Essay: The Evolution and Future of Retail in India: Growth, Challenges, and Opportunities

Introduction to Finance

Finance is an integral part of business. The economic development of any country depends upon the existence of a well-organized financial system. It is the financial system that supplies the necessary financial input for the production of goods and services, which in turn promotes the well-being and standard of living for the people of the country. Finance and the function of finance are essential components of economic activity. Finance is necessary for all types of organizations, including small, medium, and large-scale industries, as well as the agriculture and service sectors. Over the 60 years of independence, the availability of finance has been made easier through the functioning of commercial banks, development banks, and primary markets. However, all these services and instruments are associated with different types of costs. Hence, it has become necessary to make use of such sources not only to recover the cost but also to increase the wealth of investors. Contrary to this, the new economic reforms have created a challenging environment in the economy. This calls for the effective utilization of funds to yield the predetermined returns. A firm’s success and survival depend on how efficiently it is able to generate funds as and when needed. Finance holds the key to all activities.

The Sanskrit saying “Arthasachivah,” which means “Finance reigns supreme,” speaks volumes about the significance of the function of finance in any organization. According to Paul G. Hastings, “Finance is the management of the monetary affairs of a company. It includes determining what has to be paid for the money on the best terms available and devoting the available funds to the best uses.”

Finance guides and regulates investment decisions and expenditures. The expenditure decision may pertain to recurring expenditure or capital budgeting. To get the best out of the available funds is a major task of finance. The finance manager has to perform this task most efficiently to be successful. The finance function does not distinguish between the private and public sectors. It is important, even indispensable, to both sectors. Even the government treats finance as a signpost to control and measure what it has achieved or proposes to achieve. Finance may rightly be considered the sinew of any business activity, and its importance is recognized in every branch of science. Every business activity requires financial support because financial viability is the central theme of any business proposition.

Mr. A.L. Kingshott states, “Finance is the common denominator for a vast range of corporate objectives, and the major part of any corporate plan must be expressed in financial terms.” Financial decisions must be viewed in light of the financial viability of their outcomes. It is difficult to conceive a policy decision that does not have financial implications. Moreover, business activities are not mutually exclusive; their dependence on each other can only be measured in terms of finance. Any economic transaction consists of buying and selling, implying money transactions, but it may not involve immediate payment of money, as there may be credit terms involved. In any transaction, therefore, whether it is buying or selling, the payment of money, at present or in the future, is involved.

Financial Statements

An organization communicates its financial information to users through financial statements and reports. Financial statements contain summarized information about the organization’s financial affairs, organized in a systematic form. These statements comprise the income statement or profit and loss account and the position statement or balance sheet. To give a full view of the financial affairs of the undertaking, it is also necessary to include a statement of retained earnings, a statement of changes in financial position, and a few schedules such as schedules of fixed assets and schedules of debtors.

Income Statement: The profit and loss account sets out income as well as expenses of the same period, and after matching the two, the difference, which is the net profit or net loss, is shown as the difference between the two sides of the account. Thus, the earning capacity and potential of the organization are reflected in its profit and loss account.

Balance Sheet: Also known as the position statement, the balance sheet displays all the total resources of a business and the owners’ and creditors’ equity in these resources. It indicates the statement of affairs of the business at a particular moment in time and thus its nature.

Profit and Loss Appropriation Account: Also known as the statement of retained earnings, this account is generally a part of the profit and loss account. It shows how the profit of the business for the accounting period is appropriated towards reserves and dividends and how much of it is carried forward as retained earnings.

Fund Flow Statement: Also known as the statement of changes in financial position, this statement summarizes the changes in the assets, liabilities, and owners’ equity between two balance sheet dates. Thus, it is a statement of flows, indicating the changes that have taken place in the financial position of the firm between two balance sheet dates. It summarizes the sources and uses of the funds obtained.

Financial Analysis

Financial analysis is the process of identifying the financial strength and weakness of the firm by properly establishing relationships between the items of the balance sheet and the profit and loss account. The purpose of financial analysis is to disclose the information available in the financial statements so as to judge the profitability and financial health of the organization.

The first task of the financial analyst is to select the information relevant to the decisions under consideration from the total information available in the financial statement. Secondly, the analyst must arrange the information in a way that highlights significant relationships. Finally, the analyst must interpret and draw inferences and conclusions. In brief, financial analysis is the process of selection, relation, and evaluation of profitability and the financial soundness and health of the organization.

