Confederation of Indian Industry (CII) organised the National Retail Summit 2008 at the Hyatt Regency hotel in Mumbai on December 11. The first session of the evening was on the current economic scenario and its implications for retail.
The session was moderated by Shivnath Thukral, managing editor, NDTV. The panellists were Ajit Ranade, chief group economist, Aditya Birla Group; Roopa Purushothaman, chief economist, Future Group; Abheek Singhi, partner, The Boston Consulting Group India; and Suhail Nathani, partner, Economic Laws Practice.
Thukral began the session by expressing his concern over the economic slowdown and its effect on consumer buying patterns. Purushothaman replied that consumer anxiety had increased globally.
Thukral said that retailers need to rethink the expansion pattern they are currently following because the Indian retail sector is not in a negative growth phase; it is only growing at a slow pace.
Singhi agreed and said that over the last few years, consumption rates have decreased; sectors that have been affected include retail, automobiles and real estate. At this point, retailers need to consider their expansion plans, as investors are a little sceptical.
Thukral took this forward and asked whether Indian retailers have low visibility globally, since they are not considered risk takers.
Ranade said that the retailers were playing safe because capital is not readily available due to the credit freeze. However, retailers could look at possible sources of investment. He gave the example of retailers needing to shell out 8-10 per cent of their profits to pay the rent on their properties. The solution here was risk sharing, and not a Mexican standoff, where both retailers and real-estate developers blame each other.
Nathani said that retailers could either de-risk or share the risk with other stakeholders. The existing revenue structures in India are designed to reduce taxes for retailers, which could be a problem in risk sharing. He also stressed on the fact that India needs a new and improved model of risk sharing.
Singhi continued the argument and said that there was lack of confidence between retailers and real-estate developers, which affected consumer confidence in this sector and would, eventually, affect consumption. He gave the example of people cutting down on the number of times they go out for dinner or reducing expenditure on luxury items. This trend, he said, is seen even among affluent consumers.
Purushothaman maintained that in spite of the economic downturn, some categories such as cosmetics are increasing globally, and not just in India.
Thukral expressed his concern over retailers' access to the available capital and how they would get more investments.
Ranade said that at this point, everybody wanted to hold on to their finances for some more time because inflation was really high. Even banks were playing safe and were not confident about investing in retail. The key factor here is to have confidence in retailers.
Nathani said that real-estate developers were looking at various new models. He added that the laws of retail and manufacturing should be rationalised. He gave an example of a dated manufacturing law, which said that a shirt is a packed commodity and, as per the law, every manufactured commodity needs to have a date of manufacture and date of expiry. He highlighted the absurdity of applying this law to commodities such as shirts, adding that the government needed to take a call and change such laws.
Purushothaman responded that better understanding of the market was essential, as there is a lot of diversity in the Indian market. She cited some Future Group research, which found that cities such as Surat are growing very rapidly. This was because in Tier II cities, consumers spend a higher share of their income on consumer durables and apparel. She said that the intensity of the economic slowdown differs across cities, which might be one reason why such cities are still performing well.
She added that retailers should use this time wisely. For example, recruitment is always a problem in the retail sector, so this is the right time to get the right people at the right cost. Other factors that can be looked into are the changing merchandising patterns, giving consumers a sense of security and giving them what they want.
Thukral concluded the session by asking each of the panellists what they thought should be done in the next six to 12 months.
Nathani said that three things were critical: FDI regulation on foreign investments, a serious revamp of the Commodities Act, and increase in the number of real-estate bodies investing in retail.
Ranade's view was that the Mexican standoff between retailers and real-estate developers must be resolved and both parties should work in harmony.
Singhi felt that the credit system was not functioning well and should be looked into. He added that this time should be used to conserve and consolidate.
Purushothaman ended the session by saying that focusing on specific categories would bring about a healthy rise in the retail segment.