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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Pref ace

| Foreword | Executive Summary | Methodology | Indian Retail Industry | Insights | Interview Section | Company Listing | Sponsors | Launch Event | D&B
Editorial Team

The retail sector has been at the helm of Indias growth story. The sector has evolved dramatically from traditional village fairs, street hawkers to resplendent malls and plush outlets, growing from strength to strength. According to the Indian C ouncil for Research on International Economic Relations (IC RIER), India is the seventh-largest retail market in the world, and is expected to grow at a C AGR of over 13% till FY12. In FY07 retail sales reached Rs 13,300 bn and amounting to around 33% of Indias GDP at current market prices1. According to the C entral Statistical Organisation (C SO) estimates, the total domestic trade (both retail and wholesale) constituted 13.0% of countrys GDP in 1999-2000, which has gone up to 15.1% in FY07. What is retailing? Retailing is a distribution channel function, where one organisation buys products from supplying firms or manufactures products themselves, and then sells these directly to consumers. In majority of retail situations, the organisation, from whom a consumer buys, is a reseller of products obtained from others, and not the product manufacturer. However, some manufacturers do operate their own retail outlets in a corporate channel arrangement. Retailers offer many benefits to suppliers and customers as resellers. C onsumers, for instance, are able to purchase small quantities of an assortment of products at a reasonably affordable price. Similarly, suppliers get an opportunity to reach their target market, build product demand through retail promotions, and provide consumer feedback to the product marketer. During the last few years, the Indian retail market has seen considerable growth in the organised segment. Major domestic players have entered the retail arena and have ambitious plans to expand in the future years across verticals, formats, and cities. For example, companies like Reliance, Tata, Bharti, Adani Enterprise, have been investing considerably in the booming Indian retail sector. Besides, a number of transnational corporations have also set up retail chains in collaboration with big Indian companies. The Indian retail sector is highly fragmented and the unorganised sector has around 13 million retail outlets that account for around 95-96% of the total Indian retail industry. However, going forward, the organised sectors growth potential will increase due to globalisation, high economic growth, and changing lifestyle. Moreover, high consumer spending over the years by the young population (more than 31% of the country is below 14 years) and sharp rise in disposable income are driving the Indian organised retail sectors growth. Even small towns and cities are witnessing a major shift in consumer lifestyle and preferences, and have thus emerged as attractive markets for retailers to expand their presence. Although the growth potential in the sector is immense, it is not without challenges that could slow the pace of growth for new entrants. Rigid regulations, real estate costs, high personnel costs, lack of basic infrastructure, shrinkage, and highly competitive domestic retailer groups are some such challenges. Additionally, resource constraints at shopping mall projects are also delaying completion and disrupting many retailers entry strategies. Global Retail Scenario Retailing has played a major role in the global economy. In developed markets, retailing is one of the most prominent industries. In 2008, the US retail sector contributed 31% to the GDP at current market prices. In developed economies, organised retail has a 75-80% share in total retail as compared with developing economies, where un-organised retail has a dominant share.

Global retail sales was estimated to be around US$ 12 trillion in 20072; however, in 2008, the slowdown in the global economy, especially in the US, and credit crunch, decreased consumer spending. On a global level, the economy performed robustly till 2007, but the US crisis spread over to Europe in early 2008, and its impact was felt in the Asia-Pacific region by mid-2008. India has the highest number of retail outlets in the world at over 13 million retail outlets, and the average size of one store is 50-100 square feet. It also has the highest number of outlets (11,903) per million inhabitants. The per capita retail space in India is among the lowest in the world, though the per capita retail store is the highest. Majority of these stores are located in rural areas.

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Evolution of organised retail The share of organised retail in developed countries is much higher than developing countries like India. In 20063, the share of organised retail in the US was around 85%, in Japan it was 66%, in the UK it was 80%, while in developing countries like India, C hina and Russia it was 6%, 20% and 33%, respectively. The concept of organised retail had occurred much later in developing economies than the developed economies. Modern day retail came into existence in three successive waves. The first wave took place in the early to mid-1990s in South America, East Asia excluding C hina, North C entral Europe and South Africa. The second wave of organised retail occurred during mid-to-late 1990s in Mexico, C entral America, South-east Asia and South C entral Europe. The third wave of organised retail boom started in the late 1990s and early 2000 in some parts of Africa, C entral and South America, South-east Asia, C hina, India and Russia and continues to grow at a rapid pace. Rising household expenditure in BRIC countries drives organised retail The household expenditure in Brazil, Russia, India and C hina, or the BRIC countries, is growing at a faster rate than the developed countries like the US, UK, Japan, Germany, and France, indicating the higher growth potential for the retail sector in these countries that have a large consumer base. Household expenditure (at constant prices) in developed countries like the US, UK, Germany, and Japan has witnessed an average annual growth of 3.2%, 2.5%, 0.2%, and 1.0%, respectively, during 2004-2007, but the expenditure in the BRIC countries has been much higher. The developed countries are witnessing a continuous fall in domestic demand and high dependence on export earnings, which are the reasons for lower household expenditure. In current times, the global demand is weakening, owing to economic slowdown, and this worry is looming large over the retail sector.