Techniques of Financial Statement Analysis

A financial analyst analyzes the financial statement by selecting appropriate techniques according to the purpose of the analysis. Financial statements may be analyzed using any of the following techniques:

• Comparative Statement Analysis
• Common Size Statement Analysis
• Trend Analysis
• Ratio Analysis
• Fund Flow Statement
• Cash Flow Statement
• Cost Volume Profit Analysis

Comparative Analysis: Comparative analysis means comparing two or more comparable alternatives, processes, products, qualifications, sets of data, systems, etc. In accounting, for example, changes in a financial statement’s items over several accounting periods could be presented together to detect emerging trends in the firm’s operations and results. Comparative analysis is performed by professionals who prepare reports using financial tools and techniques that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases for making business decisions.

These decisions include:

• Continue or discontinue its main operation or part of its business;
• Make or purchase certain materials in the manufacture of its product;
• Acquire or rent/lease certain machinery and equipment in the production of its goods;
• Issue stocks or negotiate for a bank loan to increase its working capital;
• Make decisions regarding investing and lending capital;
• Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

Comparative analysis often assesses the firm’s:

1. Profitability: The firm’s ability to earn income and sustain growth in both the short-term and long-term. A company’s degree of profitability is usually based on the income statement, which reports on the company’s results of operations.
2. Solvency: The firm’s ability to pay off its obligations to creditors and third parties in the long term.
3. Liquidity: The firm’s ability to maintain a positive cash flow while satisfying immediate obligations.
4. Stability: The firm’s ability to remain in business in the long run without having to sustain significant losses in the conduct of its business. Assessing a company’s stability requires the use of the income statements and the balance sheet, as well as other financial and non-financial indicators.

Methods of Comparative Analysis:

Comparative analysts often compare on the basis of the following:

• Past Performance: Across historical time periods for the same firm (e.g., the last five years).
• Future Performance: Using historical figures and certain mathematical and statistical techniques, including present and future values. This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.
• Comparative Performance: Comparison between similar firms.

Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:

• They say little about the firm’s prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.
• One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive and exact picture of the firm’s performance.
• Seasonal factors may prevent year-end values from being representative. A ratio’s values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.
• Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.

Financial analysts can also use percentage analysis, which involves reducing a series of figures as a percentage of some base amount. For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over a given time period are expressed as a percentage, it is known as horizontal analysis. Vertical or common-size analysis reduces all items on a statement to a “common size” as a percentage of some base value, which assists in comparability with other companies of different sizes. As a result, all Income Statement items are divided by Sales, and all other Balance Sheet items are divided by Total Assets.

Another method is comparative analysis. This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.

Balance Sheet Basics

In financial accounting, the balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, or a company. Assets, liabilities, and ownership equity are listed as of a specific date, such as the end of the financial year. A balance sheet is often described as a “snapshot of a company’s financial condition.” The balance sheet is the only statement that applies to a single point in time of a business’s calendar year. Understanding the balance sheet is very important because it gives an idea of the financial strength of a company at any given point in time.

The various components of the balance sheet are as follows:

Assets: Anything tangible or intangible that is capable of being owned or controlled to produce value and is held to have positive economic value is considered an asset.

• Gross Block: The total value of all the assets that a company owns, determined by the amount it cost to acquire these assets. It includes depreciation charged on each asset.
• Net Block: The gross block less accumulated depreciation on assets. Net block represents the actual worth of the asset to the company.
• Capital Work-In-Progress: Sometimes, at the end of the financial year, there is some construction or installation ongoing in the company, which is not complete. Such installation is recorded in the books as capital work in progress because it is an asset for the business.
• Investments: If the company has made some investments out of its free cash, it is recorded under the head investments.
• Inventory: The raw materials, work-in-process goods, and completely finished goods that are considered to be part of a business’s assets and are ready or will be ready for sale.
• Receivables: Includes the debtors of the company, i.e., it includes all those accounts that owe money to the company.
• Other Current Assets: Includes all the assets that can be converted into cash within a very short period, like cash in bank accounts.

Liabilities: In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services, or other yielding of economic benefits in the future.

• Share Capital: Share capital or issued capital refers to the portion of a company’s equity obtained by trading stock to a shareholder for cash or an equivalent item of capital value. Share capital usually comprises the nominal values of all shares issued, less those repurchased by the company. It includes both ordinary shares and preference shares. If the market value of shares is greater than their nominal value (value at par), the shares are said to be at a premium, also called share premium.
• Reserves and Surpluses: Amount appropriated out of earned surplus or retained earnings for future plans or unforeseen expenditure. It includes the free reserves of the company built out of genuine profits. Together they are known as the net worth of the company.
• Total Debt: Includes the long-term and short-term debt of the company. Long-term debt is for a longer duration, usually more than three years, like debentures. Short-term debt is for a shorter duration, usually less than a year, like bank finance for working capital.
• Creditors: Entities to which the company owes money.
• Other Liabilities and Provisions: Includes all liabilities that do not fall under any of the above heads and various provisions made.

