Retail Practice

The Great Indian Bazaar

Organised Retail Comes of Age in India
August 2008
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1
The Great Indian Bazaar
Organised Retail Comes of Age in India
Preface 5
Introduction 7
1. The Indian Retail Market: Emerging, Accessible but Surprisingly
Competitive 11
2. Indian Shoppers: Evolving in Step with the World, in Their Own Time 25
3. Retail Economics: Innovation at Every Step 43
4. A Call to Action: Emerging Priorities for Retailers and the Industry 71
Contents
3
4
Header
5
The Indian retail market has attracted much interest in recent times. The market
is large and growing, and traditional mom and pop stores are modernising
themselves even as almost every Indian business house is exploring the retail
opportunity.
Yet, questions about the proftability of the sector remain unanswered. We feel
this is the right time to discuss what it takes to grow and to make money in
Indias retail market.
This report is the product of a year-long research project to gain a perspective
on this market by McKinsey & Companys Consumer and Retail practice in India
with support from colleagues in other emerging markets.
Kartik Sheth, an Engagement Manager based in our Mumbai offce, led the
work. The knowledge effort was initially managed by Pooja Haldea and Archana
Jagannathan, both from our Mumbai offce, supported by Amrita Dhar, Arpana
Shahi, Suhail Sameer, Sarayu Natarajan (alumni) and Vikram Vaidyanathan, all
consultants in our India offce.
Finally, this report would not have been possible without the support of our
partners from India and other offces across the world. We thank Pierre Avanzo,
Laxman Narasimhan and Subbu Narayanswamy, who refned our insights. Many
other colleagues across the frm also contributed their knowledge: Manuela
Artigas and Nicola Caliccio (Brazil), Wai-Chan Chan and Anne Tse, (alumni,
China); Sandrine DeVillard (France); Brian Salsberg (Japan); Arend Van Wamelan
(South Africa); Peter Child and Khiloni Westphely (the UK). We thank them all.
Peter Haden Ireena Vittal
Preface
5
Introduction
These are exciting times for Indian retail.
With continued economic expansion and retail growth, India is set to become
a US$ 450
1
billion retail market by 2015, comparable in size to Italy (US$ 462
billion) and much larger than Brazil (US$ 258 billion) today. Whats more, India
is perhaps the last virgin BRIC
2
market for organised retailers. The game here
has just begun, with organised retail
3
accounting for less than 5 per cent of
todays market and likely to expand to anywhere between 14 to 18 per cent by
2015. By that year, we expect that around 65 million households will patronise
organised retail, amounting to over 300 million shoppers, almost equivalent to
the population of the US today.
This retail revolution could do wonders for the Indian economy: creating over 1.6
million much needed new jobs in the next fve years, raising overall economic
productivity and, perhaps most importantly, lowering prices for shoppers as has
been the case in most economies across the world (Exhibit).
7
1 All fgures in this report are at 2007 prices and exchange rates.
2 Brazil, Russia, India, China.
3 Organised retail has been defned as a network of similarly branded stores with an element of self-service.
THE GROWTH OF ORGANISED RETAIL WILL HAVE MANY BENEFITS
FOR INDIA
Would raise factor productivity and growth by 30-40%
Would add US$ 3-5 billion in GDP growth over five years Higher sector
productivity
Could lower consumer prices by 3-5%
Could absorb 0.3-0.5% of total inflation Lower prices for
consumers
Should reduce waste through supply chain pipes
Could increase farmer income by 20-30%
Efficiency
Could improve tax contribution by up to 1% of retail sales or
Rs. 3,000 crore
Increased tax
contribution of
retail
Would create 1.6 million formal jobs in retailing alone
Would add 2-3 times as many new jobs in supporting systems More formal
employment
Exhibit
8
But how much of this Indian retail story is for real? What are Indian shoppers really
looking for? What model should retailers adopt to make money in a market where
talent and real estate are currently in short supply?
McKinsey & Companys Retail practice in India has spent the last two years studying
these questions, working with its clients and comparing Indias retail market
evolution with that of other emerging markets. This report summarises our latest
perspective. Its insights are based on three distinct sources (Exhibits 1 and 2):
1. How Half the World Shops, the frst-ever quantitative global research on
shoppers across the BRIC markets, contrasted with shoppers in the US and
France to understand the differences. This is a proprietary survey of 10,000
shoppers across Brazil, Russia, India, China, and South Africa conducted over
the last two years. As part of this survey, we conducted home audits, joined
shoppers on trips to stores, pored over shopper diaries and led qualitative
and quantitative surveys across six emerging markets. In each of these
markets, we covered all the relevant income segments in tier I, II and III towns
and included both shoppers and infuencers. In each, we assessed broad
attitudes to shopping and conducted in-depth analyses of shopping for food,
apparel and electronics.
2. The Bird of Gold: The Rise of Indias Consumer Market. We also built on insights
on income evolution and category consumption from proprietary research by
the McKinsey Global Institute in India and China. This report is a combination
Exhibit 2
THREE SOURCES OF INSIGHT
First ever quantitative global research on shopper behaviour and
attitudes
6,000 BRIC shoppers; 2,800 South African shoppers; 1,700
US/French shoppers
Focus group/home audits/shopper diaries
The Bird of Gold : The Rise of Indias Consumer Market First-ever
comprehensive research segmenting consumer demand in India
Data from NCAER*, UN, the Reserve Bank of India, Oxford
Economics
Insights from in-depth client studies across countries
China
Thailand
Brazil
US
* National Council of Applied Economic Research, India
9
of two disciplines: economics and management. By integrating these two
perspectives, MGI gained insights into the microeconomic underpinnings
of the broad trends shaping the global economy. As a result, the report
provides business leaders and policy makers with a fact base and insights
into one of the most important trends in the world economy over the next two
decadesthe integration of well over a billion new consumers from emerging
economies into the global marketplace.
3. Finally, we created detailed case studies of the evolution of organised retail in
several developing countries such as Brazil, Russia, India, China, South Africa,
Mexico, and mature ones in North America and Europe. We also reviewed
industry structure and conduct in these markets, paying special attention to
the performance of winning and struggling retailers.
This report is organised into four sections.