The consumer market in the developed countries is saturating, and therefore, big retail companies in those countries are increasingly expanding their footprint in emerging countries like India, C hina, and Russia. Even though 100% FDI is not permitted in the retail sector, India continues to attract leading global retailers to start retail business through local alliances. For example, recently, Wal-Mart has opened its first store at Amritsar (Punjab) in a joint venture (JV) with Bharti Enterprises, and it is also planning to expand its footprint to other parts of India. The fact that the penetration of organised retail in BRIC countries is much lower than the developed countries is acting as an added advantage for these retail giants. Major global retail markets This section provides a brief overview on the retail industry in major global markets on the basis of phases of retail lifecycle. Organised retailing in most economies typically passes through four distinct phases: In the first phase, new entrants create awareness of modern formats like hypermarket, supermarket, department stores etc and raise consumer expectations In the second phase, consumers demand more modern formats as the markets develop, thereby leading to a strong growth In the third phase, the high rate of growth leads to a stage of mature market In the final phase, the domestic market reaches a saturation point leading to limited growth, so retailers explore and evaluate new markets across the globe USA The US retail market is the largest retail market in the world, and the organised sector constitutes over 85% of the total retail sales. In 2008, the US retail industry recorded sales of US$ 4,404.7 billion, amounting to 31% of the national GDP at current prices. The US retailing is divided into three categories: department stores, mass merchandisers, and specialty stores. C onsumers in the US have now become more value-conscious, which has led to an increase in the sales of discount stores that make mass merchandisers as the largest category. Online retailing also has been gaining popularity in the US, but the recent slowdown in the economy and financial crisis have shrunk consumer spending, which is likely to reflect in the retail sales figures of 2008. As domestic markets in the developed countries have saturated and opportunities in emerging markets are rising, organised retailers from those countries have been turning to new markets. UK The UK retail sales were valued at 278 billion in 2008 with 197,990 establishments. The industry contributed to 8% of the national GDP in 20084. The retail industry in the UK provides employment to 2.8 million people, which constitutes 11% of the total workforce; however, the recent global economic slowdown has affected the UK market also. As the financial system in the UK is facing problems, and has resulted in a sluggish economy,

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consumer spending has also reduced. China

Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

C hina opened up its economy to the world in 1980s which led the growth of the organised retail market in the country, which constituted 20% of the total retail sales of US$ 785 billion in 20065. C hinas retail industry is also growing at a phenomenal rate and plays a vital role in the global retail scenario due to its large and burgeoning population, large cities, and increasing purchasing power of local population. Retail in India: Industry Structure The retail industry in India is highly fragmented and unorganised. Earlier on retailing in India was mostly done through family-owned small stores with limited merchandise, popularly known as kirana or mom-and-pop stores. In those times, food and grocery were shopped from clusters of open kiosks and stalls called mandis. There were also occasional fairs and festivals where people went to shop. In the twentieth century, infusion of western concepts brought about changes in the structure of retailing. There were some traditional retail chains like Nilgiri and Akbarallys that were set up on the lines of western retail concepts of supermarkets. The government set up the public distribution system (PDS) outlets to sell subsidised food and started the Khadi Gram Udyog to sell clothes made of cotton fabric. During this time, high streets like Linking Road and Fashion Street emerged in Mumbai. Some manufacturers like Bombay Dyeing started forward integrating to sell their own merchandise. Shopping centres or complex came into existence, which was a primitive form of todays malls. Since liberalisation in early 1990s, many Indian players like Shoppers Stop, Pantaloon Retail India Ltd (PRIL), Spencer Retail ventured into the organised retail sector and have grown by many folds since then. These were the pioneers of the organised Indian retail formats. With the opening up of foreign direct investment in single-brand retail and cashand-carry formats, a new chapter unfolded in the retail space. Many single-brand retailers like Louis Vuitton and Tommy Hilfiger took advantage of this opportunity. The cash-and-carry format has proved to be an entry route for global multichannel retailing giants like Metro, Wal-Mart and Tesco. Booming Indian economy spurs consumption The Indian economy posted a remarkable C AGR growth of 8.9% during FY04-FY08, which increased the per capita income and in turn, the disposable income of a large section of the population. Growth in the retail trade depends on the fundamentals of an economy. The Indian economy grew at a robust rate over the last five years, riding high on the high growth in the service sector (10.5%) and the manufacturing sector (9.4%) as compared with 7.4% and 4.1% during FY99-FY03. The rise in per capita income and the resultant rise in disposable income stimulated consumption during this five-year period, thereby resulting in a spurt in retail trade. Furthermore, according to the Mckinsey Global Institute (MGI), the average real household disposable income is likely to grow by 5.3% during 2005-2025 and reach Rs 318,896 per annum as compared with 3.6% in the previous 20 years, which indicates the huge potential for the retail sector in India.

Private Final Consumption Expenditure, per capita income and retail sales are positively related The private final consumption expenditure (PFC E) and GDP growth are indicative of the growth in the retail sector. In the past consumers, especially young consumers in the age group of 15-34, increased their consumption expenditure with an increase in their earnings; these young consumers totalled around 400 million and constituted 35% of the total population. Due to the consequent boom in the Indian retail sector many foreign and Indian players entered the Indian retail sector.

The chart above shows that during FY95-FY00, the PFC E (constant prices) increased by 5.4% per annum. Later on, from FY01 to FY03, PC FE declined to 4.0%. Again during FY03-FY07, it went up to 6.2% per annum. During these time periods, the retail sales, the per capita income, and the real GDP growth followed a similar trend as the PFC E, which made it evident that there is a positive correlation between real GDP and PFC E on the retail sector. During FY08, the PFC E as a percentage of GDP at factor cost at constant prices remained very high at 62.2%; hence, the overall retail sector growth received a major impetus during this period.

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

There have been striking changes in Indias consumption pattern over the past 50 years owing to the ever-increasing media exposure, changes in lifestyle, growing urbanisation, coupled with an increase in the education levels among others. The Indian retail industry has matured tremendously over the years, and has become more process-driven, standardised, qualityassured, and brand-driven. Size of the Indian retail industry In 2007, the total Indian retail industry was valued at Rs 13,300 billion (estimate), and the organised segment constituted 5.9% of the value at Rs 783 billion. In the segment, the clothing and accessories sales had a majority share of 38.1% followed by the food and grocery segment at 11.5% and electronics segment at 9.1%. The organised retail industry grew at a C AGR of 33% during 2004-2007. Even though the organised retail segment has a minuscule share in the total industry, it has enormous potential considering the rising urbanisation, the efficient supply-chain, the readily-available retail space, and modern technology, which help in reducing consumer prices to a great extent.

