Digitizing Small and Micro-Merchants in India - What’s missing?

Our first blog of this series explores the current landscape of small and micro-merchants in India and the potential for digitization to improve business outcomes.

The retail sector is an important indicator of a country's economic well-being as it reflects the level of production and consumption within the economy. A growing economy is reflected in higher consumer spending, primarily in retail. The size of the offline retail market in India is approximately $ 860 billion in 2022

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. However, during times of crisis, retail is one of the first sectors to contract, resulting in reduced consumption and negative impacts on businesses focused on food and consumer goods. This contraction, in turn, affects employment opportunities. This was evident during the COVID-19 pandemic with a near 60%

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decline in business year-on-year in 2020.

Characteristics of the Indian Retail Sector

The Indian retail industry is highly fragmented with 97% of businesses run by unorganized retailers like traditional family-run shops and corner shops. The size of organized retail is small and nascent. A significant proportion of brick-and-mortar stores in India comprise food and grocery (F&G) shops that clock a 16-22% growth y-o-y (except during the pandemic). Only 3-4% of the F&G segment is organized

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. The organized retail market in India has 12% of the total market share. 

The offline retail sector (also known as Fixed Stores) encompasses a wide range of businesses, including brick-and-mortar stores, supermarkets, department stores, and more. Products offered by the retail market in India can generally be categorized into three broad areas:

1. Food Products: This category includes all the operations involved in distributing food and related products to consumers. Ex. grocery stores, kirana, fresh produce stores

2. Consumer Goods: This category encompasses the businesses engaged in selling various products, many of which can be reused or consumed over an extended period of time. Ex. apparel and clothing stores, general merchandise stores, hardware, pharmacies

3. Durable Consumer Goods: This category comprises the activities that offer consumers longer-lasting products such as household appliances, furniture, cookware, and other items of similar nature. Ex. electronics and appliance stores, automotive, jewellery and luxury goods, etc.

What are the segments of offline physical stores?

Officially, these stores are counted under the Medium, Small, and Micro-enterprise (MSME) sector. The MSME sector in India categorizes the market into Micro, Small, and Medium service and manufacturing establishments

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. These are physical stores across the country, with varying scales, turnover, investment, employment, and revenue. The following tables provide an overview of the MSME sector -

In our research, we've divided the market into three categories: large, mid-market, and long-tail

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retail sectors. While these categories align with the MSME classifications, they are specifically tailored to suit our research focus on the retail sector. Typically, retail products are available to consumers through three types of establishments:

The digital technology market for the retail sector in India includes point-of-sale (POS) systems, inventory management software, digital payment solutions, online ordering and delivery platforms, and loyalty programs. Using these technologies, these stores can improve their operational efficiency, reduce costs, and offer customers a more convenient and personalized shopping experience.

Despite multiple solutions existing in the market, a closer understanding of the offline retail sector indicates two findings

1. UPI and POS-based payment systems have taken precedence over other merchant-facing technologies 

2. The digital technological product offering is skewed towards the larger offline stores that have high volume and value of transactions

To elaborate further, the Indian digital payment landscape for merchants is growing at a significant rate. The value of P2M non-cash transactions is expected to grow to $1.7 trillion over 5 years. There are multiple drivers of growth for the payment sector in India. Some of these are illustrated below.

Our findings suggest that in the landscape of digital products, the innovation of payment infrastructure for merchants is almost solved in India. However, in terms of digital innovation for merchants, our research inquiries focus on whether the adoption of digital payment channels is the end goal or whether it is a gateway for merchants to avail of other products and services that can enable and improve business outcomes for them.

Based on our research and understanding of available products in the market, we observe that there is significant unmet potential for digital interventions for micro and small merchants (long-tail merchants) that goes beyond fintech digital payment solutions.

What’s missing in the digital innovation space for micro-merchants?

There is a limited presence of five types of digital interventions for long-tailed merchants in India. These can be listed under four categories - financial products, digitizing the supply chain, cash and account management tools, and digitization of physical stores and value-added services. Below is a list of digital technological products that could benefit the micro-merchants and improve their business performance and outcomes.

To sum up…

The retail industry has faced unprecedented challenges with the emergence of unforeseen circumstances like the COVID-19 pandemic and the rise of e-commerce. To survive in this rapidly changing landscape, retailers have embraced digital interventions and established a strong online presence. Large retailers swiftly adapted with sophisticated in-house e-commerce platforms, and technological solutions while mid-market retailers are scaled enough to utilise the growing number of merchant SaaS offerings. However, long-tail retailers have faced limitations due to their awareness and resource constraints. Despite these differences, adopting digital solutions such as merchant QR Codes has offered convenience for consumers and unlocked new growth opportunities. In the second blog of this series, we explore the vast landscape of digital offerings and Software-as-a-Service (SaaS) solutions tailor-made for retail businesses and identify solution spaces that can benefit offline retail businesses in India.

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All artworks are designed by Himanshi Parmar.

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1. https://www2.deloitte.com/in/en/pages/about-deloitte/articles/future-of-retail-emerging-landscape-of-omni-channel-commerce-in-India.html

2. https://rai.net.in/images/insights/RAI-Anarock%20Retail%20Report.pdf

3. An organised store would be registered and licensed to operate along with filing regular GST returns.

4. MSME annual report - https://msme.gov.in/sites/default/files/MSMEANNUALREPORT2022-23ENGLISH.pdf

5. Our categorisation of long-tail retail for this research combines both small and micro-enterprises under the MSME classification.

Other reports referenced -

1. https://www.crisil.com/content/dam/crisil/mailers/rating-newsletter/2021/february/recovering-from-the-pandemic-shock.pdf

2. Bain and company webinar on digital report - https://www.bain.com/insights/the-future-of-india-retail-payments-webinar/

3. Catalyst report - https://ifmrlead.org/files/catfiles/Fixed-store.pdf

4. Mastercard report - https://ifmrlead.org/files/catfiles/Fixed-store.pdf

5. CFI - https://www.centerforfinancialinclusion.org/the-digital-payments-push-what-50-micro-merchants-in-india-are-saying

6. IBEF, MSME classification - https://www.ibef.org/industry/msme

7. https://ifmrlead.org/files/catfiles/Fixed-store.pdf