Chapter 1: The Indian Retail Market: Emerging, Accessible but Surprisingly
Competitive
Chapter 2: Indian Shoppers: Evolving in Step with the World, in Their Own Time
Chapter 3: Retail Economics: Innovation at Every Step
Chapter 4: A Call to Action: Emerging Priorities for Retailers and the Industry
A fnal word: Our perspectives on retailing in India extend from luxury to lifestyle
to value retailing across urban and rural markets. This report, however, refers
primarily to customers with the largest potentialin the large urban middle-class
or what we call the belly of the market, including nuances of their purchases in
key categories including grocery and food, apparel and electronics.
10
1. The Indian Retail Market:
Emerging, Accessible but
Surprisingly Competitive
It is early days in the evolution of organised retail in India, but things are changing
fast. The market is growing exponentially, as economic growth lifts more of
Indias people into the consuming classes and organised retail lures more and
more existing shoppers into its open doors.
As stated earlier, by 2015, India is likely to be a US$ 450 billion retail market.
Over 300 million shoppers are likely to patronise organised retail, a fve-fold
growth up to 2015, accounting for anywhere between 14 and 18 per cent of total
retail (Exhibit 1.1). The share of organised estimate is always a source of
huge debate. Our assessment of market potential assumes organised retail will
emerge where a critical mass of shoppers exist, purchasing the three largest
categories todayfood, apparel and electronics. We do not factor in any major
constraints such as diminishing real estate supply or discontinuous growth
through franchising of existing mom and pop stores.
11
BY 2015, ORGANISED RETAIL WILL HAVE A 14-18% SHARE
OF TOTAL RETAIL
US$ billion
Size of organised retail in India
4-5
7
CAGR
30-35%
2007
65-80
2015
14-18
Share of
organised retail
Per cent
Exhibit 1.1
12
But what will characterise this fast growing market? As is often the case with
India, every assertion and its opposite is true. The market is large but basket
sizes are small. Shoppers will embrace foreign and westernised brands but are
unlikely to let go of traditional categories any time soon. Organised retail will
expand rapidly but mom and pop stores will also hold their sway.
Dealing with these seeming contradictions wont be easy; many of the existing
players as well as new entrants will struggle to survive. A useful point of departure
is: who will be the relevant shoppers, those likely to be the customers of
organised retail?
POTENTIAL SEGMENTS FOR ORGANISED RETAIL WILL GROW FIVE-FOLD BY
2015
India has about 200 million households today. In an emerging market such
as this, income remains the most critical driver of consumption. In an earlier
McKinsey & Company report, The Bird of Gold: The Rise of the Indias Consumer
Market, we identifed fve distinct consumer segments
1
(Exhibit 1.2), ranging
from around 1 million global households earning over US$ 22,000 a year in
2006 to about 100 million deprived households barely surviving on an annual
income of less than US$ 2,000 (the box Indian consumers fall into fve groups
1 Chapter 2 of this report describes shopping behaviour in the various segments.
Exhibit 1.2
Total households HH retail spend
US$/HH
Globals
>US$ 22,000
Strivers
US$ 11,000-22,000
Seekers
US$ 4,000-11,000
Aspirers
US$ 2,000-4,000
Deprived
<US$ 2,000
Household income*
12, 800
5, 200
2, 300
1, 350
700
INDIA HAS FIVE MAIN CONSUMER SEGMENTS
101
91
11
2
1
Million, 2005
100% = 206
Market for
modern retail
* Real per annum
Source: The Great Indian Middle class; NCAER; MGI India Consumer Demand Model
13
INDIAN CONSUMERS FALL INTO FIVE GROUPS
Indian households can be classifed into fve economic groups based on real
annual disposable income:
Globals: Enjoying an annual disposable income of over Rs. 1 million per
annum, households in this group comprise the richest people in the country
and can afford a global lifestyle. The group has traditionally consisted of senior
corporate executives, large business owners, politicians, big agricultural-land
owners and top-tier professionals. It now also includes a younger, upwardly
mobile sectionmid-level executives and graduates from Indias best colleges
who are offered the highest salaries in the country.
Strivers: With an annual disposable income of Rs. 500,000 to Rs. 1 million
per household, this group consists of highly successful people in cities,
towns, and villages who have established sources of income and substantial
savings. It includes businesspeople, professionals, government offcials, and
medium-scale industrialists.
Seekers: Households in this group have an annual disposable income of Rs.
200,000 to Rs. 500,000 per household. By far the most varied economic
group in terms of employment, attitude, age, and other variables, this
group includes those fresh out of college as well as traditional white-collar
employees, mid-level government offcials, and medium-scale traders and
businesspeople.
Aspirers: With an annual disposable income of Rs. 90,000 to Rs. 200,000
per household, this group includes small shopkeepers and farmers, and low-
skilled workers in industries and services. People in this group spend about
half of their income on basic necessities.
Deprived: This group consists of the poorest households in the country with
an annual disposable income of less than Rs. 90,000 per household, making
ends meet through unskilled or low-skilled activities. People falling in this
economic group often fnd it hard to fnd work throughout the year and have to
rely on seasonal or part-time employment.
Source: The Bird of Gold: The Rise of Indias Consumer Market, McKinsey Global
Institute, May 2007
14
provides a brief description of each segment). The top three segmentsglobals,
strivers and seekers, comprising 14 million households in 2006, are existing
and potential shoppers for organised retail.
Our extensive study of consumption segments in India shows that only the top
three have the income, attitude and confdence to patronise organised retail
today, as described below:
Only the top 14 million households have the income to spend on categories
beyond the basic (food, housing, education, utilities and transport).
Members of these income groups are increasingly experimenting with new
categories (even in food) and consumption occasions as they become
richer and more comfortable with new shopping formats. The top 1 million
households, the globals, could be shoppers in any city in the world: they are
demanding, they know what they want, and they spend on many categories
including vacations abroad, branded apparel and new food service offers.
The next 13 million seeker and striver households are still experimenting
with new formats and categories but are eager consumers nevertheless.
Already, they spend only 15 to 20 per cent of their incomes on food (much
lower than the all-India average of 42 per cent). And today, over 50 per cent
of their retail spending is on categories other than food. Since penetration of
these segments is still low in most categories, they clearly have many years
of consumption growth ahead of them.
