An Analysis of Inventory Turnover and Its Impact on Financial Performance in Indian Organized Retail Industry

Article excerpt

The purpose of this research paper is to assess the operational efficiency of the companies in the Indian organized retail industry, expressed in terms of inventory days, and to investigate the impact of the inventory days on the key financial indicators. Panel data was collected from CMIE's Prowess database for the period 2000-2010 for three retailers viz., Pantaloon Retail (India) Ltd., Shopper's Stop Ltd. and Trent Ltd. These are considered as the representatives of the industry due to high market share. Fixed effect model has been used to analyze the panel data. For the data analysis, ANOVA is used to check the significance of differences in the inventory holding period of the case companies. Further, for analyzing financial impact of inventory holding period, regression analysis is used. The results suggest large differences in the inventory positions of companies under study. An inverse relationship is observed between inventory days and the financial performance ratios under consideration which is partially supported by the regression function. Interestingly, significant results could not be obtained for all the companies under study. The findings have policy implications as the measures could be implemented for improving the inventory position and thereby the financial performance by the retailers.

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INTRODUCTION

Indian organized retail industry is understood to be a key sector of the economy due to plenty of opportunities in the sector. It is understood that the retailers who follow the legal compliances of the business constitute the organised segment of the retailing business. These mainly include the big corporations who operate through a chain of stores. Unorganised retailing is the conventional form of retailing where the investment in business is very low and many a times without a proper brick and mortar setup. Despite plenty of opportunities available for the organised retailing in India, the industry is still in its premature stage. The Indian organised retail business seems to be a minnow when compared with its counterparts in other emerging economies. The reasons for this are multiple in which the primary one is the lack of job opportunities. Another key reason is the low cost of investment in unorganised sector due to which many shops get opened in the residential premises by simple modification of infrastructure. This unorganised setup (Mom and Pop) is commonly referred to as a 'kirana' store in India. Given the low cost of investment and the low portfolio of products and services, the unorganised sector suffers from lack of deployment of technology and business management skills. Entrepreneurial skills are developed over a period of time with rich experience where the expertise of business management evolving from various B-schools is not put to test due to the lack of paying capacity (Guruswamy et.al., 2005). This is due to strong competition in the retail industry, especially in the grocery retail where kiranas and local markets pose a big threat to the organised set up. The "economics of small-format grocery retailing in India" has been misunderstood by Subhiksha (a store brand in the organised retail segment in India), who got cash strapped (The Financial Express, 2009), and the employees didn't get their salaries for several months.

Despite all these issues there are unlimited opportunities supporting the Indian economy as a front runner in the future, for high growth in the organised retail sector. The Indian organized retail industry has the capability to grow along with the growing wealth of the Indian middle class due to their rising disposable income (CII- AT Kearney, 2006) thereby increasing the demand for lifestyle goods.

The last decade saw a great boom in the organised retail industry in India which is attributed to the changing demographics, international brands foraying in India, infrastructure developments, credit availability, usage of latest technology and a world class shopping experience. …