organised retail store

Electronic copy available at: http://ssrn.com/abstract=2403858

1 SIT Journal of Management

Vol. 3. No. Special. November 2013. Pp. 1-11

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A Comparative Study of Organized and Unorganized Retail Sectors in

Bangalore

Mihir Dash* & Sam Chandy**

Abstract

This study analyzes the challenges and opportunities faced by organized and unorganized retail

players in Bangalore. It was found that organized retailers see competition from the unorganized

sector as their biggest challenge, followed by competition between organized retailers and the

inefficiency of distribution channels, internal logistical problem and retail shrinkage, while

unorganized retailers see organized retailing as their major challenge, followed by cost of

operation, logistical problems, competition between other kirana retailers and inefficient

distribution channels. It was also found that organized retailers see Bangalores growing middle

class as their greatest opportunity followed by large number of earning youth customers,

Bangalore having people from all over India, proportionate increase in spending with earnings

and Indias booming economy, while the kirana retailers see Bangalore having people from all

over India as their biggest opportunity, followed by Bangalores growing middle class, Indias

booming economy, large number of educational institutions in Bangalore and proportionate

increase in spending with earnings. Thus, the study found that the major challenges as well as

opportunities of organized and unorganized retail are almost the same. This means that

mitigating the challenges and leveraging on the opportunities could benefit both sectors.

Keywords: retailing, organized and unorganized retailing, competition, distribution channels,

logistics, retail shrinkage, cost of operation.

*Mihir Dash, School of Business, Alliance UniversityChikkahagade Cross, Chandapura-Anekal

Road,Anekal, Bangalore-562106e-mail: [email protected], M: +91-9945182465.

**Sam Chandy, Vice President, Operations, Supercold Refrigeration Systems Pvt. Ltd. Industrial

Estate, Manvila, Kulathur P.O.Trivandrum, Kerala 695583.




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Introduction Indian retail is expected to experience tremendous growth in coming years, and is already

labeled as the sunshine sector in India. The Indian retail sector can be broadly classified into the

organized and the unorganized retail sectors. The unorganized retail sector typically consists of

small-time family-run retail outlets popularly known as mom and pop stores or kirana stores.

The organized retail sector typically consists of large retailers with large numbers of outlets,

product assortment, customer convenience, and so on.

The organized retail industry in India is estimated to be an impressive US $518 billion in 2012,

and has been growing at 10.6% over 2011-12. However, the retail market in India is the most

fragmented in the world. Only 8% of the entire retailing business in India is in the organized

sector, and this share is expected to grow to 20% by 2020. However, this growth may be

impossible without overcoming the numerous challenges faced by the industry.

Organized retail is in the stages of finding its feet in India even now. Organized retail trade

makes up over 70-80% of total trade in developed economies. Indias retail contribution is quite

low even when compared to other developing Asian economies like China, Thailand, South

Korea and Philippines, all of which have retail contributions close to 20-35%. These figures

quite clearly reveal the relative underdevelopment of the Indian organized retail sector.

Challenges faced by Organized Retail Sector in India

The organized retail sector in India is still at a developmental stage, characterized by a very

small number of players trying to create a new paradigm. To become a flourishing industry, the

Indian retail sector has to attract leading Indian and foreign players to make substantial

investments. In addition to this, a number of challenges which organized retailing faces are

identified.1

1 http://www.naukrihub.com/india/retail/overview/challenges/



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Technology is one of the major challenges faced by organized retailers; specifically, the

availability, feasibility, and adoption of technology. Technology is already being widely used for

a host of activities including theft prevention, logistics, billing & payment. The scope of

technology is much wider, and can be used for other functions like understanding customer

preference using RFID, keeping track of customers using CRM packages, enterprise

management tools (ERP), and so on. In particular, technology can be leveraged to alleviate

internal logistical problems and to make distribution channels more efficient. Retail majors are

under serious pressure to improve their supply chain systems and distribution channels and reach

the levels of quality and service desired by customers. This is coupled with the challenge of

recruiting and retaining specialized talent to manage the technology.

Another challenge is that of lack of adequate infrastructure, including proper pliable roads,

airports and railway stations capable of handling large consignments on a daily basis, proper

warehouses, cold storage systems, roads with less traffic, proper connectivity etc. This is coupled

with the problems of power supply. The lack of proper infrastructure and distribution channels in

the country results in inefficient processes.