The 91 million aspirer households are just starting to buy more than the
basics but are still not comfortable with organised retail. The aspirer segment
is the market of tomorrow. Currently, its members do spend on categories
beyond the basics, primarily on special occasions, and increasingly sample
all the categories that better-off households do. Doing so is their signal
that they have arrived. However our work in India reveals that organised
retailwith its air conditioned stores, security guards at the entrance, and
uniformed staffintimidates them. As increasing incomes allow them to
browse and shop, and they get more familiar with these formats, they will
enter and buy. For now, they will walk around malls but not enter the stores.
The bottom 101 million households are focused on necessities. Indians in
this category are still spending a disproportionate amount on the basics of
life. Many of them are living under the countrys offcial defnition of poverty
(consuming 2,400 calories per capita a day in rural areas, 2,100 in urban
areas). They spend as much as 60 per cent of their incomes on food. Other
15
basics such as housing, health, education, utilities and transport take away
another 18 per cent. This leaves them very little for other categories. They are
unlikely to be users of organised retail at least in the next 5 to 10 years.
If living costs increase and GDP growth slows, the threshold of income of
households entering modern retail will change. But the impact at worst will be to
slow the pace of growth by a matter of months.
For India, these times could be called magical. Over the next 10 years, the relative
sizes of consumption segments will change substantially (Exhibit 1.3). Sustained
income growth with infation under control will lift consumption among a massive
number of households over the next decade (Exhibit 1.4), as it did in China
between 2001 and 2004. The largest part of the growth will be among seekers,
with the number of households in this segment growing from 11 million in 2006
to 55 million in 2015. This group will lead the move towards organised retail. In
addition, the richest shopper segment, the globals, will also grow, from 1 million
to 3 million households, creating a market for lifestyle productsas is happening
in China today. The boom in luxury products though, is yet to happen.
2

For retailers, the thing to note is that the shoppers they are attracting today are
going to be outnumbered by the new shoppers of tomorrow. They need to fnd
ways to retain the early shoppers, who will be the bigger spenders tomorrow
2 The rest of this report focuses on value and lifestyle retail, not luxury retail.
Exhibit 1.3
Household income
bracket
Strivers
US$ 11,000-22,000
Seekers
US$ 4,000-11,000
Aspirers
US$ 2,000-4,000
Globals
>US$ 22,000
Deprived
<US$ 2,000
THREE SEGMENTS HAVE THE HIGHEST POTENTIAL
FOR ORGANISED RETAIL
Potential target
consumer
segments
Total households
2015F, million 2005E, million
101
91
11
2
1
74
106
55
6
3
100% = 206 100% = 244
14 million
growing to
64 million
Market
for next
wave of
growth
Source: The Great Indian Middle Class; NCAER; MGI India Consumer Demand Model
16
and core to a formats success. But they also need to manage how they are
perceived by the relatively less well-off shoppers of tomorrow. Retailers who
welcome them early and hook them through a better understanding of their
needs will enjoy the riches to come.
So what do these shoppers look for? What is the shopping basket currently and
how will it change?
BASKET SIZE IS SMALL AND LIKELY TO REMAIN SO, UNLESS CONSUMPTION
IS SHAPED ACTIVELY
As organised retail grows in India, the country will remain a market of millions of
small transactions. Today, the shopping basket of those frequenting hypermarkets
in India amounts to US$ 7 to US$ 10 a trip, very small compared to US$ 40 to
US$ 45 in the US and about half of the Chinese bill size (estimated at between
US$ 10 to US$ 18). While basket size will increase, it is likely to remain small for
some time to come since organised retail is still in the early stages of growth.
There are vast implications of the small basket size. At the very least, the small
basket size suggests that it will take twice as many customers as in China and
four times as many customers as in the US to achieve the same sales density
in India. That most stores in India are currently a fourth to a sixth the size
of those in developed markets, (with similar demand peaks on the weekend)
indicates the extent of the retail operations challenge. The result is visible in
Exhibit 1.4
CHANGE IN THE UNDERLYING INCOME CURVE WILL DRIVE GROWTH
Number of consuming HH growing at fastest rate . . . . . . similar to the Chinese evolution
1985
1995
2005
2015
2025
-5
0
5
10
15
20
25
30
35
0 100 200 300 400 500 600 700 800 900 1000
Annual household disposable income
thousand, Indian rupees, 2000
Distribution of household income
% of households
2001
mean
2006
mean
Threshold
middle
class
22,000 28,000 33,000
39 million
households
in 2004
17 million
households
in 2001
Annual urban household income distribution
RMB
Source: MGI; IGD Global Retailing conference
17
stores today. The best stores look packed, with long check-out lines. Clearly
operational effciency, e.g., at check out, and sound asset utilisation are critical
from day one.
But that is not all. Our work also suggests that shaping consumption will be
critical to driving growth in this market. For example, it is evident that some of
the more successful stores today are the victims of their own success, becoming
saturated at 8,000 to 12,000 customers per day. Without expanding their sizes,
to ensure healthy store growth these retailers will fnd it essential to shape their
customers consumption. This can be done in two ways: creating new peaks
apart from the weekend and offering more categories to increase basket size.
They will also need to consider what kind of customers they would like to convert
into their core franchise.
Building a sustainable model will therefore require that retailers think carefully
about who their target shoppers are, what these shoppers want and how to
service them effciently. Just as importantly, retailers must know how to reach
this soon-to-be massive number of Indian shoppers.
THE MARKET IS GEOGRAPHICALLY CONCENTRATED
Perhaps it will be good news for retailers that the Indian market is surprisingly
concentrated and is likely to remain so. But they must also note the corollary:
while this concentration makes it easier to reach shoppers, it also creates
intense competition in specifc parts of the country.
The frst question to consider is where do the targeted Indian shoppers live?
Urban India accounts for 30 per cent of the countrys total population but
currently accounts for 64 per cent of its consumption. The number of urban
dwellers will remain high even in 2015, when consuming households are likely
to have grown fve-fold, as stated before. Rural India has lots of individually rich
shoppers, but they are widely dispersed and hence diffcult to reach.
Whats more, the market within urban India is further concentrated: 39 per cent
of Indias buying power is in the eight large tier I cities (Exhibit 1.5 and 1.6).
