Capital Requirements and Economies of Scale

Capital Requirements and Economies of Scale:

In the case of retail stores, there is lack of good distribution network and lack of knowledge of consumer buying patterns which calls for large investment in distribution channels and research to improve the reach.

Economies of scale is required in as there are large fixed costs associated with setting up a manufacturing plant as there are problems of under-developed infrastructure, erratic supply of water and electricity in many areas, a high cost of capital and continuous up gradation of technical and managerial skills.

Supply Chain Issues:

The existence of too many intermediaries in the supply chain coupled with issues in logistics, management of POS data, pilferage and distribution and inventory management, eats away the profits of the retailer, making it unattractive for new entrants.

Product Differentiation:

Though the awareness is increasing amongst the Indian consumers, retailers and manufacturers are unable to increase brand loyalty. The Indian consumer is very price sensitive and hence he keeps hoping from one place to another, hunting for good deals.

Switching costs vary amongst the electronic categories. For instance, the switching costs in mobile phones are high, as consumers who are used to one brand find it difficult to use another brand. However, for televisions, cameras, and even laptops, consumers are ready to try new brands based on price for features offered and service quality or reputation of the brand.

Government Policy:

By encouraging manufacturing zones and improving the infrastructure, the government is developing the entire manufacturing sector, which will help in boosting the electronics production in India, which has traditionally been a very small slice of the overall manufacturing segment. While the government is trying to encourage the growth of the retail and manufacturing industries in India, there are some policies which need to be looked at.

• The duty structure for electronics adds up to 30% which is a significant amount. This is mainly due to the multiple tax structure which consists of 12% VAT, 8% excise, 4% Goods and Service Tax, 2% Central Sales Tax and Local taxes.

• The FDI policy limits to 51% stake for foreign investors, which forces foreign retailers to use franchise arrangements, and in the manufacturing sector, the FDI is 100% favouring foreign investors.

• Existence of the grey market due to poor government regulations to keep counterfeits at bay coupled with the lack of consumer knowledge and legal recourse encourages manufacturers to churn out spurious products which can lead to lost sales of the tune of 10-15%.

• Red tapes and bribery in the Indian government system is also a stumbling block for new retailers