India’s fragmented retail sector is in a churn and two major developments last week point to the consolidation currently underway. The churn has been precipitated by the fragmented nature of the industry, the need to develop scalable models to stay ahead as also the challenges posed by the growing e-commerce industry.
Aditya Birla group announced the consolidation of all its branded apparel businesses under one company Aditya Birla Fashion and Retail, which will be India’s largest pure play fashion and Lifestyle company with a network of more than 1,800 stores spanning five million sq. ft. The company also plans to add another 200 stores this year.
This was immediately followed by Bharti Retail announcing plans to merge with the retail operations of Future Retail. As per the arrangement, Future Retail will demerge its retail operations into Bharti Retail, which will demerge its retail infrastructure into Future Retail.
Kumar Rajagopalan, CEO, Retailers Association of India (RAI) “The brick and mortar (B&M) retailers have to do things to achieve scale and amid increasing consumption and competition, there is a scramble among serious players to increase scale through M&A.”
There is likely to be more M&A activity in the apparel segment but it has more to do with brand acquisition than with retail points,” Arvind Singhal, Chairman, Technopak Advisors, a leading retail consultancy said.
The highly competitive environment is pushing consolidation to create larger players. Increasing consumption amid heavy competition demands M&A activity to create larger players to achieve financial size and scale.
The extent of fragmentation in the industry can be gauged by the fact that the largest player Reliance Retail with a turnover in the region of Rs.18,000 crore or $3 billion, accounts for a meagre share of the industry, which is estimated at $540 billion. This is likely to grow to $1 trillion by 2020, a report by Boston Consulting Group said. There are a few majors such as Reliance, Future-Bharti and Aditya Birla Group. Although the Birlas have moved with alacrity to consolidate their apparel business, the performance of the pure-play retail chain stores under ‘More’ requires attention according to sector analysts.
Now newer players are emerging and regional players are getting stronger. It seems like there are fewer scale players and the attention is shifting to region-specific players for M&As.
“There are not that many large players in the retail sector and those remaining are regional majors such as Spencers,” said Rachna Nath, Leader – Retail, PwC India. “With FDI in multi-brand retail still not a reality, a consolidation amongst the Indian players has long been on the anvil.”
FDI not an issue
The consolidation happening in the industry follows some acceptance of the fact that 100 per cent foreign direct investment (FDI) will not happen and it is left to the domestic players to grow the pie and expand their share.
Under the current rules, while 100 per cent foreign ownership is allowed in cash-and-carry trade, or wholesale trade, as well as single-brand retail, there is a cap of 51 per cent in multi-brand retail. Also, it has been left for each state to decide whether it wants foreign ownership of multi-brand retail stores or not.
In its keenness to protect interests of the smaller, unorganised trade, the government has been sending strong signals about its opposition to mega international retailers coming in. “The government has been too focused on the ownership issue and has displayed a misplaced understanding of the sector,” Mr. Singhal said.
“Pure play multinational retailers are avoiding India due to the government’s ambivalent attitude to FDI and it has been sending unwelcome signals. They are anyway already selling their products through e-commerce which is in fact an area that the government does not know how to handle,” Mr. Rajagopalan said.
Growing e-commerce challenge
The way the business is moving and the increasing thrust on e-commerce is re-proving the country’s consumption story. E-commerce or e-tailing is the recent paradigm that retailers have had to also confront and already 75 per cent of retailers have adopted e-commerce in some form and globally, retailing has already graduated to a multi-channel, omni-channel retail industry.
“E-commerce has emerged out of nowhere and forced retailers to adapt. However, its growth has been predicated on excessive discounting which is not viable in the long term,” Mr. Singhal said.
“For lifestyle brands in e-commerce, the need of the hour is to protect the brand and ensure that there is no indiscriminate discounting,” Mr. Rajagopalan said. “This is why leading luxury and high-end players globally as well as several leading retailers here do not offer discounts on their websites.”
The margins of retailers have been impacted and although it is expected that discounting will continue for 12-18 months, the players are moving beyond discounts and thinking about building customer loyalty.
“Today, as competition intensifies and consolidation sets in, retailers are being forced to adapt to the e-commerce opportunity,” Mr. Rajagopalan said. “Besides having to adopt an omni channel strategy using offline and online channels to offer a seamless and unified customer experience in order to stay relevant.”
ramnathsubbu.r@thehindu.co.in