The concentration is even greater in luxury retailing. Recent McKinsey research
shows that just fve neighbourhoods in Mumbai and Delhi and one in a town in
Punjab account for 65 per cent of potential luxury customers in India.
3
But as
3 Its important to note here that this degree of concentration by no means suggests that
organised retail in India makes sense only in these 34 cities. There could be equally valid retail
strategies aimed at tier III and IV towns or even rural India. This report however is restricted
to large-scale strategies to build presence frst where the major consuming segments are
located. We believe that unconventional or niche strategies might create signifcant value but
will clearly require a very different business model.
18
incomes increase over the next fve to 10 years, buying power will spread to an
additional 26 tier II cities.
One model of retailing suggests that perhaps organised retail is likely to focus
on these 34 cities, which account for over half of todays spending and most of
Exhibit 1.6
BUYING POWER IS CONCENTRATED IN 8 TIER-I CITIES TODAY
ESTIMATES
Share of urban income
Per cent; 2001
39
14
9
39
Number of cities*
Tier I
Tier II
Tier III
Tier IV
26
33
8
5,094 towns
* Classification based on population. Tier I >4 million, Tier II 1-4 million, Tier III 0.5-1 million, Tier IV rest of urban centres
Source: Census of India 2001; NCAER The Great Indian Middle Class; MGI
Exhibit 1.5
CLASSIFICATION OF CITIES AND TOWNS
Mumbai
Kolkata, Delhi,
Chennai
Bangalore
Hyderabad
Ahmedabad, Pune
Surat, Kanpur, Nagpur, Lucknow,
Jaipur, Kochi, Vadodara, Indore,
Ludhiana, Madurai, Bhopal, Patna,
Nasik, Agra, Varanasi, Rajkot, Meerut,
Jabalpur, Dhanbad, Kozhikode . . .
Tiruchirapalli, Amritsar, Faridabad, Aurangabad,
Allahabad Gwalior, Jodhpur, Raipur, Bhubaneshwar,
Goa, Pondicherry Aligarh, Moradabad, Mangalore,
Gorakhpur, Bhavnagar
Rohtak, Rourkela, Udaipur, Anand, Faizabad, Hassan,
Shimla, Roorkee, Gurgaon, Shillong
Tier I: Major cities
Tier II: Mainstream cities
Tier III: Climbers
Tier IV: Small towns
26 cities
Population >1 million
33 cities
Population >500,000
8 cities
Population > 4 million
Total income >100 billion Indian rupees
5,094 towns
Note: Population for each city estimated using the average urban household size (from MGI model) and the estimated number of households
in each city from NCAER (in the year 2001).
Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute
19
Indias economic growth. In this respect, India will be similar to China, where the
key economic centres of Beijing, Shanghai and Guangzhou produced the frst
shoppers for organised retail, followed by the next 29 tier II cities, which enjoyed
a second wave of economic growth to emerge as major retail centres between
2000 and 2007 (Exhibit 1.7). Today over 1,000 cities in China can support a
hypermarket compared to under 200 cities in India today.
Knowing where the high-potential shoppers are located is only the frst step in
the game. Just as importantly, retailers need to think about how their priorities
will change over the coming years as Indian shoppers and competition in the
industry evolve.
HETEROGENEOUS EVOLUTION IS LIKELY
The early focus of organised retailers in India has been on acquiring sites to
open doors and attract customers, both critical factors in building a business
from scratch. Differentiation has been less crucial at this nascent stage, as
supply creates demand and an attractive price proposition and convenient
location have been suffcient to attract shoppers. Indeed, every day, more new
players announce their entry.
But we believe several of these entrants will struggle in the next phase of retail
evolution, as the rules for winning change dramatically and suddenly. We would
Exhibit 1.7
EXPECTED GEOGRAPHIC SPREAD OF RETAIL IN INDIA IS SIMILAR
TO CHINAS
WAVE 1 First phase of
retail action (in the mid-90s)
Key cities: Beijing,
Shanghai and Guangzhou
WAVE 2 Second phase
(2000-2007)
Tier II: 29 capital and
prefecture cities
WAVE 3 From 2007
Tier III: 251 urban areas
20
not be surprised if many of these initial adventurers do not survive the next
stage of evolution in India. This has been the case in several other sectors that
developed in the last 15 years in India (whether airlines or telecommunication)
and also in the retail sector in China, which is about 10 years ahead of India in
its evolution (Exhibit 1.8).
Our work with retailers in China confrms that the country has reached the
exploratory stage, especially in the top urban centres. In these markets,
winners are those who can retain customers (not just acquire them), offer a
differentiated proposition vs. other players (not just open a store) and increase
operational effciency as scale becomes material. Shoppers are now used to
basic benefts (such as attractive prices and convenient location) and are looking
for more. Winners will reinvent themselves and deliver clear benefts. Others are
as likely to consolidate as have players in other sectors.
Importantly, moving from phase 1 to 2 is a matter of competitive intensity and
not time or the buying power of the city. Hence in cities such as Bangalore and
Hyderabad, early signs of phase 2 are evident as real estate availability has
allowed new formats to develop. On the other hand, cities like Delhi and Mumbai
are still in phase 1 despite the high buying power of their residents. In Bangalore
Exhibit 1.8
EARLY DAYS FOR ORGANISED RETAIL
Dominance of
mom and pop
stores
First few
organised local
retailers appear
Large-scale
innovation in
formats and
value
propositions by
local retailers
First few global
retailers enter
Global
retailers start
acquiring
3-4 winning
local retailers
survive and
flourish
Multiple global
retailers in the
top 10
Organised
retails
share of
total
market
3-5% 5-30% 30-80% >80%
India Brazil China Singapore
Time from fragmented stage

5-15 years 10-25 years > 25 years

Phase 1
Fragmented
Phase 2
Exploratory
Phase 3
Consolidated
Phase 4
Mature
21
and Hyderabad, organised retail already has a concentrated presence with an
estimated share of 18 to 24 per cent or four to fve times the all-India share.
The impact is visible in the performance of many stores and the search for
differentiation has already started.
