Going gets tougher for modern retailers

Local backlash biggest challenge for organized retailers.

Every revolution comes at a price, and as a retail revolution sweeps across India, it is becoming increasingly clear that organized retailers are up against some pretty steep odds.

Reports from last week of a fresh attack on Reliance Fresh (a retail chain promoted by conglomerate Reliance Industries), this time in the central state of Madhya Pradesh, show that of all the challenges modern retailers face in India, the backlash from the so-called unorganized retailers is potentially their biggest yet.

The latest attack on a Reliance Fresh outlet follows similar acts of vandalism against the chain in northern Uttar Pradesh, along with opposition in the eastern states of West Bengal and Orissa. In each case, politicians either directly supported the agitation or voiced opposition to the spread of organized chains, citing the impact on the mom-and-pop shops in the area.

The loss of a livelihood is never an easy issue to deal with, but it will be retrogressive to prevent the evolution of a modern retail network with vandalism and violence.

The violence against Reliance’s chain may look like freak incidents sponsored by politicians with their own personal agendas and hungry for headlines. But the fears surrounding millions of retailers and their employees, of losing jobs or being put out of business, are real.

The country’s retail industry was valued at $300 billion in 2006, according to IndiaRetailBiz.com, and employed 21 million people — mostly in retail outlets that occupied less than 500 square feet. As larger, modern retail storefronts open up — sometimes anchoring the malls that seem to be springing up everywhere — and sell wares cheaper, offer a wider selection and deliver a better shopping experience, the relatively inefficient and unorganized sector will struggle against the organized chains.

It is likely that there are more occasions for friction in future, not less, and while several jobs will be created, many others will inevitably be lost. While political will is going to be tested at one level, industry associations probably will have to take a lead in starting a wider debate on the whole issue of modern retailing.

The loss of a livelihood is never an easy issue to deal with, but it will be retrogressive to prevent the evolution of a modern retail network with vandalism and violence.

The timing of the backlash against modern retail couldn’t have been worse for the organized industry. Foreign investment into the sector is still restricted, but there is no shortage of local players eyeing a slice of the potential market.

Rentals are reportedly going through the roof as existing chains expand or new ones enter the fray, escalating costs. Ditto with staff expenses, with the industry working to meet the increasing demand for managerial talent.

Revenue growth for the listed retailers such as Pantaloon Retail and Shoppers’ Stop has been furious over the past several quarters, and analysts expect the growth to continue at a fast pace. But the industry already works with wafer-thin profit margins — less than 5% in fact, while their stocks enjoy premium valuations of more than 50 times forward price-to-earnings estimates.

The last thing either the companies or their investors need is to be targeted for crime.

By V. Phani Kumar

Varahabhotla Phani Kumar is a reporter in MarketWatch’s Hong Kong bureau.

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