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The Retailers Association of India (RAI) works towards creating a favorable climate for the modern retail industry in the country. Kumar Rajagopalan, CEO, RAI, spoke to Moneylife’s Priyanka Desai on the various challenges facing the industry. This is the first part of a two-part series
Priyanka Desai (ML): Do you perceive high rentals in retail space in India curbing the growth of this sector?
Kumar Rajagopalan (KR): Real estate (for retail) has been a very costly affair traditionally (in India). If you look at most of the stores in the country, they are small stores, known as high-density stores. Such kirana stores are stocked from top to bottom, without giving much thought to ambience. The format of these stores is what has worked for India.
When modern retail came in, ambience gained importance. Retailers started thinking that for a consumer, it was not a very good thing to have a cramped shop. Also, the need for variety was realised - with this, the need for larger stores came in. But the problem of high rentals is still inherent in the country. So, when in the rest of the world, on an average, rentals are about 4% or 3.5% of sales, in India, it can be 8.5%- 9%. This is a very high price to pay especially when the net profits would be 2%-3% of total business.
Rentals are so high that often, retailers feel that they are earning only to pay rentals. During the downturn, rentals started going down. But (now), the problem of high rentals exists. The difference is whether one is paying 12% of sales as rentals or 8%.
The other thing that has happened is that retailers learnt their business well in the downturn. Customer confidence is back in the market (now) and the market is very 'pro-purchase'. Retailers are clocking high sales and rentals are not very high as of now (compared to sales). It has become a slightly better trading environment.
ML: Do you foresee rentals going up in the near future?
KR: There is a possibility (of retail rentals going up) as residential prices are going higher; businesses are improving; hence commercial prices are going up, pushing up rentals. Good commercial properties - especially in the urban parts of the country - are always in short supply, so there is always more demand than supply.
ML: What is your stance on FDI (foreign direct investment) in single-brand stores?
KR: FDI is really needed; we completely support FDI. We have submitted a paper to the government regarding this. FDI will bring in a lot of money into the country, a necessity in the retail sector. It does not mean that foreign investors will come into the country and do business (directly). They will tie up with local brands. Though retail is a global business, the actual business is localised. The retailer has to know the consumer really well. In fact, in a diversified country like ours, with (so) many tastes and styles, one has to tie up with a local retailer who knows his consumer in order to generate great business. We believe global knowledge of retailing coupled with global funds with Indian entrepreneurship is necessary for the retail industry's growth in India.
ML: What is the scope for organised retail in rural areas?
KR: From a pure modern retail perspective, it's still a new pasture. There is high demand in the rural regions as well, but there is still time for retail expansion in these regions, unless someone comes up with a suitable format.
ML: What is your stance on the APMC (Agricultural Produce Marketing Committee) which hinders free movement of goods and makes traders dictate prices?
KR: There is not enough of free transfer of goods & services between the manufacturer and the ultimate seller, which is the retailer. Obviously one should be allowed to purchase and procure (agri-products). The government is also realising the importance and easing APMC norms. It is now much better than what it was before. This will also prove beneficial in checking (food) inflation as more and more organised retailers set up shop in the country. There will be competition, which will make them take up procurement seriously. Farmers too will get a good price for their produce. This will also help in curtailing stock wastage. RAI has submitted a paper (on the subject of easing of APMC norms) and is working closely with the government in this regard. The government has been supportive of this. APMC norms will be eased. One good thing coming out of (high food) inflation is awareness about easing of APMC rules.
ML: Don't you think APMC should be controlled by a central entity rather than leaving it to the mercy of the states?
KR: This should happen, but it will take time. Retail is currently just a state subject; it's not even an industry. However, the agricultural sector is one where states have got a larger role to play. I guess some level of central control is required so that cartelisation of any kind is avoided. But having said that, I think every state can follow a uniform code, compare notes with other states and take it up from there. I don't see any reason why it should be forced upon every state. Some states are ready to experiment and carry out modifications. Otherwise it will be like the goods & services tax (GST), which is taking so much of time to implement, because so many states have to dovetail on to a single focus.
(In the next and concluding part of this two-part series, we will look at the specific problems - and opportunities - facing the sector).
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