Another challenge is that of cost of operation, arising from: higher labor costs, social security to

employees, high quality real estate, rentals, security, maintenance, much bigger premises,

comfort facilities such as air-conditioning, back-up power supply, higher electricity tariffs, taxes,

and so on. This is added to the increasing cost of land and increasing rental rates.

Competition is another major challenge, from unorganized sector, from other organized sector

players, and from international players. Traditional retailing in the form of kirana stores, with its

low cost structure, has adapted to the advent of organized retail, becoming more customer

friendly by offering credit, home deliveries, and so on, adding a personal touch to shopping that

organized retailers may find impossible to emulate. Organized retail players also compete, with

loyalty programs, home delivery of goods, customer retention strategies, offers, and discounts.

International players are also in the scene. Currently, FDI in retail is restricted to 51%, but it is

expected to be thrown open to international competition.



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Opportunities for the Organized Retail Sector in India

These are factors which are, to an extent, opportunities, and which have the potential to leave a

positive impact on the retail landscape if effectively tapped.

Indias economy is a major source of opportunity. Indias economy is currently the third largest

in the world, with a GDP of US $4.735 trillion in 2012, and growing at 6.7% p.a. This has been

accompanied with a huge growth in incomes, and a proportionate increase in spending. The

Indian middle class is fast-growing, expected to reach 267 million by 2015. Also, there has been

a shift in the age profile of spenders - a new set of young earners, in their mid-twenties, has

emerged - the Gen Y - and over seven million people are entering this category every year.

India is a very young nation, with two-thirds of its population is below the age of 35, and nearly

50 % is below 25.

Another source of opportunity is the tremendous growth in recent years of metropolitan cities

such as Bangalore. The top six metropolitan cities of Mumbai, Delhi, Chennai, Kolkata,

Bangalore and Hyderabad are at the centre of Indias booming economy, representing 6% of the

population yet contributing 14% of Indias GDP; also, 85% of Indias urban retail market is

concentrated in these cities. In particular, Bangalores position as Indias major economic hub

has consolidated over the years. Bangalore's US$ 60.5 billion economy makes it a major

economic centre in India, housing many industries, including heavy industries, education,

software companies, aerospace, telecommunications, machine tools, heavy equipment, and

defense establishments. In particular, Bangalore is the Silicon Valley of India, the leading

contributor to India's IT industry. This has attracted many non-Bangaloreans to come to

Bangalore for reasons like job, higher education, training, and so on. This has lead to increased

diversity and a cosmopolitan culture, with a growing consumer/mall culture.

Bangalores fast developing infrastructure also plays a role in attracting the organized retail

sector. Bangalore is undoubtedly one of the fastest growing cities in Asia and also one of the

most sought after cities in India by people, companies, multinationals and tourists. Bangalore



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city has also seen great improvements in its roads, highways and other infrastructure, including

several flyovers, road projects, and the Bangalore Metro project.

The present study focuses on the challenges and opportunities faced by organized retail players.

The objectives of the study include identifying the factors promoting or restricting the growth of

organized retailing in Bangalore, comparing the extent of impact of the identified factors (both

challenges and opportunities) within different product-based shop formats across organized

retailers, comparing the organized and unorganized retailing scenario in Bangalore in order to

understand these segments and to find out if they share the same challenge and opportunity

factors, and comparing the organized and kirana sectors to understand their individual strengths

and weaknesses.

Organized retailing, if at all it should grow to its expected levels, will grow from urban areas like

Bangalore, Mumbai, Delhi, Kochi, Kolkata and Chennai where it already has a presence. The

future of organized retailing depends on the performance of this sector in the above mentioned

cities. For this reason, the study was carried out in the city of Bangalore among organized

retailers. Since this study deals with the challenges faced by organized retailers, it could, to an

extent be generalized for the other major cities in India. However, this generalization may vary

depending on factors like presence of airports, ports, proper infrastructure, availability and

adoption of technology, availability of skilled labor, mindset of state governments, mindset of

people, and other local factors across states.

Data and Methodology:

The data for the study was collected from a sample of one hundred managers of organized retail

outlets and one hundred unorganized retail outlets in order to assess the impact of the challenge

and opportunity factors. The sample retail outlets were selected by convenience sampling

methods. The respondents were administered a structured questionnaire in which they were

asked to rate the extent to which they were affected by each challenge factor and each

opportunity factor on a seven-point Likert scale. Data was also collected from retailers to assess

the extent of impact of each factor on the different product formats.