Phases 3 and 4 of the retail evolution are still some distance away. With a
25-year history of organised retail, Brazil resembles the consolidated market
of phase 3. Well-established retailers hold 60 to 80 per cent
4
of the total retail
market. Mergers and acquisitions have been frequent, and shopper segments
are increasingly thinly sliced, with distinct formats catering to each. The basis
of competition has moved from mere presence and effciency to innovation and
then increased customer lock-in.
What does all this mean for retail in India? First, it is likely to have a small
share and face intense competition. Second, organised retail will grow alongside
traditional retail, not usurp it.
Small but growing share for organised retail, with pockets of intense
competition
As more players try to build initial positions in India, the competitive landscape
will become crowded, especially in some catchments and cities. With few
entry barriers, there will be many more entrantslocal and, depending on how
regulations evolve, global. It is quite likely that, even with a 14 to 18 per cent
overall share nationally, organised retail will feature catchments with intense
competition quite early in the game. In Hyderabad, for instance, one catchment
already has over 10 hypermarkets, six convenience stores and hundreds of
traditional mom and pop stores fghting for a share of the wallets of its newly
affuent shoppers. This is also true for some areas in Bangalore.
Second, price and location will soon lose their power and winners will need to
swiftly differentiate themselvesbe famous for something (Exhibit 1.9). Till
now just opening stores was enough to generate footfalls and retailers were
catering to all consumer segmentsthey were everything to everyone. Now
retailers will be forced to make choices about the segment to target and then
tailor their delivery to cater to this segment. However, it will be important for
them to differentiate themselves only to the extent that they remain attractive
to a large enough customer segment and hence viable.
4 Organised retail in Brazil includes a large informal sector that qualifes as organised.
22
Finally, this evolution will happen sooner than expected. As weve said above, in
the more developed markets, differentiation is already a prerequisite.
Mom and pop stores will survive
Diverging from popular belief, we see that mom and pop stores will retain their
hold in India even as organised retail evolves.
Both will grow alongside, as has happened in China (Exhibit 1.10). Shopper
attitudes, existing regulations and a cost advantage over organised retail will
preserve the popularity and viability of traditional retail. The street vendor
and neighbourhood store (kirana store) beneft not just from Indians habit of
buying fresh food often, making convenient location a must. They also gain from
their sagacity in offering credit and home delivery. These stores have for long
maintained accounts for households, waiving payment till the end of the month
and sending goods to the door, at just a phoned-in request. Kirana stores also
enjoy lower operating costs and higher asset turns. Further, organised packaged
goods players have recognised them as a sweet spot and are working closely
with them to improve in-store experience and service.
True, this cost advantage could diminish as organised retailers start to leverage
their scale to negotiate better with their suppliers. However, the biggest
challenges to traditional stores sustainability will not be competition but the
opportunity cost of the real estate they are occupying and the willingness of the
next generation to continue in this business.
Exhibit 1.9
ORGANISED RETAILERS WILL NEED TO BE FAMOUS FOR
SOMETHING
Price promotions and
discounts
Lowest prices everyday
Convenient location in high
street/mall
Convenient in-store layout
Mix of private label and high-
end brands across categories
and price points
Distinctive fashion to drive
footfall
Price
Experience
Convenience
Authority/Range
Service
Fun family experience
Comfortable and safe environment
Attentive and knowledgeable staff
Products available when required
23
Despite these two challenges, we are already seeing the Indian entrepreneurial
spirit at work at several kirana stores, ensuring their survival even if in a new
form. Adaptations include:
1. Becoming specialist stores: we see more chemist, food and lifestyle/beauty
stores.
2. Switching to exclusive brand outlets (from multi-brand ones): many are
evolving their relationships with brand owners.
3. Providing new services suited to their location and size advantage. For
instance, some convenience stores are following their counterparts elsewhere
in the world; internationally, some convenience stores make 50 per cent of
their profts by selling mobile telecom, travelling and ticketing services. In
India, the largest telecom player sells about 70 per cent of its pre-paid airtime
through a large network of over 750,000 mom and pop stores.
This holds a clue for organised retailers: fnd out what fast-evolving Indians are
buying and how and discover how best to adapt to or shape this behaviour. The
next chapter describes the evolving attitudes of Indian shoppers, what shopping
baskets hold today and how their composition is likely to change in the coming
years.
Exhibit 1.10
EMPHASIS ON CONVENIENCE FAVOURS CONTINUED GROWTH
IN MOM & POP STORES, AS SEEN IN CHINA
Total retail sales revenue; US$ billion
42%
58
2001
Organised
Mom & Pop
Exhibit 1.10
CAGR
23
5
Per cent
21% growth in
traditional
retail over 4
years
300
58
500
42
2005
42
Per cent
Source: MGI; Euromonitor; Planet Retail; trade interviews; McKinsey analysis
24
2. Indian Shoppers: Evolving in Step
with the World, in Their Own Time
Organised retail will grow in India as retailers establish positions and start
shaping this market. But how well they do so will depend on their understanding
of Indian shoppers and what will make them shift their buying behaviour. So
far the hustle and bustle of bazaars, the home delivery and cottage industry
credit of the local grocer and the bargaining pleasure of mom and pop stores
have been attractive enough. What will attract shoppers in large numbers to
organised retail? And what will they buy when they get there?
To answer this question, we studied Indian shoppers in two ways: one, obtaining
a category view of their spending and how it is changing as they get richer; two,
getting a holistic view of their attitudes and behaviour as shoppers compared
with their peers in other markets (see box Decoding the Indian shopper). Our
extensive study showed that:
Indian shoppers have some similarities to their peers in other markets, but
have also been shaped by a unique context and history and therefore differ
in ways that are important for retailers to understand.
Indians are experimenting with several categories as incomes rise. Non-food
categories, particularly apparel and electronics, are leading the shift to
organised retail.
25
26
DECODING THE INDIAN SHOPPER
We used two different approaches to understand Indian shoppers. One,
to obtain a category view of spending and how it is changing as incomes
rise, we used insights from our study of consumption in India, as reported
in The Bird of Gold: The Rise of the Indias Consumer Market, and from
the extensive work we have done in specifc retail categories, both for
retailers and branded manufacturers.
Two, we built a more holistic view of the attitudes and behaviours of Indian
shoppers by comparing them with shoppers in other emerging markets,
including China, India, South Africa, Russia and Brazil. We called this effort
How Half the World Shops.
