The study of the history of retailing business throws up the fact that in most economies organised retailing passes through four distinct phases in its evolution cycle.

In the first phase, new entrants create awareness of modern formats and raise consumer expectations. During the second phase, consumers demand modern formats as the market develops, leading to strong growth. As the market matures, intense competition forces retailers to invest in back-end operating efficiency.

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In the final phase, retailers explore new markets as well as inorganic opportunities as growth tapers off. Supply chain management (SCM) attains top priority in the third phase of evolution.

Fierce competition forces retailers to respond quickly to changes in the market, bringing forth the importance of SCM in handling availability of stock, supplier relationships, value-added services and cost cutting.

Traditional retailers are expected to enhance their investments in supply chain, whilst new entrants are likely to look at supply chain first broadening their national reach.

What drove the retailing in India?

India is currently in the second phase of the retail evolution, with domestic customers becoming more demanding with their rising standard of living and changing lifestyles.

Change in customers' focus from just buying to broad shopping (buying, entertainment and experience) has led to a pick-up in momentum in organised formats of retailing.

Unavailability of quality retail space has been one of the main constraints for development of organised formats in India. In the past, negative yield on leased property and lack of bank funding due to unorganised property market resulted in a dearth of quality retail space in the country.

The spread between yield on property and its financing cost has turned positive with the fall in interest rates. Attractive yields on investments have resulted in a sharp increase in property development. From 25 operational malls in 2003, the country is expecting to have over 220 malls by 2006 with a cumulative estimated space of 40 million sq ft and over 600 malls by 2010, with as much as 100 million sq ft retail space.

Pro-active steps taken by the government permitting use of land for commercial development in various cities, including Mumbai and Delhi, have also contributed to increased availability of retail space in the country.

Availability of retail space is expected to increase further whenever property funds and investment trusts are permitted, which will help create a secondary market for real estate in the country.

Consumerism and brand proliferation also enhanced organised retailing in the country. Most of the world's leading brands, including like L'Oreal, Espirit, Louis Vuitton, Marks & Spencer, Tommy Hilfiger, Louis Phillipe, Levis, Pepe, Lee, Arrow, Dockers, Red Tape, Clairns, Hugo Boss, Tiffany, Bulgari, Ecco, Chambor, Revlon, Philips, Corelle, Magppie, Nike, Reebok, Parker, Ray Ban, Lego and Mattel, are now present in India.

Another factor that accelerated the growth of organised retailing is media proliferation. Increased advertisements and brand promotions have led to a growing consumer spending across a wide range of product categories.

What will fuel the boom?

Differential sales tax rates exist across states in the country. Besides, there is multiple-point octroi/entry tax collection.

All these add to cost and complexity of distribution as these necessitate multiple warehouses and do not allow for centralisation of certain procurements given the incidence of local levies.

Implementation of Value Added Tax will streamline the complexities in the tax structure and narrow the cost disadvantage between organised and unorganised retailers.

While some leading retailers are still able to get funding from banks, the smaller ones are constrained for funding for growth. Similarly, equity options are also restricted as foreign direct investment is not permitted in the retail trading sector.

FDI restrictions have also stalled entry of international majors to retailing in the country, which could have otherwise helped the industry develop with funding and bring better practices and systems. However, positive changes are expected on the FDI front.

The development of road infrastructure, especially the Golden Quadrilateral project interlinking North-West and East-West corridors, will bring in efficiency in supply chain and reduce wastages.

Where are the road-blocks?

Non-availability of trained manpower, especially at the management level, poses a key risk for the retail sector. Besides, as organised retail grows rapidly, there will be pressure on existing players as new entrants look for trained manpower at various levels.

Opening up of FDI in retail could see the entry of international majors which will put further pressure on the manpower of existing retailers.

SCM efficiencies are essential to retailers to maintain and improve margins. SCM includes vendor and logistics management which is underdeveloped in India. However, with growing size of operations, SCM efficiencies will become a key differentiator of profitability in retail.

The road ahead

Notwithstanding some stumbling blocks, no one can mistake the immense potential of the boom in the domestic retail sector.

Given the size and the purchasing power of the Indian consumer, the road ahead can only get smoother and it is only a matter of time before the domestic retail industry is on par with its western counterparts.