Organized sell - Challenges Ahead For India's Organized Retailers

PEPSICO - Organized sell - Challenges Ahead For India's Organized Retailers

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Booming economy, suitable demographic patterns, increasing per capita earnings and urbanization gave rise to a new sector in India: Organized Retail. Opportunity up of sell sector for Fdi can be thought about as the prime theorize behind the blooming organized sell sector. Sensing this Opportunity several companies ventured into this sector, along with Reliance, Bharti and Pantaloons.

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Despite the Government allowing only 51% of Fdi in singular format sell segment, global sell giants like Tesco, Wal-Mart and Metro Ag are development inroads indirectly straight through franchise agreements and cash and carry wholesale trading, thus giving some serious competition to domestic retailers. Nevertheless, growth Opportunity in this sector can be judged by the fact that only 3% of the total sell sector is organized and 97% of the sector still consists of local mom and pop stores.

Unfortunately, the growth strategy used by all organized sell players of increasing their number of market backfired when rentals dramatically shot up following the global economic melt down. Profitability is seriously hampered and almost all major retailers are now struggling to claim their bottom line. Mean operating profit margin declined from 9.5% in 2007 to 7.9% in 2008. The worst part is that such a drastic growth in the number of market was backed by requisite leverage which is anticipated to supplementary hurt these organized retailers' liquidity and profitability levels.

Retailers are correcting their over enthusiastic strategies of the past and focusing on enhancing their firm model. This section will characterize some of the challenges these organized retailers are facing on both macro as well as local levels.

Aggressive Expansion

Over the last few years Indian retailers most beloved mode of expansion was to growth their number of outlets across metros. Outlets were built wherever real estate was ready and not where they were literally required, which led to 'Clustering'. Following credit crunch in 2008, several outlets were cast strapped and had to be done down naturally because they were operating in unfeasible locations.

Poor supply Chain Management

One of the major challenges for retailers is to reduce shrinkage which includes short-weighing, pilferage and poor goods handling. While the Mean shrinking percentage of list in advanced countries is 1% to 2% of Cost of Goods Sold, it is estimated to be much higher for Indian retailers, primarily due to the lack of focus on supply chain management. The existing supply chain is not devoid of inherent infirmity of India's infrastructure, besides being corrupted along the whole chain. Tracing shrinkage is a Hercules task as almost all the transactions still continue to be based on paper system. This gives rise to the need of third party logistics organizations that can supply services at competing prices. Third party logistics is a belief still absent from the Indian retailers' value chain.

A large part of shrinkage takes place within the retailer by its employees. Moreover, tracking an employee's track article and background checks is difficult. Retailers are now joining hands to fight this battle by creating a database of employees and share it amongst themselves to avoid shrinkage from within.

Employee training and retention

The most coarse strategy applied by retailers to keep labor cost at minimum was to hire fresh graduates with no experience in sell sector. They have now realized that in difficult store situations, experienced and talented employees that have sound comprehension of ground realities could give retailers a competing advantage. Despite a downturn, need for skilled manpower still continues to be a major concern across the sector.

Managing working capital

One of the most prominent factors affecting a retailer's profitability is the way it handles its working capital. Lower footfalls, resulting into lower sales has directly impacted Indian retailers' working capital position. Discounting is now the most coarse technique used to turn slow entertaining inventory.

Besides lower footfalls other factor which is hurting retailers' liquidity position is the requisite number of leverage they are carrying which was used earlier for aggressive expansion. Banks are now reluctant to finance retailers given the falling interrogate and plummeting profitability. Retailers are therefore seeing it difficult to finance their working capital requirements.

Diversifying into untapped rural areas

Experts believe that the next phase of growth for organized sell sector will come from rural areas that list for half of the 0 billion domestic sell market. Retailers will have to focus on the previously untapped lower earnings strata by providing them way to credit facilities. On the back of souring commodity prices and enhancing productivity, rural economy is set to boom in the next decade.

Backward Integration

One way to heighten efficiency and profitability is to take off unwanted intermediaries which eat into the already stressed margins. To heighten rural economy, Indian Government popular ,favorite covenant farming and Leasing. Agreeing to Kpmg, this will bring about technology transfer, growth capital inflow and assure store for crop production, besides eliminating intermediaries. Pepsico and Itc's E-chaupal are already benefiting from covenant farming in Northern India.

Despite the above mentioned challenges, long term prospects of organized retailers are still very attractive. prominent consolidations and partnerships can be anticipated soon for enhancing operating and cost efficiency. Focusing on supply chain management and partnering seem to be the need for an hour for organized retailers so as to leverage their expertise and financial muscle.

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