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The challenge factors considered were: Technology, Internal Logistics, Skilled workforce, Retail

Shrinkage, Understanding Customers (Behavior and Loyalty), Coping with Ever-Increasing

Customer Demand, Inefficient Distribution Channels, Lack of infrastructure, Power Supply

issues, Cost of operation, Land & Rental Rates, Competition from the other Sector, Competition

between Retailers of same sector, and Government opposition to FDI. The opportunity factors

considered were: Indias booming economy, Large, earning youth customer base, Proportionate

increase in spending with earnings, Increase in trend of Impulse buying, High bargaining power

with suppliers, In house branding of goods, Bangalore's position as India's major economic hub,

Bangalores fast developing infrastructure, Bangalore's growing middle class, Bangalore has

people from all over India, Large number of educational institutions, Bangalore developing as a

tourist destination, and the Growing mall culture in Bangalore

Findings The extent to which organized and unorganized retailers perceive the impact of the challenge

factors is summarized in Table 1.

Table 1: Table showing mean ratings of Challenge factors

Organized

Retailers

Kirana

Stores F value p-value

Technology Availability, adoption and feasibility 4.76 3.17 100.778 0.000

Internal Logistical Problem 5.20 5.59 6.116 0.014

Availability of skilled workforce 4.65 4.98 2.503 0.115

Retail Shrinkage 5.05 4.91 0.526 0.469

Understanding Customers (Behavior and Loyalty) 5.00 4.63 5.480 0.020

Ever Increasing Customer Demand 4.50 4.20 2.793 0.096

Inefficient Distribution Channels 5.26 5.35 0.254 0.615

Delays due to lack of infrastructure 4.55 3.83 22.231 0.000

Power Supply 3.40 5.24 220.162 0.000

Land & Rental Rates 4.10 5.18 60.852 0.000

Competition from the other Sector 5.89 6.06 1.129 0.289

Competition between Retailers of same sector 5.77 5.50 3.075 0.081

Cost of operation 4.64 5.60 43.646 0.000

Government opposition to FDI 1.00 1.00

Source: Primary Data

Organized retailers see competition from the unorganized sector as their biggest challenge,

followed by competition between organized retailers and the inefficiency of distribution

channels, internal logistical problem and retail shrinkage. For unorganized retailers, the major

challenge they see ahead of them is organized retailing, followed by cost of operation, logistical

problem, competition between other kirana retailers and inefficient distribution channels.

Governments opposition to FDI does not seem to affect organized or unorganized sectors.



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Overall, it was found that the first few rankings are the same for organized and unorganized

retailing. So it can be understood that the major challenges faced by organized and unorganized

retailers are largely the same. Dealing with these challenges could lead to the benefit of both

sides, and the co-existence of both kirana and organized retailing in the same retail landscape.

The extent to which organized and unorganized retailers perceive different opportunity factors is

summarized in Table 2.

Table 2: Table showing mean ratings of Opportunity factors

Organized

Retailers

Kirana

Stores F value p-value

Indias booming economy 5.27 5.49 2.387 0.124

Large, earning youth customers 5.81 4.27 71.343 0.000

Bangalore developing as a tourist destination 4.58 5.03 4.782 0.030

Increase in trend of Impulse buying 4.71 3.72 32.263 0.000

Large number of educational institutions 5.26 5.43 0.823 0.365

Bangalore has people from all over India 5.46 6.01 16.653 0.000

Bangalore's growing middle class 6.00 5.69 3.846 0.051

Bangalore's position as India's major economic hub 4.47 5.01 8.298 0.004

Proportionate increase in spending with earnings 5.28 5.36 0.190 0.663

Growing mall culture in Bangalore 4.74 4.35 3.163 0.077

High bargaining power with suppliers 3.35 1.73 96.064 0.000

In house branding of goods 3.21 3.14 0.092 0.761

Bangalores fast developing infrastructure 4.64 5.31 16.194 0.000


Organized retailers see Bangalores growing middle class as their greatest opportunity followed

by large number of earning youth customers, Bangalore having people from all over India,

proportionate increase in spending with earnings and Indias booming economy. The kirana

retailers on the other hand see Bangalore having people from all over India as their biggest

opportunity followed by Bangalores growing middle class, Indias booming economy, large

number of educational institutions in Bangalore and proportionate increase in spending with

earnings. Organized retailers as well as unorganized retailers feel that higher bargaining power

with suppliers and in-house branding of goods are not a huge opportunity.