1
Our hypothesis was that these shoppers
differ from those in mature retail markets and, as their incomes rise, they
will continue to show different shopping habits and preferences. Using
multiple techniques, from kitchen and wardrobe audits to shopping trips
with individuals, from qualitative and quantitative analysis to online survey,
we compared behaviour across emerging markets. Next, we compared
our fndings with similar research among US and French shoppers. This
led us to a powerful set of insights on their overall shopping habits and
a detailed understanding of food, apparel and electronics, as presented
in this chapter.
INDIAN SHOPPERS DIFFER IN KEY WAYS FROM THOSE IN OTHER MARKETS
BUT ARE NOT DIFFICULT TO UNDERSTAND
Indian shoppers seem bewildering in their diversity and unique preferences. A
global luxury retailer is delighted that its frst store in a luxury hotel in India broke
even in an incredibly short time. But a local lifestyle retailer bemoans the fact
that its store economics do not work on a high street like Connaught Place in
Delhi. Similarly, Indian shoppers will wait for the seasonal sales to buy branded
shirts, but are also buying more top-end mobile phones than shoppers in the
UK are today.
Do these paradoxes indicate that the Indian shopper is intrinsically diffcult to
understand? We believe not. As we conducted our research, we were conscious
of two lessons from our work with some of the most successful early entrants into
organised retail. One, it is not wise to think in terms of averages when catering to
Indian shoppers. Segments are as far apart from each other as can be imagined,
1 The frst-ever quantitative global research on shopper behaviour and attitudes by
McKinsey & Company, covering 6,000 BRIC shoppers and 2,000 US and French shoppers
using focus groups, home audits and shopper diaries.
27
in income, spending across categories and adoption of categories. The global
Indians are as different in their outlook and behaviour from the aspirers they live
close to as they are from shoppers in Singapore and Moscow.
Two, its better to shape not predict the behaviour of Indian shoppers. The bulk
are new to organised retail and their attitudes and preferences are evolving so
fast that what is a buying factor today is taken for granted tomorrow. A recent
attitudinal survey we conducted revealed that almost half of Indian shoppers do
not have clear preferences as they are either frustrated with what is available to
them or are not served by modern retail and dont care. As a result many of the
attitudinal segments we see in other markets are yet to be seen in India. The
segments are clearly to be seen in Brazil, the US and France, and are starting to
emerge in China. But in India shoppers are still quite undifferentiated, whether
its the rich, the young or shoppers in metros. Again, this is a sign that it is early
days for organised retail in India.
We have assessed Indians shopping attitudes as a snapshot restricted to 13
million seeker and striver households, falling in the middle of the consumption
classes described in chapter 1. To avoid the trap of averaging, we have left
out the 1 million global households (who shop differently) and the shopping
behaviour of the 91 million aspirer households (whom we view as the shoppers
of tomorrow). We studied these shoppers across six cities in India and compared
them with 8,000 of their counterparts in Brazil, Russia, China, South Africa, the
US and France.
The resulting photograph is revealing, although we recognise that it captures
an Indian shopper who is evolving very fast. It shows that some Indian shopping
habits are universal, i.e., they are more or less the same as those in the rest of
the world, some are similar to those of other BRIC shoppers but different from
those in more mature retail markets, and some are unique.
Some shopping habits are universal
Indian shoppers are very much the same as their global counterparts in four
critical attitudes. First, they will not travel for more than 15 minutes for regular
shopping (for food and other standard purchases). Second, they like to see the
best brands, even if they are not yet ready to buy them. Third, they want to be
able to choose from a range of products. Fourth, they need to check prices
within and across stores. Let us look at two of these attitudes more closely:
28
Shoppers follow a 15-minute rule. Shoppers do not travel long distances for
regular shopping. All those covered in our study, including Indian shoppers,
follow the 15-minute rule (Exhibit 2.1). In our survey, 64 per cent of respondents
said shopping locations should be within 15 minutes of travel from home, as did
fairly similar numbers in China (69 per cent) and France (70 per cent). In India,
this travel distance was defned as the journey time by autorickshaw
2
, in China
as a journey by bus or bicycle and in the US as a journey by car.
Exceptions are made only for high-value categories such as apparel, electronics
or jewellery and festive or wedding purchases. On these occasions, Indian
shoppers are willing to go across town or even to other cities (e.g., Kanchipuram
to buy saris for a South Indian bride).
Clearly, one implication of this is that traditional formats in convenient locations
are here to stay. Second, locations within neighbourhoods will be coveted and
real estate pricing for these locations will continue to remain strong. Finally, for
locations outside neighbourhoods and eventually in suburbs, which are likely to
see massive real estate investment, retailers will need to innovate to meet the
15-minute rule. One example of such innovation is by retailers in China, who
organise buses to take shoppers to stores outside their neighbourhood and who
are now developing tailored suburb formats especially those within townships
being built from new.
2 Motorised three-wheeled vehicle.
MOST SHOPPERS SURVEYED FOLLOW THE 15-MINUTE RULE
64
69 69 70
74
78
Brazil US France China Russia India
Convenience is a must globally
% of people travelling less than 15 minutes
Measure and
forecast
catchment
density
Watch for
transport/
infrastructure
evolution
Key
Implications
although mode of 15-min travel differs
Auto rickshaw
Walking
Bicycling Driving
Exhibit 2.1
Source: How Half the World Shops (2006)
Exhibit 2.1
29
Shoppers are highly value and price conscious. Shoppers choose stores they
perceive as offering value. This is especially critical in emerging markets, where
shoppers often believe that retailers increase prices to recover store rentals
and overhead costs such as air conditioning and security. To fnd out which
stores price right and which at a premium, shoppers regularly compare
prices. Our research showed that price checking is common across markets.
An equivalent number of Indian and US shoppers (39 per cent) reported this
behaviour, exceeded only by French shoppers (43 per cent).
How it is done is fairly simple. Indian shoppers use Key Value Items (KVIs)
to quickly check if the store is pricing at a premium or otherwise, but their
list of items is small3.4 in India versus 6.4 in Brazil (Exhibit 2.2). For daily
purchases, they usually check a few unbranded items including (local) rice,
pulses and wheat four and a few branded products that vary across regions in
India
3
and include a malted beverage, a tea or coffee brand and a soap brand.
