by Shatanjoy Ray
Introduction
Competition for market share and in the process the eagerness to capture a major chunk of the revenue is the central objective of all firms. Thus to measure competitiveness and thereby obtain an idea of the industry, has been the focus of many a economist. This has led to the development of many measures to capture the magnitude of competitiveness in the market. The following essay uses the various measures used to capture competitiveness in an industry to obtain a fair idea of the nature of industry. It focuses primarily on the retail industry and uses the example of Bangalore to illustrate the concept.
Competition
Competition is an intrinsic feature of any industry. Competition in business is best described as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms." Seen as the pillar of capitalism in that it may stimulate innovation, encourage efficiency, or drive down prices, competition is touted as the foundation upon which capitalism is justified. According to microeconomic theory, no system of resource allocation is more efficient than pure competition. Competition, according to the theory, causes commercial firms to develop new products, services, and technologies. This gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).
Competition for market share and in the process the eagerness to capture a major chunk of the revenue is the central objective of all firms. Thus to measure competitiveness and thereby obtain an idea of the industry, has been the focus of many a economist. This has led to the development of many measures to capture the magnitude of competitiveness in the market. The following essay uses the various measures used to capture competitiveness in an industry to obtain a fair idea of the nature of industry. It focuses primarily on the retail industry and uses the example of Bangalore to illustrate the concept.
Competition
Competition is an intrinsic feature of any industry. Competition in business is best described as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms." Seen as the pillar of capitalism in that it may stimulate innovation, encourage efficiency, or drive down prices, competition is touted as the foundation upon which capitalism is justified. According to microeconomic theory, no system of resource allocation is more efficient than pure competition. Competition, according to the theory, causes commercial firms to develop new products, services, and technologies. This gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).
Retailing in India
Let us now focus on some key indicators of the Retail Industry in India
· Total Consumer Spend in the Year 03-04 – INR 9300 billion ( USD 375 billion) growing over 5% annually
· Retail sales – 55% at INR 280 billion (USD 205 billion)
· Organised Retail – Only 3% but growing at 30%
· Organised retail to cross INR 1000 billion mark by 2010
· INR 200 billion investment in the pipeline
· Top 6 cities account for 66% of total organized retailing.
· Overwhelming acceptance of modern retail formats.
Fashion drives organized retail.
2004 figures :
Organised retail : Rs. 280 billion Clothing, Textiles & Fashion accessories: 39% Footwear 9% Jwellery & watches 7% Mobile hand sets & accessories 3% Health & Beauty (including services) 2% Food & Grocery 18% Durables 13% Books, Music & Gifts 3% Home 3% Pharma 2% Entertainment 1% Five Reasons why Indian Organized Retail is at the brink of Revolution :
· Scalable and Profitable Retail Models are well established for most of the categories
· Rapid Evolution of New-age Young Indian Consumers
· Retail Space is no more a constraint for growth
· Partnering among Brands, retailers, franchisees, investors and malls
· India is on the radar of Global Retailers Suppliers
Looking Ahead
· Total Consumer Spend in the Year 03-04 – INR 9300 billion ( USD 375 billion) growing over 5% annually
· Retail sales – 55% at INR 280 billion (USD 205 billion)
· Organised Retail – Only 3% but growing at 30%
· Organised retail to cross INR 1000 billion mark by 2010
· INR 200 billion investment in the pipeline
· Top 6 cities account for 66% of total organized retailing.
· Overwhelming acceptance of modern retail formats.
Fashion drives organized retail.
2004 figures :
Organised retail : Rs. 280 billion Clothing, Textiles & Fashion accessories: 39% Footwear 9% Jwellery & watches 7% Mobile hand sets & accessories 3% Health & Beauty (including services) 2% Food & Grocery 18% Durables 13% Books, Music & Gifts 3% Home 3% Pharma 2% Entertainment 1% Five Reasons why Indian Organized Retail is at the brink of Revolution :
· Scalable and Profitable Retail Models are well established for most of the categories
· Rapid Evolution of New-age Young Indian Consumers
· Retail Space is no more a constraint for growth
· Partnering among Brands, retailers, franchisees, investors and malls
· India is on the radar of Global Retailers Suppliers
Looking Ahead
Many strong regional and national players emerging across formats and product categories Most of these players are now geared to expand far more rapidly than the initial years of starting up Most have regained / improved profitability after going through their respective learning curves Malls in India
A decade ago – not a single mall 3 years ago – less than half a dozen Today – 40 malls 2 years from now – 300 malls
INDIA RETAIL BY 2007-08
50 million sq ft of quality space under development
7 major cities to account for 41 million sq ft development
300 malls, shopping centres and multiplexes under construction
To open 35 hypermarkets, 325 large department stores, 1500 supermarkets and over 10,000 new outlets
Thus we observe a lot of activity is taking place in the Retail domain, with a lot of foreign players entering the market through strategic alliances. And with Walmart poised to enter the market through a JV with Bharti Group of India, and Reliance entering the market in a BIG way with its Reliance Fresh concept, the scene is sure to get hotter by the day. This naturally leads us to the question of competitiveness in the retail domain, more so in the grocery space. We conclude by using the measures of Competitiveness to illustrate the state of retail (grocery) in the city of Bangalore. Before we proceed to the Case study, let’s review the various measures of competitiveness.
Thus we observe a lot of activity is taking place in the Retail domain, with a lot of foreign players entering the market through strategic alliances. And with Walmart poised to enter the market through a JV with Bharti Group of India, and Reliance entering the market in a BIG way with its Reliance Fresh concept, the scene is sure to get hotter by the day. This naturally leads us to the question of competitiveness in the retail domain, more so in the grocery space. We conclude by using the measures of Competitiveness to illustrate the state of retail (grocery) in the city of Bangalore. Before we proceed to the Case study, let’s review the various measures of competitiveness.
