GST boost for brick-and-mortar retail expansion

Execution challenges for physical stores are expected to reduce after the implementation

The Goods and Services Tax (GST) regime will be a shot in the arm for the brick-and-mortar retail industry, which has faced major competition from online e-commerce players in the past few years.

Besides the uniform tax, the execution challenges for physical stores are expected to reduce significantly after the implementation of the GST, which has brought optimism for retailers to expand aggressively.

“Today e-commerce companies get an advantage in terms of taxation,” said Kishore Biyani, chief executive officer (CEO), Future Group, which is present across all retail formats from supermarkets to fashion retail business. “The GST will create a great level-playing field and is definitely helping our new expansion plan,” he added.

There have been some changes in the dynamics for brick-and-mortar stores in the past six months. The drying up of funds for some of the e-commerce players was a positive for the physical retail industry. Then the listing success of Avenue Supermarts (D-Mart) boosted investors’ confidence that the brick-and-mortar model can be profitable if executed well. With the GST being implemented in the next few months, the industry looks forward to a level-playing field. “The GST is not just a tax reform, it is a whole new way of doing business,” says Krish Iyer, president & CEO, Walmart India, pointing out the current challenges in terms of inter-state transportation of goods, as it has to pass through various check posts.

This not only affects the efficiency but also increases the transportation cost. “The GST will create a unified national market and, hence, make supply chain and the Indian retail sector more efficient,” said Iyer, whose expansion plans have got a boost with the GST.

The US major’s local arm, which operates wholesale cash-and-carry stores in India, plans to add 50 new such stores in next couple of years to its existing chain of 21. Biyani is even more enthused as he plans a major foray in physical stores. 

When he set a target of growing Future Group’s revenue five times to Rs 1 lakh crore in financial year 2020-21, he did not factor in the GST. Biyani now hopes to do better than his initial target as he plans to open 10,000 neighbourhood stores instead of 4,000 that he had earlier envisaged.

Currently, e-commerce players sell from low value-added tax (VAT) markets such as Hyderabad and Bengaluru. VAT on items such as smartphones in these markets is 5 per cent, much lower than the national average of about 12 per cent. This has led to brands such as Xiaomi and Motorola planning to expand their offline retail from the current model of selling mostly online. Also, under the new tax regime, manufactures will have to depend on wholesalers who will ultimately depend on retailers, including mom-and-pop stores to get the tax-credit based on ultimate transactions with consumers. Since the GST regime is going to have a system of giving grades to every taxpayer, including the small kirana stores, manufacturers are likely to avoid those with lower grades. This could put many small, standalone stores at a disadvantage.

“That is why more organised players will go and open shops there to be in a position to tie up with a local player or take the business over,” said Anil Talreja, partner Deloitte Haskins & Sells. 

Modern retailers like Future Group have already started planning their expansion into neighbourhood stores.

Reliance Retail, the largest Indian retailer, also plans to open 700 stores in the next three years. This includes 200 fashion stores under Reliance Trends, a similar number of food and grocery stores in Fresh and SMART format and around 300 wholesale outlets as a part of its cash-and-carry chain Reliance Market. According to its last official data at the end December quarter, Reliance Retail operated 3,553 stores across 686 cities with an area of over 13.25 million sq ft. 

“With belief in consumption being intact and the ambitions of e-commerce becoming unrealistic, the faith in brick-and-mortar stores has got reinforced in the last six months,” said Arvind Singhal, chairman and managing director at management consulting firm Technopak. “GST certainly makes brick-and- mortar more efficient as it is low on tax and movement of goods for unsold inventory becomes easier,” he added.

Illustration: Ajay Mohanty