Prices are checked for other categories as well. For jewellery, the price of a
plain gold chain helps assess price, while for electronics the price of a colour
television or a 165-litre refrigerator meets the same purpose. Interestingly, this
behaviour is of a milder degree than in other countries. As can be expected, this
complexity is increasing as more competitors enter and organised retail begins
to play a bigger role in shoppers lives.
3 It is notable that the list was equally small but slightly different for the aspirers segment of
Indian shoppers. They checked prices for cooking oil, sugar and wheat.
Exhibit 2.2
INDIAN SHOPPERS CHECK FOR PRICES, BUT IN LESS STORES AND
FOR FEWER PRODUCTS
I often check prices between stores
Per cent agree/strongly agree
Average
number of
stores
checked
2.7 2.4 1.9 2.4 2.6 2.7
20
33
37
39 39
43
France India US Brazil Russia China
Typical reference products differ by
income
Strivers, seekers: Rice, pulses, flour
Aspirers: Wheat, sugar, oil
Average number of products checked in a visit: 3.4 in India vs. 6.4 in Brazil
Source: How Half the World Shops (2006)
30
A clear implication for retailers is that they need to pay careful attention to the
pricing of these KVIs. We also observe the critical importance of range in setting
price perceptions. While these are early days for private label in India, several
retailers are experimenting with larger ranges that include exclusive and private
label brands which are proving popular with cash-constrained consumers.
Cheaper alternatives to mainstream brands (in the form of B brands or private
label products) are likely to grow within organised retail as they have in both
BRIC and developed markets.
Notably, our research also showed that not all retailers are getting value for their
pricing. For example, retailers pricing low across the whole range but not getting
KVIs and their entry price points right can be perceived as higher priced. We will
discuss this further in the next chapter.
Some Indian shopping attitudes are like those of other BRIC shoppers (although
different from shoppers in developed retail markets)
As with their counterparts in Brazil, Russia and China, the Indian shoppers
covered in our survey enjoy shopping, distrust retailers, want to see top brands,
treat quality and safety as a major decision factor, shop frequently for fresh food
and are highly open to credit. The most notable of these tendencies are their
attitude to shopping as an activity, to fresh products and to credit.
Love for shopping. About two-thirds of shoppers surveyed in India and about 40
per cent of those surveyed in China said that shopping is a favourite leisure activity
for the family (Exhibit 2.3). This is in marked contrast to the mature shopping
markets such as the US and France, where it is considered a chore. Indians
(and Chinese) see shopping as family entertainment, spending hours together in
a mall or a store. For many of them it is a window to the world, flled with the
excitement and pleasure of discovering new things and a new way of living.
This has important implications for retailers. First, this is an opportunity to
create exciting retail formats that help retain this attitude to shopping. Clearly,
as the Indian market and retail networks grow, retailers need to ensure that
the magic of the front-end does not diminish as they look for effciency at the
back-end.
Second, retailers need to be able to design their layout and operations to
cope with many shoppers who are essentially browsing or window shopping
for pleasure. It is critical not to drive these shoppers away as they will shortly
become bigger spenders when their incomes rise. But managing the implication
for basket size and store footfall is an intriguing challenge.
31
Preference for fresh. Indian and other BRIC shoppers place a high premium on
freshness. Over 70 per cent of shoppers surveyed in all BRIC countries prefer
fresh products. Equally importantly, over 40 per cent shop for fresh food every
day, with the Chinese shopping even more frequently. The Brazilians and Russians
surveyed shop for fresh food every day of the week while Indians do so six days a
week; the Chinese reported 11 shopping trips a week for fresh food (Exhibit 2.4).
Fresh categories bought include fruits and vegetables as well as meat.
DESIRE FOR FRESH PRODUCTS DRIVES SHOPPING FREQUENCY
Shopping
trips/week
7
7
6
11
Brazil
Russia
India
China
Source: How Half the World Shops (2006)
ILLUSTRATIVE
Mom & pop store visit Modern retail visit
Exhibit 2.4
14
22
23
33
41
63
India China Brazil US Russia France
SHOPPING IS THE WINDOW TO THE WORLD
Shopping is one of my favourite leisure activities
Per cent agree/strongly agree
We go for
pleasure -
its an
excuse to
go out
If its a
large
supermarket
we will stay
at least 3
hours.
Shopper
Quotes
Source: How Half the World Shops (2006)
Exhibit 2.3
DESIRE FOR FRESH PRODUCTS DRIVES SHOPPING FREQUENCY
32
This preference for fresh products has a lot to do with cooking styles, availability
and trust in retailers. Brazilian, Indian and Chinese shoppers usually cook fresh
food at home every day, most of the time from scratch, using fresh ingredients.
This makes freshness very important. Second, they are used to having fresh
produce at hand throughout the year (It is only in Russia that winter brings a
lack of fresh products.) In India, in addition to the habits of hot cooked food,
low refrigerator penetration and poor power stability have further contributed to
this attitude.
But what connotes fresh in India is different from other markets. In India, fresh
implies unpacked fruits and vegetables and meat freshly cut from a butcher. In
China, fresh connotes live seafood while in South Africa, it has to be packed or
frozen to be considered fresh! This makes it critical to understand the preference
for fresh food and how it will evolve.
What does this mean for retailers? For one thing, Indian shoppers will buy only a
small share of fresh food from organised retail. This is so in China where, even
after a decade of organised retail, less than 10 per cent of fresh produce and
an even smaller per cent of meat are sold by organised retailers. According to a
recent study by Neilsen, shoppers in Wuhan (a tier I town in China), make about
21 shopping trips a month to wet markets, about 10 a month to traditional
retail stores, and less than 20 to all other organised retail formats including
supermarkets, hypermarkets and department stores (Exhibit 2.5). This has
prompted some notable innovations. Even global retailers have added a live
market feel for these categories in their stores, with live snake and fsh displays
and a wet foor that makes fresh produce shoppers feel at ease.
Distrust of retailers. In general, BRIC shoppers do not trust retailers much. Over
60 per cent of shoppers in Brazil and Russia and 25 per cent in China said they
do not trust their retailers. But the highest distrust is found in India, where 67
per cent reported lack of trust in retailers. Indian shoppers expect the retailers
they use most frequently to try to cheat them on prices in a small way (in fact,
some shoppers told us that they prefer shopping at a store where they know the
storeholder personally, because he is likely to cheat them the least).