Comparing between the organized and unorganized sectors of retailing, it was found that even

though there are differences in the extent to which organized retail and unorganized retail sector

perceives a challenge or opportunity factor, the first few major factors are common for both

segments.



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The extent to which the challenge and opportunity factors are perceived to affect different

product segments is summarized in Tables 3 and 4.

Table 3: Table showing Challenge factors in different product segments

Home

Decor &

furnishing

Food &

Beverage

Health,

Beauty

&

Wellness

Books &

Music

General

Merchandise

Electronic

Goods &

Consumer

Appliances

Fashion

(Clothing,

Footwear &

Accessories)

Technology Availability, adoption and

feasibility 3.62 3.95 5.08 5.83 5.77 3.00 5.94

Government opposition to FDI 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Internal Logistical Problem 5.92 5.81 5.17 3.75 6.31 6.00 3.67

Availability of skilled workforce 5.69 4.14 6.08 6.17 2.92 6.36 2.72

Retail Shrinkage 2.54 6.14 5.58 4.33 5.85 3.73 5.94

Understanding Customers (Behavior

and Loyalty) 5.38 4.76 4.17 5.83 3.92 6.18 5.06

Ever Increasing Customer Demand 3.46 4.10 2.58 4.83 6.00 6.18 4.67

Inefficient Distribution Channels 5.77 6.19 5.58 4.58 6.08 5.18 3.50

Delays due to lack of infrastructure

(Roads and Traffic, Airport, Railways,

Ports)

4.54 5.19 4.17 4.50 5.62 4.09 3.61

Power Supply 3.15 4.10 3.00 4.00 3.15 3.18 2.94

Land & Rental Rates 3.69 4.24 3.08 4.92 4.00 3.82 4.61

Competition from Unorganized Sector 3.54 6.14 6.33 6.33 6.23 6.00 6.39

Competition between Retailers 5.69 5.48 5.25 5.08 6.31 6.18 6.33

Cost of operation 4.00 4.43 4.33 5.83 4.00 4.00 5.61


Table 4: Table showing Opportunity factors in different product segments

Home

decor &

furnishing

Food &

beverage

Health,

beauty &

wellness

Books

& music

General

merchandise

Electronic

goods &

consumer

appliances

Fashion

(clothing,

footwear &

accessories)

Indias booming economy 5.62 4.86 5.17 4.75 5.38 6.18 5.28

Large, earning youth customers 6.08 5.71 5.75 6.17 5.08 6.27 5.78

Bangalore developing as a tourist

destination 3.46 5.57 6.33 5.83 3.77 3.64 3.39

Increase in trend of Impulse buying 3.08 4.90 3.75 3.17 6.08 5.18 6.06

Large number of educational

institutions 3.00 5.62 6.17 6.58 4.38 5.27 5.61

Bangalore has people from all over

India 5.92 5.76 6.33 6.00 5.00 4.91 4.50

Bangalore's growing middle class 6.38 6.29 4.08 5.67 6.38 6.27 6.44



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Bangalore's position as India's major

economic hub 3.15 6.14 5.17 3.00 3.92 4.18 4.56

Proportionate increase in spending with

earnings 5.77 6.14 2.75 5.67 5.38 4.64 5.67

Growing mall culture in Bangalore 3.15 4.48 4.42 5.75 4.00 6.18 5.39

High bargaining power with suppliers 2.62 3.00 2.50 1.92 5.15 3.00 4.72


According to the Technopak report on organized retailing in India (2007), the following table

shows the share of each product segment in the total retailing scenario in India in 2006, and a

projection for the year 2010.

Table 5: Table showing the share of various segments in the Indian retail scenario

2006 2010

Home decor & furnishing 3% 4%

Food & beverage 60% 55%

Health, beauty & wellness 7.4% 8%

Books & music 1.6% 2%

General merchandise 4% 5%

Electronic goods & consumer appliances 5% 5%

Fashion (clothing, footwear & accessories) 14% 15%

Others 5% 6%

Source: Technopak 2007 report on Organized Retailing in India

The above figure shows a high 60% share for food and beverage segment in the year 2006,

followed by fashion clothing, footwear and accessories at 14%. Since these segments collectively

contribute to about 74% of the entire gamut of retailing in India, more emphasis should be made

to negate the challenge factors and to leverage upon the opportunity factors faced by these two

segments. Considering the top five challenges and opportunities in case of food & beverage

segment, the following results are found.