Profit and Loss Statement

The Profit and Loss Statement, also known as the Income Statement, is a company’s financial statement that indicates how revenue (money received from the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”). It displays the revenues recognized for a specific period and the costs and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.

Items in the Profit & Loss Statement

Operating Expenses:

• Revenue: Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances.
• Expenses: Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major operations.
• General and Administrative Expenses: Represent expenses to manage the business, including salaries of officers/executives, legal and professional fees, utilities, insurance, depreciation of office buildings and equipment, office rents, office supplies, etc.
• Selling Expenses: Represent expenses needed to sell products, including salaries of salespeople, commissions, travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.
• R & D Expenses: Investigative activities conducted by a business with the intention of making a discovery that can either lead to the development of new products or procedures or the improvement of existing products or procedures.
• Depreciation/Amortization: Charges with respect to fixed assets/intangible assets that have been capitalized on the balance sheet for a specific accounting period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement.

Non-operating Expenses:

• Other Revenues or Gains: Revenues and gains from activities other than primary business activities (e.g., rent, income from patents). It also includes unusual gains that are either unusual or infrequent but not both (e.g., gain from the sale of securities or gain from disposal of fixed assets).
• Other Expenses or Losses: Expenses or losses not related to primary business operations (e.g., foreign exchange loss).
• Finance Costs: Costs of borrowing from various creditors (e.g., interest expenses, bank charges).
• Income Tax Expense: Sum of the amount payable to tax authorities for the current reporting period (current tax liabilities/tax payable) and the amount of deferred tax liabilities (or assets).

Irregular Items: These are reported separately to better predict future cash flows. Irregular items most likely may not appear in the next year. They are reported as net of taxes.

• Extraordinary Items: Both unusual (abnormal) and infrequent, such as unexpected natural disasters, expropriation, prohibitions under new regulations. Natural disasters might not qualify depending on the location (e.g., frost damage would not qualify in Canada, but it would in the tropics).
• Changes in Accounting Principles: For example, deciding to depreciate an investment property that has previously not been depreciated. However, changes in estimates (e.g., estimated useful life of fixed assets) do not qualify.
• Discontinued Operations: These are the most common type of irregular items. Shifting business location, stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations.

Retail Background of the Industry

The Indian retail industry is divided into organized and unorganized sectors. Organized retailing refers to trading activities undertaken by licensed retailers, i.e., those who are registered for sales tax, income tax, etc. These include corporate-backed hypermarkets and retail chains, and also privately owned large retail businesses. Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, hand-cart and pavement vendors, etc. India’s retail sector is evolving rapidly and with a three-year compounded annual growth rate of 46.64 percent, retail is the fastest-growing sector in the Indian economy. Traditional markets are making way for new formats such as departmental stores, hypermarkets, supermarkets, and specialist stores. Western-style malls have begun appearing in metros and second-rung cities alike, introducing the Indian consumer to a previously unparalleled shopping experience. The Indian retail sector is highly fragmented with 97 percent of its business being run by unorganized retailers, like traditional family-run stores and corner stores. The organized retail sector is still in a nascent stage, though attempts are being made to increase its proportion to 9-10 percent by 2015, bringing huge opportunities for prospective new players. This sector is the largest source of employment after agriculture and has deep penetration into rural India, generating more than 10 percent of India’s GDP.

The last few years have witnessed immense growth in this sector, with key drivers being the changing consumer profile and demographics, an increase in the number of international brands available in the Indian market, economic implications of the government increasing urbanization, credit availability, improvement in infrastructure, increasing investments in technology, and real estate building a world-class shopping environment for consumers. To keep pace with the increasing demand, there has been a hectic activity in terms of the entry of international labels, expansion plans, and focus on technology, operations, and processes. This has led to more complex relationships involving suppliers, third-party distributors, and retailers, which can be managed with the help of an efficient supply chain. A proper supply chain will help to meet the competition head-on, manage stock availability, supplier relations, new value-added services, cost-cutting, and most importantly reduce the wastage levels in fresh produce.