Furthermore, with the entry of big foreign players, the Indian organised retail market has become more competitive in terms of implementing newer business models on the operational format, and pricing, and in terms of efficiency. The organised retail sector will largely benefit in terms of productivity and growth if sectors like agriculture, food processing, and textile are encouraged further. The above-mentioned sectors would receive a remarkable boost if they would supply to big Indian and foreign retail players, which will ensure their growth in tandem with the retail sector. Moreover, the organised retail sector will directly and indirectly improve the countrys employment scenario. Many Indian retail players have already started purchasing supplies directly from farmers and other suppliers, which has invariably eliminated the supply-chain complexities and large number of intermediaries, and has resultantly lowered prices for consumers. Furthermore, the amendment of the Agriculture Product Marketing Act (APMC ) has revamped the farm produce supply chain. Industry segmentation Organised retail can be segmented in two ways - segmentation by verticals and by channels. Verticals are segmented on the basis of the type of merchandise offered; similar merchandise can be clubbed together to form a vertical, for instance food and grocery. C hannels are the means through which retailers sell their merchandise; for example, store channels of retailing that comprise different formats like hypermarkets, supermarkets and department stores and non-store formats like online retailing, vending and kiosks. Major retail segments Food and grocery: In 2007, the food and grocery segment was valued at Rs 7,920 billion, and it enjoyed a dominant market share of 62% in the total Indian retail sector; however, there was a completely opposite scenario in the organised retail segment. The food and grocery segment is the second-largest in the organised retail and has an 11.5% share that is valued at Rs 90 billion. Initially this segment grew at a slow pace due to the presence of an established retailing system led by kirana stores, a highly-fragmented food supply chain, and the lack of a developed food processing industry. Nilgiri was one of the earliest retailers that started a chain or stores in different parts of the country. However, the growth of Nilgiris stores was limited as it was challenged by a weak supply chain and an under-developed food processing industry. Post-liberalisation, organised retailers saw a renewed opportunity in the food and grocery segment. Few food and grocery retailers Food Bazaar: PRIL ventured into food retailing with Food Bazaar in Apr 2002. Initially it was a part of Big Bazaar but later on it started operating as a standalone outlet in addition to being a part of Big Bazaar. The store offers a wide range of fruits, vegetables, FMC G products and ready-to-cook products. It uses a concessionaire model for wet groceries, and it sources staples from APMC or farmers (where the state permits). Food Bazaar attracts high footfalls due to innovative initiatives like live-grinding, live bakery, fresh juice corner etc. In Aug 2007, the store ventured into another retail format that served the food and grocery segment called the KB Fair Price shop. This store is modelled on the concept of low-frills neighbourhood store of 1,000-1,600 square feet. The Fair Price store follows a pricing model that is 20% lower than the prevailing market price. More: Aditya Birla Retail Ltd forayed into the retail business in 2006 by acquiring Trinethra Super Market Ltd, the south-India based retail chain. In May 2007, the company launched its own brand of stores called More in Pune. The supermarket store has a minimum size of 2,500 square feet and offers fruits, vegetables, staples, personal care, general merchandise, pharmacy, poultry and dairy products. Reliance Retail: Reliance Retail Ltd, a subsidiary of Reliance Industries Ltd, has an aggressive plan to expand its retail network across India. It entered the food and grocery segment in November 2006 through its convenience store format Reliance Fresh. The store offers a range of fruits, vegetables, personal care, home care and kitchen utensils. It focuses on building a strong relationship with the agri-business value chain and sources directly from wholesalers. Fashion and accessories

