Operational Challenges in Indian Retail Industry

Published by MBA Skool Team, Published on May 07, 2013

India is an attractive market for retail investment. The sector is witnessing dominance of large domestic players, like Reliance, Bharti, AV Birla Group and international conglomerates such as Wal-Mart, Marks & Spencer, Tesco etc. Current Indian retail scenario looks gamut because of poor supply chain, infrastructure, policy barriers, untrained workforce and inconsistent sourcing systems. In the Indian retail huge investments, government policies, third party intervention, and changing consumer preferences will distinguish supply chain revolution.

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Operational inefficiencies in terms of stock out percentage, shrinkage, wastage, inventory turns, storage cost and logistics as a percentage of costs is very high compared to global norms. Hence, Supply chain will be a differentiating factor   that gives the competitive advantage to firms.

Thus planning and investing in field of supply chain in the areas of sourcing (contract farming), distribution centers (warehouse, cold storage), transportation networks (3PL), inventory (both store level and warehouse) (VMI), supply chain information systems such as warehouse management systems, planning, forecasting, inventory management, backward integration, quality management systems, service monitoring and control will improve the network and the business.

On a long term basis, there would be a need to build a flexible supply chain which would be capable of responding to changes, intrinsic or extrinsic changes, drastic or slow changes, in demand, supply and technology.


  • The analysis attempts to analyse the factors driving growth and outlook for the ‘Organised retail industry’.
  • Current Retail Market Scenario
  • Challenges, Gaps and Competition
  • Operations and Supply Chain aspects in setting up the stores
  • Recommendations – The road ahead


  • Has grown at a CAGR of 14.6% for the period FY07-12.
  • Food & grocery is estimated to have remained the highest contributor at 58% of the total retail sales during FY12.
  • During FY07- 12 (p), the organized retail in India has grown at a CAGR of 26.4%.
  • Food and grocery contributed to 24.3% of the total organized retail sector.
  • Expects the penetration of organized retail in the total retail pie to increase to 8.8% by FY15.

Source: Technopak Advisors Report


  • Emergence of nuclear families
  • Growing trend of double-income households
  • Increase in disposable income and customer aspiration
  • Increase in expenditure for luxury items
  • Large working population
  • Low share of organized retailing
  • Liberalization of the FDI policy
  • Tremendous avenues in Tier – II and tier – III cities. Almost two-third of India’s middle class opportunities lie outside top urban cities
  • India among the youngest nations in the world


  • Disappointing Footfall. Despite constant promotional offers and deep discounts, consumers are expected to cut down on their discretionary spending.
  • Banks hesitant to finance due to falling demand and low profitability. Higher cost of funds and slowdown in demand can result to delay of projects in the near future. Huge debt funding and high interest payments.
  • Poor supply chain management and weak back-end support infrastructure. Expanding and building on logistics and technology initiatives are weak.
  • Low level automation in warehouses and not enough quality measures.
  • Rentals – skyrocketing to all time high. Retail space in urban areas is expensive and keenly contested. Retail spaces in tier II, III cities and semi-urban areas are plagued with issues such as inadequate infrastructure, as roads, electricity, and cold chain.
  • Organized sector does not have industry status. It is further making it difficult for the players to raise funds for their expansion plans.
  • Policy induced barriers – Organized retail in India is managed by both the Ministries of Commerce & Consumer Affairs. While the Ministry of Commerce takes care of the retail policy, the Ministry of Consumer Affairs regulates retailing in terms of licenses and legislations.
  • Crowding in unattractive locations.
  • A long way to meet international standards.
  • Retail shrinkage - losses due to theft by employees & administrative errors (3% -4 %)
  • Demand of skilled workforce is high but there is talent shortage & lack of trained manpower.


Retail market performance

Financial Year-2011


Net Profit

Total Reserves/Losses





Reliance Fresh




Avenue Super Mart (Dmart)




Bharti Wal-Mart (Dec 10)




Aditya Birla (More)




Reliance Retail




Easy Day (Bharti Retail)




Nature’s Basket (Godrej)








All figures in Rs. Crores.  Source: Ace Equity and annual reports

Source: Planet Retail 2008; Nielsen 2010; PwC



Logistics cost as % of price

Inventory turns

Stock-out percent

Shrinkage percent

Indian Retailers

Approximately 10

3 to 14

5 to 15


Global Retailers


Average 18

Below 5

Average 1




Wastage Volume




Wastage Value

Percent of retail price



Rs billion



Storage and Commissions

Percent of retail price



Rs billion



SOURCE: Deloitte


Succeeding in India’s retail sector is a combination of choosing the right retail real estate, localizing products and mastering the supply chain.

Research: PWC-Winning in India’s retail sector.

a) Correct mix of Private Labels (PL) in the stores:

  • Stocking PL alone will not attract footfall. So, it is recommended that company also stocks branded apparels and accessories.  Following mix of private labels is recommended. Generics – 5-10%, Copy cats – 50-60%, Value innovators – 10-15%, Premium Brnads - 15-20%
  • There is significantly more margin in private labels due to fewer middlemen.
  • There is ~100% control over the pricing, branding, sales, etc.
  • A niche consumer loyalty is created for the private label unlike national brands.

Merchandizing, local advertising and other core functions should be done by company itself instead of outsourcing.

b) Store location selection based on proper research: Catchment area analysis has to be done extensively. Potential demand, supply of merchandise and store image-related factors in locating the retail outlet is important. Layout should suit both impulsive and situational needs.

c) Localisation of stores: Getting the merchandise mix right. Collect past data to understand the customer buying behaviour. Equip category managers or select category captains to improve assortments.

d) Sound Supply Chain system

  1. Robust Supply network planned for micro and macro sourcing as well as Distribution. Follow Hub and Spoke model. Milk run distribution model will reduce costs.
  2. Cold Storage and Refrigerated vehicles to improve product shelf life and reduce wastages.
  3. Just-in-time inventory
  4. Retail Information Systems
  5. GPS for truck and trailer tracking

e) Contract Manufacturing will reduce any further capital expenditure. 100% sourcing networks is viable.

f) Integrate backwards to procure directly from farmer where APMC (Agriculture Produce Marketing Committee) acts have been amended to facilitate this process.

  1. Shortened supply Chain
  2. Efficiency
  3. Reduction in wastages
  4. Increased margin and lower prices
  5. Less sourcing/logistics costs

g) Technology is the differentiator:

  1. Sound inventory management using RFID
  2. Timely dissemination of information
  3. Enables retailer to deal with stock outs, seasonality, transferring stocks and ensuring low levels of dead stock
  4. Efficient order processing
  5. CRM,SRM
  6. Improve process flow and shelving errors
  7. Check on availability and location of articles

h) Regional Warehouse: Lead time for stock replenishment will be low

i) Demand Forecasting: Weekly or Daily basis

j) Operational strategy to mitigate challenges

i) Service monitoring and control:

j) Quality - Quality Management System  comprising Quality Control and Quality Assurance departments to ensure end-to-end quality control-from raw material procurement to manufacturing, packaging and delivery at the doorstep of the customer.

k) Outsourced transportation – 3PL: Parts of the value chain may be outsourced to a 3PL while a company can look into backward integration for critical areas.

l) Average levels of stock, order levels and the retailer has to keep a tight control on costs associated with each transaction in the selling process.

m) Maintain essential inventory.

n) Setting the right price point.

o) Focus on profit instead of volume (be ready to lose an occasional sale).

p) Provide extraordinary service and after sales support.

q) Employ the best possible staff.

r) Better shopping environment.

This article has been authored by Senthilkumar Pazhamalai, SCMHRD.

Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.

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