Large Indian players like Reliance, K. Rahejas, Bharti Airtel, ITC, and many others are making significant investments in this sector, leading to the emergence of big retailers who can bargain with suppliers to reap economies of scale. Hence, discounting is becoming an accepted practice. Proper infrastructure is a prerequisite in retailing, which would help modernize India and facilitate rapid economic growth. This would help in the efficient delivery of goods and value-added services to the consumer, making a higher contribution to the GDP. International retailers see India as the last retailing frontier left, as China’s retail sector is becoming saturated. However, the Indian government restrictions on FDI are creating ripples among international players like Walmart, Tesco, and many other retail giants struggling to enter Indian markets. As of now, the government has allowed only 51 percent FDI in the sector to ‘one-brand’ shops like Nike, Reebok, etc. However, other international players are taking alternative routes to enter the Indian retail market indirectly via strategic licensing agreements, franchise agreements, and cash-and-carry wholesale trading (since 100 percent FDI is allowed in wholesale trading).

Retail Industry

India has one of the largest numbers of retail outlets in the world. Of the 12 million retail outlets present in the country, nearly 5 million sell food and related products. Though the market has been dominated by unorganized players, the entry of domestic and international organized players is set to change the scenario. The organized retail segment has been growing at a blistering pace, exceeding all previous estimates. According to a study by Deloitte Haskins and Sells, organized retail has increased its share from 8 percent of total retail sales in 2012 to 10 percent in 2013. The fastest-growing segments have been wholesale cash-and-carry stores (150 percent), followed by supermarkets (100 percent) and hypermarkets (75-80 percent). Further, it estimates the organized segment to account for 25 percent of total sales by 2014.

The Indian retail industry is the largest industry in India, employing around 8% of the population and contributing over 10% of the country’s GDP. Retail industry in India is expected to rise by 25% yearly, driven by strong income growth, changing lifestyles, and favorable demographic patterns. It is expected that by 2016, the modern retail industry in India will be worth US$ 200-225 billion. The Indian retail industry is one of the fastest-growing industries with revenue expected to amount to US$ 350 billion in 2014, increasing at a rate of 5% annually. A further increase of 7-8% is expected in the retail industry by 2015, driven by growth in consumerism in urban areas, rising incomes, and a steep rise in rural consumption. It has been predicted that the retail industry in India will amount to US$ 21.5 billion by 2015, up from the current size of US$ 7.5 billion.

Shopping in India has witnessed a revolution with changes in consumer buying behavior and the whole format of shopping also altering. The modern retail industry in India can be seen in the presence of multi-storeyed malls, huge shopping centers, and sprawling complexes offering food, shopping, and entertainment all under the same roof. The retail industry in India is expanding aggressively, creating a great demand for real estate. Indian retailers’ preferred means of expansion is to move into other regions and increase the number of their outlets in a city. The retail industry in India is progressing well, and for this to continue, both retailers and the Indian government need to make a combined effort.

The retail sector, one of India’s largest industries, has emerged as one of the most dynamic and fast-paced industries, with several players entering the market. India is seen as a potential goldmine for retail investors from around the world. India earned $511 billion in 2012 and is attracting both local and global players. Organized retail still accounts for less than 5% of the market but is expected to grow at a CAGR of 40%, from $20 billion in 2007 to $107 billion by 2013, and to $1.3 trillion by 2018, at a CAGR of 10%. India has one of the largest numbers of retail outlets in the world. One of the 12 million retail outlets present in the country, nearly 5 million sell food and related products. Though the market has been dominated by unorganized players, the entry of domestic and international organized players is set to change the scenario.

As the contemporary retail sector in India is reflected in sprawling shopping centers, multiplex malls, and huge complexes offering shopping, entertainment, and food all under one roof, the concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. This has also contributed to large-scale investments in the real estate sector, with major national and global players investing in developing infrastructure and constructing retail businesses. The retailing configuration in India is fast developing, as shopping malls are increasingly becoming familiar in large cities. When it comes to the development of retail space, especially malls, the Tier II cities are no longer behind in the race. If development plans until 2007 are studied, they show the projection of 220 shopping malls, with 139 malls in metros and the remaining 81 in Tier II cities. The government of states like Delhi and the National Capital Region (NCR) are very supportive of permitting the use of land for commercial development, thus increasing the availability of land for retail space and making NCR host to 50% of the malls in India.

Indian Retail Industry – Its Growth, Challenges, and Opportunities

The contemporary retail sector in India is reflected in sprawling shopping centers, multiplex malls, and huge complexes offering shopping, entertainment, and food all under one roof. The concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. This has also contributed to large-scale investment in the real estate sector, with major national and global players investing in developing infrastructure and constructing retail businesses.