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Fashion and accessories is the largest category in organised retail and had a 38.1% share valued at Rs 298 bn in 2007. In terms of total retail, this category held the second position with a 9.5% share valued at Rs 1,313 bn. The segment has driven the retail boom in India and has opened many opportunities for large as well as global retailers to enter the segment. Despite the high rental, many global retailers like Gas, Gucci, Levis, Benetton, Marks and Spencer have opened their stores in India, and also have plans to increase their presence. The mens wear segment had the highest share of 40.2% in the Rs 1,313-billion fashion and accessories market in 2007 while the womens category accounted for 34.8%, followed by the kids wear and uniform category at 24.9%. Demand in the branded apparel segment is increasing as consumers are upgrading to premium brands due to changing preferences. The premium segment has seen the fastest growth in value owing to the rising preference for formals at Indian workplaces, the new offerings from international brands, and the increasing willingness on the part of consumers to pay a premium for quality. The apparel retailers are also pushing themselves to the accessories segment to attract more customers. Few fashion and accessories retailers Pantaloons: The first Pantaloon store was opened at Gariahat in 1997 in 8,000-square-feet area. Over the years, the store has undergone several transitions. When it was launched, the store mostly sold external brands. Gradually, it started retailing an eclectic mix of external brands as well as private labels. Initially, it positioned itself as a family store targeted across age and gender groups but later it shifted its focus towards being a fashion store and gave more emphasis on the youth. As on Dec 2008, Pantaloons had around 44 stores spread across major cities in India. Shoppers Stop: Shoppers Stop is one of the largest retailers in India. It primarily caters to the lifestyle segment and offers customers both domestic and international brands. The store recently revamped its branding by introducing a new symbol. Shoppers Stop has lifestyle retailing as its core housing brand across categories like apparels and accessories. The store operated at 26 locations in 12 cities as on Dec 2008. Koutons: Koutons Retail is a leading manufacturer of readymade and fashion wear brand. It was established as C harlie C reation Pvt Ltd in 1991 for manufacturing and exporting garments. Later in 1998 Koutons was established to provide affordable mens wear to the masses. Koutons also entered the womens segment in Apr 2008 by launching its brand Les Femme, which caters to young women in the 16-34 years age group and includes apparels like t-shirts, partywear, lycra, semi-formal shirts, denims, capri pants etc. Koutons has also launched its brand Les femme for women & Koutons Junior for kids. Few renowned brand of Koutons are: Koutons mens wear, Les Femme, Koutons Junior and Charlie Outlaw. Footwear In 2007, the footwear segment had a 1.1% share in the total retail market and was valued at Rs 160 billion while it had a 9.9% share in the organised market and was valued at Rs 77.5 billion. In the same year the organised footwear market recorded a fantastic growth of 49% over 2006 while the overall retail market grew by just 16.4%. The changes in consumer behaviour and attitudes reflected in the increasing demand for newer styles and different types of footwear. The market currently offers many brands that cater to every target segment. The Indian footwear market is moving at a brisk pace presently to cater to the domestic demand. Moreover, the influx of international brands is inducing the otherwise price-conscious customers to shell out more bucks for their favourite brands. The footwear market is experiencing a changing consumer preference for casual and younger style due to media penetration and due to the increasing awareness about international trends and lifestyle. There already are a large number of players, both domestic and international, in the semi-formal, formal and casual segment but the casual segment dominates the Indian footwear market with a 75% share. Branded sports wear is also growing at a faster rate than the other segments and the key players in this segment are Adidas, Reebok, Nike, Puma et al. Few footwear retailers Reebok: In 1995, Reebok forayed into the Indian retail market. Today Reebok is one of the frontrunners in the Indian sports wear industry. Reeboks offerings include apparels, footwear and fitness equipment and products. Its footwear offerings are mostly in the trainers and sneakers segment. Reebok recently has introduced its new lifestyle vertical Reebok C lassic. Bata: Bata India is one of the most well-known and largest footwear retailers in India. The retailer manufactures and markets different types of footwear that includes rubber, canvas, leather, and plastic footwear. It markets footwear under the brand names of North Star, Power, Ambassador, Marie C laire besides dealing in international brands like Dr Scholl and Hush Puppies. Bata has a strong distribution network structure of wholesalers and distributors. Khadims: Khadims forayed into footwear retailing in 1993 and is one of the most renowned retailers in east India. Khadims markets its own products besides few others and specialises in womens and childrens footwear. The retailer has a presence in multi-brand outlets (MBOs) across the country in addition to its own exclusive outlets. Home and office improvement In 2007, the home and office-related retail segment was valued at Rs 455 billion in the total retail market while it was valued at Rs 50 billion in the organised retail market. In the same year the segment had a 6.4% share in the organised retail. Home and office improvement is another important segment of the organised retail as people have started spending more on discretionary items. Presently the segment is growing at an impressive rate. Due to the salary hikes and rise in the double-income households, the lifestyle needs of the young and flourishing India are surging and consequently, consumers are going for renovation of their homes. The concomitant rise in investments in furniture, home accessories and furnishings, has added to the segments boom. Few home and office improvement retailers Godrej Lifespace: On Apr 1, 2003, Godrej & Boyce Manufacturing C ompany Ltd launched a new retail division. The division was established to present a new concept in retailing by displaying and selling under one roof the Godrej range of home and office furniture, appliances, security equipment and locks. Later in 2005, the showrooms were branded as Godrej Lifespace Stores. Home Stop: Home Stop is one of the premium home improvement stores that offers a wide range of merchandise. It stocks various national and international brands that cover all the home needs like home dcor, furniture, bath accessories, draperies and health equipment. Home Stop currently operates three Home Stop stores, one each in Mumbai, Bangalore and New Delhi. Home Town: Home Solution Retail (India) Ltd (HSRIL), a subsidiary company of Pantaloon Retail, is designed to cater to the home furnishing and improvement market. The format is designed as a one-stop destination that offers a complete range in consumer electronics, furniture and other home products. HSRIL operates five retail formats: C ollection-i, Furniture Bazaar, Electronics Bazaar, Home Town and e-zone. Electronics In 2007, the electronics segment had a 4% share in the total retail segment and was valued at Rs 575 billion while it had a 9.1% share in the organised electronic retail segment valued at Rs 71 billion. The electronics market has seen a proliferation of brands and product categories in recent years. All international brands from Japan, Korea, the US, Europe and C hina have been launched in India and have been trying to build a panIndia dealer network. The lifestyle category has seen higher growth in India on the back of changing consumer preferences and a consumption boom. Few electronic retailers eZone: eZone is an electronics specialty retail format from HSRIL by Kishore Biyani-led Future Group. The first eZone store was launched in 2006 in Indore and was followed with a second one in Bangalore. eZone offers a range of personal products like computers, laptops, handy cams, MP3 players and mobile phones, entertainment products like plasma/LC D, flat TVs, home theatre systems, DVD players, and stereosystems, home products like refrigerators, air conditioners, washing machines and microwave ovens, among other kitchen appliances.