Measures of Competitiveness
There are two widely used measures of Competitiveness: 1) Concentration Ratio 2) Hirschman-Herfindahl Index. We would briefly analyze the various measures before proceeding further.
Concentration Ratio
This is a widely used measure which is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry.
Market forms can also be classified based on the concentration ratio. Listed in ascending firm size, they are:
· Perfect Competition: a very low Concentration Ratio
· Monopolistic Competition : below 40 % for the 4 firm concentration ratio
· Oligopoly : above 40% for the 4 firm concentration ratio
· Monopoly : with a near 100 % concentration ratio
Hirschman-Herfindahl Index
The Hirschman-Herfindahl Index or HHI, is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 1 moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the HHI generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.
The major advantage of the HHI when compared to other measures of Competitiveness such as the Concentration Ratio, is that the HHI attaches more weight to larger firms.
Take for example an industry where the top six firms produce almost 90% of the total output. Now let us consider the following scenarios:--
1) All the six firms produce 15% of the total output
2) The first company produces 80% and the subsequent five firms produce 2% of the output
In both the cases, we consider that the remaining 10% is divided amongst 10 equally sized firms.
Now for some computation:--
The 6 firm Concentration Ratio in both the cases is 90% but it fails to capture the nature of the market. The HHI gives proper weight to larger firms.
The HHI in Scenario 1 : 6 * (0.15 2 ) + 10 * (0.01 2 ) = 0.136
The HHI in Scenario 2 : (0.8 2 ) + 5 * (0.02 2 ) + 10 * (0.01 2 ) = 0.640
The HHI thus is capable of capturing the nature of the industry. The first scenario is more representative of Perfect Competition, while the latter captures to a great extent the Monopolistic powers of the single firm.
Notatively the HHI is represented as :
Here Si denotes the market share of firm i in the market, and n is the number of firms.
The Hirschman-Herfindahl Index (HHI) ranges from 1 / N to one, where N is the number of firms in the market. Equivalently, the index can range up to 10,000, if percents are used as whole numbers, as in 75 instead of 0.75. The maximum in this case is 1002 = 10,000.
The Hirschman-Herfindahl Index (HHI) ranges from 1 / N to one, where N is the number of firms in the market. Equivalently, the index can range up to 10,000, if percents are used as whole numbers, as in 75 instead of 0.75. The maximum in this case is 1002 = 10,000.
Case Study
Now let us consider the city of Bangalore. It is the capital of the state of Karnataka, and was one of the first cities to taste the fruits of the Retail Revolution. Moreover with the IT boom in the city, the city has witnessed over the last decade a substantial increase in per capita income and subsequently disposable income. The cosmopolitan demographic feature of Bangalore does make it an ideal choice for big retailers to set up shop.
Over the past few years a lot of retailers have set up chain of food and grocery stores. Reliance was the latest to enter under the Reliance Fresh brand name.
We now use the concept of the HHI to calculate and measure the degree of competitiveness in the country. This measure in the context is entirely dependant on the extent of presence in the city. Number of shops present in the city has been considered to arrive at the measure.
Thus the HHI obtained indicates that there is still humungous scope of growth. Moreover, there exists almost perfect competition in the market. Although Foodworld is market leader with almost 27 % market share. It is due to its first mover advantage. In the years to come, it is sure to face a lot of competition from Reliance and Spencers who have lined up a string of new projects. The HHI also indicates, that it is still an open market, and the perfect competition will drive costs down, improve efficiency, and improve the shopping experience of consumers. At the end of the day, consumers will benefit by obtaining better bargains on products across categories. The market might also see consolidation with major players strengthening their presence through M&A s. There would also be efforts on part of the retail chains to capture niche markets.
Limitations and further Extension of this Approach
The limitation of this approach to gauge the nature of the grocery retail market is that it uses number of stores as a determining factor. However a better measure to capture the share of market for each store/retailer would be a ratio of turnover to floor space. This would appropriately capture the revenue per unit of space and would give us a fair idea of the health of the retail chains. However this measure was not considered due to the paucity of data. In future, when the market becomes mature enough and we do have access to secondary data, this study can be extended to incorporate the same.
Another line of extension of this study could be inter city, inter region comparisons. However for this, the retail chains need to extend to Tier II cities and there should come about a change in the way Indian consumers shop. Subject to availability of data the concept can also be used to compare the nature of the organized retail market in an Indian city (such as Bangalore) vis a vis a foreign one such a London, which has an extensive network of retail chains.
Conclusion
The above essay demonstrates that using measures of Competitiveness, particularly the Hirschman-Herfindahl Index, we can analyze the nature of the market for individual products, categories or industries. The future of Retail in India is extremely bright and is experiencing tremendous growth in the past few years. The Retail industry ( Grocery) in Bangalore shows that there exists a lot of competition among retailers and it is more akin to a situation of Perfect Competition. The market is slowly maturing and will soon see consolidation and segmentation.
References
i) “Fast Moving Consumer Goods”—a report by PricewaterhouseCoopers for IBEF
ii) The 2005 Global Retail Development Index—a report by ATKearney
iii) “8 steps to India; helping Australian food companies export to India”—a report
iv) State of Competition in India: An Overview—a CUTS report, 2005
v) ICICI Bank presentation on “FDI in Retail”
vi) CMIE report on Market Size and shares, 1999 and 2005
vii) Various Online Retail Industry magazines for facts and figures
Disclaimer
Facts and Figures stated in this essay have been collated from various Reports of Institutions and online Retail Industry trade magazines. The accuracy of the same has been taken for granted.