Table 6: Table showing ranks of challenges and opportunities for the food and beverage segment

Challenges Opportunities

Rank 1 Inefficient distribution channels Growing middle class

Rank 2 Competition from unorganized sectors Bangalores position as a major economic hub

Rank 3 Retail Shrinkage Proportionate increase in spending with earnings

Rank 4 Internal Logistical problem Bangalore has people from all over India

Rank 5 Competition between organized retailers Large number of earning youth customers


Since food and beverage alone add up to 60% of the entire retailing activities in India, the key to

a successful organized retailing future lies in negating the above mentioned challenges and

leveraging upon the above opportunities. Similarly, considering the top five challenges and



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opportunities in case of Fashion clothes, footwear and accessories segment, we get the following

results.

Table 7: Table showing ranks of challenges and opportunities for fashion clothing and footwear segment

Challenges Opportunities

Rank 1 Competition from the unorganized sector Growing middle class in Bangalore

Rank 2 Competition from organized sector Increase in impulse buying behavior

Rank 3 Retail Shrinkage Large number of earning youth customers

Rank 4 Technology, availability and feasibility Proportionate increase in spending with earnings

Rank 5 Cost of Operation Large number of educational institutions


The fashion clothes, footwear and accessories segment is the biggest Indian retailing segment

after food and beverage. The 2010 projection shows a substantial increase in the share of this

segment over 2006. Therefore it is important to negate the above mentioned challenges and

leverage upon the above opportunities in order to ensure a proper growth, not just of this

segment, but of retailing as such.

Discussion Both organized sector and the unorganized sector see each other as their biggest threat. But

actually, it was found in the study that their major challenges as well as opportunities are almost

the same. This means that mitigating the challenges and leveraging on the opportunities could

benefit both sectors. This comes as a pacifier to the much talked about debate about organized

retailers making unorganized retailers out of business.

It is not possible to deal with all the challenge and opportunity factors all at once. The most

popular product segment in the Indian retailing scenario is the food & beverage segment,

followed by the fashion clothing, footwear and accessories segment. They together contribute to

about 74% of the entire retailing revenue. Therefore dealing with the most critical challenge and

opportunity factors of these two segments would definitely give a face lift to the entire organized

retailing sector.

Organized retail players must adopt strategies to enhance their growth. Without doubt, they have

to make substantial investments in technology to ensure zero wastage of goods, time, effort, etc.;

and in particular, they have to invest in supply chain infrastructure. On the other hand, the

Government can to take several steps to help enhance organized retail growth. It can ensure

single window clearance for retail chains, and can permit FDI in retail in phases, starting perhaps



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with food retailing. It can ensure flexibility of labor laws, ensuring availability of a skilled

workforce for organized retail. It can ease distribution-infrastructure creation and Octroi. It can

ease real estate and rent laws for retail outlets, and enforce zoning laws and city development

plans.

The present study has some mild limitations. The sample selection was judgmental and

convenience-based and this may not be perfectly representative of the retail scenario. Also, the

sample size for kirana retailers was low, and could have given a better representation if a higher

sample size was considered.

References

1) Aggarwal, S. (2008), Rising Mall Rentals in Major Cities Dampen Retailers Early Euphoria, Indian Express, 6th May 2008

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th February 2008

3) Berman, B. and Evans, J.R. (2003), Retail Management: A Strategic Approach, 9th

Ed,

Prentice Hall Publ.

4) Chadha, A.S. (2008), India Most Attractive Retail Destination in the World, The Economic Times, 19

th March 2008

5) Freathy, P. (2003), The Retailing Book: Principles and Applications, Prentice Hall

6) Guha, R. and Jayaswal, R. (2008), Government may allow FDI in food retail, The Economic Times, 22 April 2008

7) Gupta, S.L. (2007), A Study on Trends in Retailing Industry in India - A Case Study on Shopping Malls, BVIMR-Management Edge Journal of Bharati Vidyapeeth University, January-June 2007

8) Singhal, A. (2007), Impending Economic Impact of a resurgent Indian retail sector, Technopak report on organized retailing in India

9) Writangar, M. (2008), Frauds steal retail show, The Economic Times, 22 January 2008