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Viveks: In 1965, B A Lakshmi Narayana Setty founded Viveks in a 200-square-feet-shop in C hennai. Today Viveks is one of the largest consumer electronics and home appliances retail chains in India. Viveks Ltd is a public limited company that runs two retail brands Viveks and Jainsons. The store was transformed into a public company from a family-run company when 14 stores of Jainsons were bought over in 1999. Later on in 2001 two stores of Premier and in 2002 Spencers Super Store were purchased. Viveks has recently absorbed Spencers into the Premier brand. Viveks grew from three stores in 1995 to more than 35 stores as on Dec 2008. Catering services In 2007, the catering service in organised retail showed a tremendous growth of 44.7% over the previous year. It was valued at Rs 713 billion in the total retail market and at Rs 57 billion in the organised retail market. The catering services market is divided into fast food, cafes and restaurants and others. India is a buoyant market for this segment with over a billion people with different food habits, religious festivals, and various regions. Each region has its own traditional food, dietary habits and its own food specialities. In recent times many international food chains have entered India, which has made this segment more dynamic and its growth, fast-paced. The key growth drivers of the segment in India are: the changes in Indian demographics, young working population, nuclear families, rise in double-income household etc. Few catering service retailers Yum! Restaurants: Yum! Restaurants is present in India through its brands Pizza Hut and KFC . In 1995, KFC , which mainly serves chicken products, set foot in India. After taking into account the vegetarian population of India, KFC recently modified its menu and launched a vegetarian fare, which now constitutes 40% of the product categories. Pizza Hut entered India in 1996 and as on Dec 2008, there were 147 Pizza Hut and 45 KFC stores across 35 and 14 cities, respectively. McDonalds: McDonalds is a 50:50 joint venture partnership in India between McDonalds C orporation (USA) and two Indian businessmen. Hardcastle Restaurants Pvt Ltd owns and operates McDonalds restaurants in West India while C onnaught Plaza Restaurants Pvt Ltd owns and operates these food outlets in the North. Caf Coffee Day: C af C offee Day is a division of Indias largest coffee conglomerate Amalgamated Bean C offee Trading C ompany. C af C offee Day sources coffee from 5,000 acres of estates and is the second-largest coffee shop in Asia. It has ventured into formats such as music cafes, book cafes, highway cafes, lounge cafes, garden cafes and cyber cafes. Telecom In 2008 the telecom market in India was worth Rs 272 billion and had a 1.8% share in the total retail market while it had a 3.4% share in the organised retail segment and was valued at Rs 27 billion. The mobile and accessories segment exhibited tremendous growth in 2007. The Indian telecom sector emerged as the second-largest wireless network in the world after C hina with the recent spate in number of wireless subscribers. Few telecom retailers The Mobile Store: The Mobile Store, promoted by the Essar Group, is one of the countrys largest mobile retailers. Its a one-stop mobile solution shop that offers telecom products like mobiles, accessories, mobile connections and recharges, mobile bill payments, handset repairs, handset exchange, music and gaming devices and DTH, all under one roof, in a world-class shopping ambience. The shop had more than 1,300 stores spread across 200 cities as on Dec 2008. MobileNXT: Bangalore-based MobileNXT Teleservices Pvt Ltd has a pan-India presence and operates in the following three major retail formats: standalone stores, store-within-a-store, and enterprise stores. This store is eyeing a pan-India network and hence has initiated a tie-up with Shoppers Stop, Star Bazaar, Mega Mart, and Landmark stores, for setting up store-withina- store in their outlets across the country. As on Dec 2008, the company was operating more than 36 stores that were spread across major cities in India. Pharmaceuticals In 2007, the pharmaceuticals market had a 3.5% share and was valued at Rs 488 billion in the total retail market; however, its share in the organised retail market accounted for merely 2.0% share at Rs 15.4 billion during the same period. The organised pharmaceutical retailer is known to implement innovative concepts and global standards to provide customers with an experience that is completely different from what an unorganised retailer offers. Few pharmaceutical retailers Apollo Pharmacy: In 1983, Apollo Pharmacy, a division of Apollo Hospital Enterprise Ltd, entered retailing by opening up its first store in C hennai. The retailer also took initiatives to provide medicines to the rural regions by tying up with ITC s e-choupal and Godrej Aadhaar. Apollo has also started expanding through the franchise route. It has recently launched a new concept, NurseStation, at its pharmacy outlets, where the nurses are available to attend the patients at their houses, or refer them to an Apollo C linic nearby. As on Dec 2008, Apollo was operating at over 890 outlets across the country. MedPlus: In 2006, MedPlus Health Services Private Ltd was incorporated in Hyderabad to cater into the health care segment. The company has established a large number of pharmacy outlets chain across major cities in various states of the country, and are majority of those are spread across four southern states. It has over 600 pharmacy outlets spread across 63 cities/ towns in the country. Beauty and wellness In 2007, the beauty and wellness segment grew at a tremendous rate of 65% over the previous year in the organised retail market. Its share in the total retail market, however, was just 0.3% and was valued at Rs 46 billion. In the organised market, the segment showed tremendous growth due to the rise in service sector employment. Few beauty and wellness retailers Reliance Wellness: In Oct 2007, Reliance Retail Ltd, owned by Mukesh Ambani, entered the beauty and wellness segment by opening its first store at Hyderabad. This store offers a wide range of products under the health foods, personal care, healthcare, and pharmaceuticals categories. Himalaya Drugs: The Himalaya Drug C ompany operates both exclusive retail outlet formats and shop-within-a-shop outlets. The stores offer an entire range of Himalaya drugs from pharmaceuticals, personal care, to baby care and animal healthcare products at competitive prices. The company emphasises on service, trained personnel and a quality shopping experience in their stores. Himalaya has also launched its online shopping website to make all its products conveniently available to its customers 24/7 and to reach a wider market, where its stores are not present. Jewellery In 2007, jewellery retail was worth Rs 694 billion and accounted for 5% of the total retail market. In the organised retail market, jewellery retail merely had a 2.9% share at Rs 23 billion. In the same year jewellery retail in the organised retail market recorded high growth of 36.9% over 2006 as compared with 15.3% recorded in the total retail market. Few jewellery retailers Gitanjali: Gitanjali Gems Ltd (GGL) is one of the largest, integrated diamond and jewellery manufacturer and retailer in India. It sources rough diamonds from primary and secondary source suppliers in the international market, cuts and polishes the rough diamonds and exports the diamonds to its international markets. GGL sells diamonds and other jewellery through retail operations in India as well as in international markets. Its brand extensions include Gili, Asmi, Sangini, DDamas, Giantti, Nakshatra, C ollection G, Gold Expressions, Vivah Gold & Kiah.

