto components sectors.
Indian logistical firms have monitored both enthusiastically and carefully, developments in the retail segment and hiking up their capital expenditure programmes. Some major players in this sector are investing significantly to cash in on the growth opportunities.
These companies have also planned to diversify their service portfolios and are leveraging their networks to offer express supply chain distribution systems while also developing and enhancing their expertise in 3PL services.
India’s present expenditure on logistics accounts for approximately 13% of its gross domestic product, which is proportionately higher than the global average. Although inadequate infrastructure is leading to periodic bottlenecks, the government is attaching high priority to this sector and infrastructure is set to see brisk development over the next few years.
Logistics companies at present provide only transport, warehousing and inventory management services and need to diversify their product portfolios with more value-added services such as packaging, labelling and reverse logistics.
The logistics sector will again experience a rapid boom in the near future when the Indian government decides to fully open up the retail sector and allow FDI in multi-brand products.
Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.
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