• The Department of Industrial Policy & Promotion’s recent clarification on the foreign direct investment (FDI) policy for e-retail has an unexpected beneficiary — brick and mortar (B&M) retail.
  • The more specific and stringent FDI guidelines require large e-retailers to make changes in their business models in a short timeframe.
  • These changes come just as e-retail sales have seen phenomenal growth, averaging 40% a year between fiscals 2014 and 2018 and reaching the ₹1 lakh-crore mark.
  • That’s thrice as fast as the B&M segment, which grew at a 13% clip to ₹3.2 lakh crore.
  • Deeper market penetration and attractive price-tags — helped generously by foreign direct investments of over ₹95,000 crore in the past four fiscals — drove online sales.
  • As a result, the organised retail market expanded at a fast pace, with penetration improving enough to tap demand beyond Tier-1 cities, though the organised segment remains but a small part of the ₹60 lakh crore retail market in India.
  • Now, following the DIPP clarification, e-retailers have started tweaking supply chains and business models, including adoption of the franchisee model.
  • This is leading to higher cost of compliance.
  • And growth will temporarily slow as the players repurpose.
  • Incorporating all the changes was not possible in the less than 40 days that the e-retailers were given.
  • In contrast, Crisil estimates that B&M retailers can add ₹10,000-₹12,000 crore in revenue in fiscal 2020 if they are able to garner just a quarter of the potential loss in e-retailer sales, mainly of electronics and apparel.
  • That would crank up their revenue growth 150-200 basis points (bps) to about 19%, compared with Crisil’s earlier expectation of 17%.

Tell us about the Poor penetration

  • While near-term drags would ease gradually, the fact that India’s organised retail market is highly underpenetrated at just 7.8% compared with 85% in the U.S., 35% in Brazil, 30% in Indonesia and 20% in China, means there’s huge headroom for growth.
  • Penetration of organised retail, which increased from 6.5% to 7.8% over the three fiscals through 2018, is expected to improve further to 9.5% through fiscal 2021 as the overall organised retail segment grows at 20-22% annually, riding on rising incomes and aspirational demand in Tier II and Tier III cities.
  • Faster revenue growth, driven by household consumption, store roll-outs with focus on private-label revenue, and increasing penetration of B&M retailers in Tier II cities, will improve cash flows and obviate the need for substantial debt addition to fund store expansions.