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Tanishq: In mid-1990s Titan Industries Ltd - promoted by the TATA Group - entered jewellery retailing through Tanishq. Tanishq has set up production and sourcing bases by researching the jewellery crafts of India. Its factory, located at Hosur, Tamil Nadu, is spread across 135,000 square feet and is equipped with all modern machinery and latest equipment. As on Dec 2008, there were 115 Tanishq stores spread across major cities in India. Reliance Jewels: Reliance Retail Ltd entered jewellery retailing by opening its first store in Bangalore. The company aims to make Reliance Jewels a one-stop destination that offers consumers a wide range of gold and diamond jewellery. Timewear In 2007, the Indian watches market enjoyed a 2.9% share in the overall organised retail market as compared with merely 0.3% in the total retail market. The market size of the watch market was valued at Rs 44 billion in the same year. The size of this market has expanded due to the changes in consumer preference and the growing market for international watches in India. International players like Tag Huer, Rado, Omega, Rolex have even signed up Indian celebrities as brand ambassadors to tap the market. Few timewear retailers Citizen: C itizen has 38 exclusive outlets in 27 cities across India. The Exclusive Branded Outlets (EBOs) called First C itizen house the latest international range of C itizen Watches and display over 800 different watches. Besides, C itizen Watches are also available at Lifestyle, Shoppers Stop and more than 250 C itizen C orners (MBOs) across the country. Titan: Titan is one of the largest manufacturers of watches in India. It offers product ranges that include the flagship brand Titan, Edge, Fastrack, Nebula, Raga, Steel, Regalia, Flip, Sonata, which is available in Titan and exclusive Sonata stores. As on Dec 2008, there were 245 exclusive Titan showrooms (World of Titan) across 122 Indian cities in India. Books, music and gifts Books, music and gift retailing were the earliest segments that witnessed a consolidation of business into organised formats. The combined share of this segment was 1.1% of the total retail market at Rs 164 billion in 2007. Organised retailers like Planet M, Music World, and Landmark dominated the music segment. Archies, a prominent gift retailer, has a presence on both high streets as well as in malls. The books and publishing business continues to thrive due to greater literacy levels and rapidly growing middle class and higher middle class population, English-speaking middle-class population. Moreover, new format chains like C rossword, Landmark, Oxford, and now, Odyssey, that fit into the leisure aspirations of people, are located conveniently, and offer an ambience conducive to browsing and book buying. As a result, the segment has been growing further. Crossword: C rossword was established in Oct 1992, is Indias leading bookstore chain and a wholly-owned subsidiary of Shoppers Stop Ltd. The company sells books and other products under the C rossword brand. C rossword sells a wide variety of products like magazines, C D ROMs, music, stationery and toys apart from books. C rossword provides customers with cafes, reading tables and cloak facilities at each of its outlets. C rossword customers can also shop for books using dial-a-book, fax-a-book and email-a-book facilities offered by the company. Its other services include gift vouchers, apart from the return, exchange & refunds policy being followed by the company. C rossword bookstores are presently located in Mumbai, Bengaluru, Ahmedabad, New Delhi, Pune, Nagpur, Vadodara, Kolkata, C hennai, Jaipur and Hyderabad. Entertainment In 2007, the entertainment segment was worth Rs 456 billion and had a 3.2% share in the total retail industry. This segment has been driven by the increasing base of young population in India, whose entertainment needs has been surging with the influx of malls and multiplexes that provide leisure retail, gaming, and cinema. Players in the segment are likely to gain greater market share as the consumer spend on entertainment is increasing. PVR cinemas, Fun C inemas, Inox are the major players in the entertainment retailing space. Overview of formats/channels The Indian retail industry is categorised into different retail formats on the basis of the retail operation. The formats are basically defined on the basis of the size of the outlet, the pricing strategy followed, the type of merchandise sold, and also the location. Given below is a list of formats on the basis of the above-mentioned characteristics: Hypermarkets: Hypermarkets are big-box formats with an average size that ranges between 60,000-120,000 square feet, and they stock multiple lines of products such as food and grocery, general merchandise, sports goods, and apparels. Hypermarkets are mammoth outlets that are fewer in number but cater to a larger area (3-5 kilometre). HyperC ITY, Big Bazaar, RPG Spencers and Shoprite Hyper are some major players in this format. Supermarkets: The average size of supermarkets range from 10,000-30,000 square feet. They are a smaller version of hypermarkets that holds multiple lines of merchandise but is limited in number when compared with supermarkets. Supermarkets are spread across the city, are greater in number, but cater to a smaller area (1-2 kilometer). Foodworld, Food Bazaar and Spinach are some major players in this format. Convenience stores: C onvenience stores offer easy purchase experience through easily accessible store locations. The stores are basically small in size (500-3,000 square feet), which allows quick shopping and fast checkouts. Subhiksha and Reliance Fresh are some major players in this format. Cash-and-carry outlets: C ash-and-carry outlet is strictly not a retail format, but considering the business dynamics it follows it can qualify for a retail format. In a retail business usually a consumer has to purchase one or more products but under this format, the consumers have to buy a minimum volume of products or value specified by the cash-and-carry retailer. In this format the buyers are basically small retailers or catering service providers who purchase in bulk quantities. This stores size ranges from 100,000 square feet to 300,000 square feet. At present, Metro is a major player that falls under this format. Wal-marts alliance with Bharti and Tescos with Trent will also come under the cash-and-carry format.

