Anurag Jain's Blog
Monday, December 08, 2003

Retail sector: Overcapacity under way?

With all the recent reports about millions of sq.ft. of retail property under development, looks like we are headed towards overcapacity in the retail sector. Will there be enough demand to sustain the current capacity-building or will it be the same story as white goods MNCs overestimating Indian middle class market in the mid/early 90s?

Some comments from my friends on this topic

In my opinion it is too early to talk of over capacity as the concept of retail mall in India is still in the nacent stage and has not been fully appreciated. What will happen if Wal-mart decide to enter India and revloutionaise the relail industry ? The current players are still not playing the right game and have not fully integrated their operational effeciency as giants like Wal-mart have done. Retailing in all forms will begin to emerge in a more productive manner.

*Sandeep Sharma
Its a key issue which also indicates some level of herd mentality among retailers. Yet It seems to be in the right direction as MDV points out. Indian middle class or the mass consumer is definitely growing with lot of aspiration values and desires for changes in retail formats.

Retailers looking for top line achievements is also tapping as much retail space and get into organized retailing which at present is far below even compared to SE Asian countries what to talk of Europe and US and the likes of Walmarts. In fact petro retailers like us have also started looking at our retail station as retail space for future and working on various plans.

So it is only a matter of time ( right now I agree it is the nascent stage) . Infact, likes of BIG bazzar , food world etc have already shown the way on optimization of retail space with all possible integrations.

* Prof. Dwarika Prasad Uniyal
iI think we need to go to the historical evolution of retail formats in UK, then in US. The development of high streets and downtowns, and slowly the
malli'sm. In india, the traditional markets have evolved around specialised mandis and shops were developed on the both sides of main road of a city which worked as life line for that city. With organised retail just a decade old and the type of formats emerging, its still very early to say which ones will survive and evolve because like any business, in retail too the operational efficinces and critical know how will take some time. Secondly its typical of india that despite of bigger formats coming. hybrid and smaller retailers have grown up too. Since indian consumer class is very heteregenous and so many sub classes, for every CP there is a karol bagh, for a Forum Mall there is gharia hat , for every CG road there is a releif road which is very necessary to cater to the diffeentiated needs of segmented people.

Also it took WAL MART 40 years to reach where it is today. The biggest advantage with indian retailers is that they can benchmark against the best, avoid the mistakes early players have committed and reduce the evolution time to 5 years which was 25 in case of eurpoean formats. With FDI still a question mark, i guess indian retailers will have to learn on their own, understanding indian markets. The question of overcapacity will come little later as even consumers will learn to adapt themselves to new culture of shopping.

Though the shift has happened, from metros to A class towns to B class town.. retailers have slowly realised that skewed growth will be detrimental for their business. Even mall developers will realise that after a point no place can sustain if there is an overcapacity. for example 4 malls in gurgaon???
why can't we have 2 malls there and 2 at ludhiyana and chandigarh?? they are equally lucerative markets...? leaving you with this thought

* Abeer Chakravarty
Overcapacity isn't an issue yet and whether it will be is too premature to conclude at this nascent stage. We are still grappling with formats and markets, and not in a stage of consolidation and conclusion yet. Since we love jumping into a trend, I suspect there would be overcapacity.

Property developers would need to better understand that just any property won't help - key issues would be high-street location for city malls/supermarkets/chains, and anchors for malls. Too few are considering the crtitical need to have huge parking spaces with ability to cart the purchases to the car boot. So it is more likely that we will have wasted capacity rather than overcapacity.

* Raja Sekar
At present i see overcapcity happening only in certain clusters like Gurgaon,Delhi in the near future. But there is good demand for malls if we go beyond the
metros.These places will be the engines for the growth of organised retail after the metros.

Building capacities will also definately bring down one of the main entry barriers like high rentals and improve operational efficiencies.This will also help
to bring in new and smaller players with new concepts and services and contribute to the overall gowth of the organised retail industry.

About Prof Dwarika's point on opening malls in non-metros, he's very right: Just recall what Walmart did in the US. And also recall what Sam Walton said about what he did in the 'country' with Walmart: "First lesson we learned was that there was much, much more business out there in small-town America that anybody, including me, had ever dreamed of."

Of course, there are contextual differences between the two countries but I would still bet on Indian smaller towns being totally 'viable'.

But my original query actually has a relation to this thing that happened with Walmart and the US. What I meant initially was not the evolution of the retail so much, which is essentially supply side (in short-term anyway), but the customer side, which is the demand side. The (disposable) income levels in US were/are very different from what they are in India. So, we can build malls after malls in India with the current thought process being "If we build, they'll come". But my question is: would the reality of lower income levels, and probably overestimation of demand, lead to a major dip in organized retail's prospects in near future (2-3 years)?

My understanding and opinion is that there'll be a major indigenization (spelling?) of retail formats after a failure of (majority of) mega malls after 2-3 years (Remember goofy off-the-shelf ERP implementation at Shoppers Stop leading to major losses 2 years back?) . And thats what will lead to a second phase of indigenous retail practices leading to a better retail future. Just a guess, no hard facts!

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