The trends driving the growth of the retail sector in India are:

• Low Share of Organized Retailing: The organized retail sector currently holds a small share of the overall retail market, presenting a significant opportunity for growth.
• Falling Real Estate Prices: Lower real estate costs make it more feasible for retailers to expand and establish new stores.
• Increase in Disposable Income and Customer Aspiration: Higher income levels and aspirations for a better lifestyle are driving consumer spending.
• Increase in Expenditure for Luxury Items: There is a growing market for luxury goods and services.

Another credible factor in the prospects of the retail sector in India is the increase in the young working population. In India, hefty pay packets, nuclear families in urban areas, increasing numbers of working women, and emerging opportunities in the service sector are key growth drivers for the organized retail sector, which now boasts retailing almost all lifestyle preferences, including apparel & accessories, appliances, electronics, cosmetics and toiletries, and home & office products. With this, the retail sector in India is witnessing rejuvenation as traditional markets make way for new formats such as departmental stores, hypermarkets, supermarkets, and specialty stores.

The retailing configuration in India is fast developing, as shopping malls are increasingly becoming familiar in large cities. When it comes to the development of retail space, especially malls, Tier II cities are no longer behind in the race. If development plans until 2007 are studied, they show the projection of 220 shopping malls, with 139 malls in metros and the remaining 81 in Tier II cities. The government of states like Delhi and the National Capital Region (NCR) are very supportive of permitting the use of land for commercial development, thus increasing the availability of land for retail space and making NCR host to 50% of the malls in India.

The Indian Retail Scene

India is a country with the most unorganized retail market. Traditionally, retailing has been a family’s livelihood, with their shop in the front and their house at the back while they run the retail business. More than 99% of retailers operate in less than 500 square feet of shopping space. Global retail consultants, KSA Techno Park, have estimated that organized retailing in India is expected to reach Rs 35,000 crore by 2013-14. The Indian retail sector is estimated at around Rs 90,000 crore, of which the organized sector accounts for a mere 2 percent, indicating a huge potential market opportunity for customer-savvy organized retailers.

The purchasing power of the Indian urban consumer is growing, and branded merchandise in categories like apparel, cosmetics, shoes, and watches are slowly becoming lifestyle products widely accepted by the urban Indian consumer. Indian retailers need to take advantage of this growth and aim to grow, diversify, and introduce new formats while paying more attention to the brand-building process. The emphasis should be on retail as a brand rather than retailers selling brands. The focus should be on branding the retail business itself. In their preparation to face fierce competitive pressure, Indian retailers must recognize the value of building their own stores as brands to reinforce their market positioning and communicate quality and value for money. The Indian retail scene has witnessed many players in a short time, crowding several categories without looking at their core competencies or having a well-thought-out branding strategy.

Strategies, Trends, and Opportunities

Retailing in India is gradually inching its way toward becoming the next boom industry. The whole concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retail has entered India as seen in sprawling shopping centers, multiplex malls, and huge complexes offering shopping, entertainment, and food all under one roof.

The outlook for private consumption has become more negative, and customers are becoming more cautious. The retail sector is concentrated. Indian retail chains are meeting stiff competition through increased efficiency, centralizing purchases, forming international alliances, and expanding operations.

As the contemporary retail sector in India is reflected in sprawling shopping centers, multiplex malls, and huge complexes offering shopping, entertainment, and food all under one roof, the concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. This has also contributed to large-scale investment in the real estate sector, with major national and global players investing in developing infrastructure and constructing retail businesses. The retailing configuration in India is fast developing, as shopping malls are increasingly becoming familiar in large cities. When it comes to the development of retail space, especially malls, Tier II cities are no longer behind in the race. If development plans until 2007 are studied, they show the projection of 220 shopping malls, with 139 malls in metros and the remaining 81 in Tier II cities. The government of states like Delhi and the National Capital Region (NCR) are very supportive of permitting the use of land for commercial development, thus increasing the availability of land for retail space and making NCR host to 50% of the malls in India.

In conclusion, the Indian retail industry is poised for significant growth, driven by changing consumer profiles, increased disposable income, urbanization, and favorable government policies. The entry of both domestic and international players is set to transform the retail landscape, creating new opportunities and challenges. To succeed in this dynamic environment, retailers must focus on building strong brands, leveraging technology, and delivering superior customer experiences. The future of retail in India is bright, with the potential to become a major contributor to the country’s economic growth and development.