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Discount stores: The focus of these stores is to offer merchandise at a price that is lower than the market price, and to gain profit from volumes. These stores keep merchandise mainly on the basis of its saleability. Usually these are no-frill stores with simple surroundings and less service. Big Bazaar and Subhiksha are some famous examples. Specialty stores: These stores usually specialise in one line/category of merchandise. As these stores are concerned with only one type of merchandise, they are able to offer a wider range of products at a lower price. Examples: Next and Vijay Sales. Department stores: These stores are typically lifestyle stores where most of the merchandise constitutes apparels and products other than food and grocery. These stores offer high quality service to consumers. These stores stock lesser merchandise than other formats since the merchandise is stored in a presentable manner. Notable examples are Shoppers Stop, Westside, Trent, and Globus. Category killers: Many major retail chains have adapted small specialty store concepts and have expanded themselves to create large specialty stores. These expanded, large speciality stores are known as category killers. Ezone, which specialises in electronics, and Staples, which specialises in office stationery, are examples of category killers.

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Regulatory Framework

Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

The Indian government has not focussed on retail as an industry. Until now, there are no specific rules and regulations that are to be followed by retail companies. However, there are certain laws that the retailers need to follow, which are general in nature and which pertain to the establishment of stores and the conduct of activities. These laws are as follows: Shop and Establishment Act Standards of Weights and Measures Act Provisions of the C ontract Labour (Regulations and Abolition) Act The Income Tax Act C ustoms Act The C ompanies Act Apart from the above Acts, the companies also follow certain regional rules and regulations on the basis of the stores location. In some regions regulations are imposed on the organised retailers to restrict their expansion and to promote regional retailers; for instance, the Tamil Nadu government imposed a 10% surcharge on organised retailers; the West Bengal government has been asking mall developers to reserve 10% space for unorganised retailers. Retailers are also required to take necessary approvals from local bodies to carry on with their business. There is no single window for clearances, and companies have to go to different agencies to get approvals, which is one of the biggest hurdles that the segment faces. FDI scenario in India In 1991, the Indian government introduced the economic policy to attract foreign investments and since then, it has amended the policy from time to time in various sectors to allow higher levels of foreign participation. The government policy in retail sector allows 100% foreign investment in wholesale cash-and-carry and single-brand retailing but prohibits investments in retail trading. In 1997, the government imposed restrictions on FDI in retail sector but in 2006, these were lifted and opened in single-brand retailing and in cash-and-carry formats. The cash-and-carry business is the easiest mode of entry for foreign retailers into India. Many global players like Metro and Shoprite have already entered the market. Wal-mart has forged an alliance with Bharti for a cash-and-carry business, and Bharti is concentrating on front-end retail. Similarly, Tesco has entered India through an alliance with Trent (Tata Group). Apart from investing in the cash-and-carry business, Trent will also support the back-end activities of Trent Ltd. Many foreign brands have also entered India either through JVs with leading Indian retailers or through exclusive franchisees to set up shop in India. Louis Vuitton, Marks & Spencer Plc, GAS, Armani are some such operators who have entered India through JVs. McDonalds, KFC , Dominos are the retailers who have taken the franchise route. Slowly the government is opening up to the idea of permitting FDI in the Indian retail sector; consequently there is greater momentum in the sector. Last year, owing to the global meltdown, investments dropped in all sectors. The government has therefore changed the guidelines for foreign investments to boost investments in the current year. This move is certainly likely to improve the investment climate in the Indian retail space. Growth Drivers C urrently, organised retail is in a nascent stage of growth in India as it just has a 5.9% share in the total India retail trade. However, in recent years, organised retailing has been growing at a robust rate due to rise in the number of shopping malls as well as in the number of organised retail formats. The key factors of growth of organised retail in modern India are discussed in the following pages. Rising disposable income of Indian middle-class The Indian middle-class can be categorised into seekers and strivers, which is the consuming class and the prime target segment for retailers in India. In 2005, these two categories together constituted around 6.4% of total households in India but accounted for 20% of the disposable income. By 2015, the middle class is expected to constitute around 25% of total households and account for 44% of the total disposable income, and by 2025, the respective figures are likely to go up to 46% and 58%. The Indian middle-class population and their growing disposable income levels will drive the future growth of organised retail in India 6 . Changing consumer preferences and shopping habits The prime reason for a paradigm shift in the shopping attitude of the Indian consumer is the change in their preferences and tastes. Due to the increasing use of IT and telecom, Indian consumers have become aware of brands and shops for lifestyle and value brands according to the need and occasion. C onsumers will continue to drive the growth in the organised retail by expanding the market and compelling retailers to widen their offerings in terms of brands and in terms of variety.

The spending on essential commodities has been steadily falling over the years, whereas the consumption of discretionary products has been growing at a healthy pace. If the composition of PFC E is studied, one can notice that the share of food, beverages and tobacco in the total PFC E has declined from 53.0% in FY90 to 42.2% in FY08. On the other hand, the share of communication, entertainment, personal care consumption has been rising over the years. C hanges in lifestyle have brought about a paradigm shift in consumption, which will undoubtedly continue to drive retail growth in segments like beauty, healthcare, telecom, and entertainment. Moreover, the rising reach of media coverage is increasing consumer awareness about products, their prices and services, which is likely to further encourage growth in the organised retail segment. Changing demographics India is one of the youngest and largest consumer markets in the world with a median age of around 25 years, which is

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

the lowest as compared with other countries. According to estimates, Indias median age would be 28 by 2020. It is expected that over 53% of the population will be under the age of 30 by 2020, which means that the potential for the Indian retail segment will be enormous. Another plus about this population is that they will be more dynamic than the previous generations because their consumption is driven by wants rather than needs. Thus, the organised retailing, which thrives on lifestyle products, is expected to receive a boost because of the young population by 2020.

Increase in working population India is the second-largest country in the world in terms of population, and is the largestconsumer markets in the world owing to its favourable demographics. In 2008 Indias working population (in the 15-49 years age group) constituted around 53% of the population as compared with 48.6% in the UK, 49% in the US, and 53% in Russia. Further, the increase in the number of working women has fuelled the growth in sales of discretionary items. There has been a 20% increase in the number of working women in the last decade.

Spurt in urbanisation Historically cities and towns have been the driving force of overall economic and social development. C urrently over 335 million people of India reside in cities and towns, which translates to around 30% of the total population7. The rapid growth in urbanisation has facilitated organised retailing in India, and has caused the speedy migration of population into major tier I and tier II cities, which have a significant share in the retail sales of the country.

The urban populations contribution in Indias GDP shot up from 29% in 1951 to 60% in 2001 and is expected to increase to 70% by 20118, as migration to cities and towns grows rapidly in anticipation of higher income opportunities provided by these epicentres. Moreover, the continuous development in urban areas has invariably attracted substantial inflows of capital both from domestic and foreign investments have led to the transition of urban areas. As the Indian organised retail is mainly concentrated in the urban areas, its growth (urban areas) is imperative for the organised retail in the country.

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

Notably, the urban areas are Indias growth centres and they are growing rapidly over the last couple of years as compared to the world average as well countries like Brazil, the US and UK among others. For instance, during 1995-2000, annual urban growth in India was 2.35% as compared to the world average of 2.07%. Furtherance, the annual urban growth in India would touch 2.6% during 2020-25, while globally it would fall consistently to reach 1.6%, C hina 1.36% from 3.1% during 1995-2000, followed by Brazil to 0.82%9. Though, percentage of urban population to total population in India (29%) is comparatively quite low against the world average (48.6%), as well as countries such as Brazil (84%), C hina (40%), the US (81%) and Russia (73%), it is however noticeable that total urban population in India was far more than the total population of the entire US in 2005 and by 2025, it is expected that Indias total urban population would constitute around 6.7% of the total world population. This would undeniably emerge as the Indias largest market for organised retail, and therefore the challenge for the retail players to leverage the full potential of flourishing urban areas.

Furthermore, due to the rapid infrastructure development in major tier I, II and III cities, many rural inhabitants are attracted to cities, which increase the urban per capita income and in turn offers unbound opportunities for the organised retail segment. Increased globalisation has also played a big role in the development of urban areas. Rise in MPCE level in urban areas The aggregate urban consumption in India has been growing steadily over the past few years as the economy has been continuously flourishing during this period, owing to a rise in urban population as well as a rapid per capita income growth. In FY05, 56.0% of the urban population was below the MPC E level of Rs 930, while in FY07 the percentage of population under the MPC E level of Rs 930 decreased to 46.1%.

The average MPC E for the urban population in FY07 was Rs 1,312 up from Rs 1,105 in FY05, on the other hand, the average MPC E for rural population in FY07 was Rs 695 up from Rs 579 in FY071 0 . The NSS report clearly suggested that the consumption pattern in urban areas differed from the rural areas. While the food items constituted 52.2% of the rural areas consumption in FY07 and the non-food items accounted for the remaining share, in the urban areas, the share of food items in consumption was 39.4% and the non-food items accounted for the rest. Organised retail concentration in tier II and III cities Initially the retail revolution began in the big tier I cities in India; however, as tier I cities are relatively saturated now, retailers, especially value retailers, are finding their way to smaller tier II and tier III cities as well. The changing landscape of the Indian retail segment and the increasing competition has also forced retailers to tap growth opportunities in tier II and III cities in India. Internet drives awareness and online purchases There has been a substantial increase in the number of Indians who use the Internet and a concomitant increase in the number of online purchases. Indians have started using the Internet not only for increasing awareness but also to shop online, which has opened a whole new channel of retailing in the Indian retail scenario. Online retailing offers consumers the convenience of ordering merchandise to their doorstep. Recently, Future Group, which owns Pantaloon, has initiated a measure to capitalise on the online opportunity through futurebazaar.com. A similar venture flipkart.com is also proving the new channel to be highly viable, especially since it eliminates the biggest cost of the physical store. Easy credit availability a boon for organised retail The higher penetration of credit cards in India has also boosted the growth of the organised retail sector; in fact, the young populations increasing fancy for plastic money has further fuelled their purchasing power. Even though the organised retail sector is at a nascent stage (constituted 5.9% of

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Indian Retail Industry: Challenges, Opportunities and Outlook - Overview

the total retail industry in 2007), it is growing at a rapid pace. Moreover, the spurt in issuance of credit cards and loans by both Indian as well as foreign banks has further boosted the segments growth. According to the RBI, as on FY09, the total number of outstanding credit and debit cards in India was 24.7 million and 137.4 million respectively.

Retail investment Investments in the retail sector have improved since FDI has been allowed in single-brand and cash-and-carry formats. According to the Technopak estimates, investments in the organised retail will touch US$ 35 billion in the next five years or so. Investments allow organised players in retail to expand at a very high rate. All key retailers in India have expansion plans over the next 3-4 years; for instance, Pantaloon has an ambitious expansion plan to take its retail space up to 30 million square feet by 2011. Likewise, Vishal Retail is expected to take its total store count to 500 with an estimated retail space of around 10 million square feet by 2011. Availability of quality real estate According to industry sources, mall space in India has grown from a meagre 1.0 million square feet in 2002 to about 57.3 million square feet by the end of 2008; tier I cities are expected to account for around 73% of the mall space and the rest is likely to be equally divided between tier II and tier III cities.
4 5

British Retail C onsortium IC RIER Report

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