Building trust quickly with modern shoppers is therefore critical for organised
retailers, particularly in the prices they charge. Our research suggests that
exposure to modern formats such as hypermarkets will help. However, given the
strong suspicion among most shoppers today, how retailers gain trust will be a
key differentiator in the retail market of tomorrow. The good news is that this
33
can be done through simple mechanisms, e.g., price and quality guarantees that
can build trust among Indian shoppers. We have seen some emerging market
retailers use this as a way to win the loyalty of core customers.
Openness to credit. Shoppers in BRIC countries are very open to credit but not
all fnd it easily available. While a third of shoppers surveyed in India agreed
that they would like to have credit for shopping, only 7 per cent said they use it
regularly (Exhibit 2.6). The young in India seem even more open to credit than
older shoppers: 45 per cent of surveyed shoppers aged 25 years and below said
they would like to have credit, compared to 30 per cent aged 25 to 34 and 28
per cent aged 35 and above. In Brazil, close to two-thirds of surveyed shoppers
said they were open to credit and over two-thirds reported using it. This is easy
to believe as retailers have led the retail fnancing revolution in Brazil. Indeed,
retailers in apparel, electronics and furniture have innovated to lock in shoppers
through credit. In India, a similar revolution is imminent as most fnancing till
now has been geared to serve the salaried employee. This is surprising in a
country where, of the 400 million working citizens, only 13 million are salaried
employees with unorganised labour and the self-employed (117 million) and
farmers (270 million) making up the rest. A consumer fnance company aiming
to fnance consumption for non-salaried households has met with remarkable
success, entering over 100 cities in India in under two years.
IN CHINA TOO, FRESH PRODUCTS ARE BOUGHT MAINLY
IN WET MARKETS
Source: Nielsen Shopper trends 2004
Trade sector, average number of visits per month: Wuhan example
0.60 0.66
0.93
1.12
1.39 1.50
5.33
7.50
10.84
21.72
Online
shopping
Personal
care
Confect-
ionery
shops
Wholesale
market
Traditional
grocery
Super-
market
Super-
market in
depart-
ment
stores
Depart-
mental
stores
Hyper-
market
Wet
markets
Ref: Q6
Exhibit 2.5
34
Uniquely Indian shopping habits
In at least six respects, Indian shopping behaviour is quite different from that of
shoppers elsewhere in the world. Our survey revealed that Indians are currently
the most promiscuous in their shopping between stores, dislike pre-packaged
goods, are willing to pay for service and convenience, favour ethnicity in womens
apparel and jewellery, are very occasion-oriented in their purchases and use
brands as proxies.
Least loyal to stores. While Indian shoppers clearly enjoy shopping, they are also
much less loyal to a single retailer. Indeed, over 60 per cent of Indian shoppers
covered in our survey say they buy at more than one retailer compared to 10 per
cent of Brazilian and 24 per cent of Chinese shoppers. This is likely to change as
stores get bigger and offer more range, shopping baskets grow and Indians get
more used to shopping for many items at once. But for now, retailers will need
to fnd a way to create loyal shoppers among the current firters.
Dislike for pre-packaged fresh. As mentioned earlier, pre-packaged implies a
lack of freshness for Indians. What is startling is the extent of this attitude.
As many as 65 per cent of Indians surveyed said they would never buy pre-
packaged fruits or vegetables. In contrast, just 24 per cent of Chinese and 6
per cent of Americans surveyed have this preference. The attitude is common
in India across income categories, age groups and types of cities. Notably, it is
SURVEYED SHOPPERS ARE EXTREMELY OPEN TO CREDIT BUT FIND
IT HARD TO COME BY
The young are even more open to credit
Age groups
Openness
Usage
Openness to credit versus usage
Per cent agree/strongly agree
58
20
25
60
18
30
18
31
40
65
9
7
Highly open to credit but constrained by availability
28
30
45 Less than 25
25-34
35 and above
Per cent agree/strongly agree
Source: How Half the World Shops (2006)
Exhibit 2.6
35
less entrenched for meat, poultry and seafood: 41 per cent of Indians surveyed
dislike pre-packaged products in these categories.
Convenience and service matter. Travel is diffcult and expensive in India.
We have seen shoppers costing a store visit with the approximate savings
expected from additional travel. As a result, as many as 64 per cent of Indians
covered in our survey say they are willing to pay a little more for conveniently
located stores compared to just 31 per cent of Chinese and 19 per cent of US
shoppers surveyed. Services such as home delivery are common, with even
hypermarkets providing home delivery. Additionally, in electronics, 65 per cent of
Indian shoppers surveyed said that they were willing to pay for good after-sales
service and for product warranties.
Ethnic apparel and accessories. Ethnicity remains the dominant preference in
womens apparel and jewellery in India. Today, more than 75 per cent of womens
apparel sold in India is ethnic in style and the majority of jewellery sold (85 per
cent) is traditional in design. This is driven by a strong local culture and heritage
in apparel and accessories, combined with a social ethos rooted in arranged
marriages. This social context is refected in the fact that apparel purchases
for occasions such as weddings or festivals account for nearly 37 per cent of
shopping trips in these categories.
But this does not imply this behaviour will last forever. With over 350 million
Indian citizens below the age of 18 and another 350 million between 18 to
40 years of age, how long will ethnicity rule? We believe that two contradictory
forces are at work. One, the traditional importance of ethnic styles might get
stronger as pride in being Indian increasesleading perhaps to hybrid fashion
trends, currently termed as fusion-wear. Two, the Indian wardrobe will get more
varied as Indian shoppers get richer and start buying different clothes for party,
formal and sports wear. These categories might be less ethnic in nature, even
though the ethnic styling will not disappear.
Occasion-oriented shopping. Indian shopping especially in categories such as
apparel is heavily oriented towards special occasions such as weddings and
festivals. Thirty-eight per cent of Indians claim that special occasions drive
most apparel purchases, compared to 6 per cent of Chinese and 3 percent of
Russians. This attitude again cuts across income groups and cities.
Brands as proxies. In the absence of adequate information, quality control and
trust in retailers, Indians use brands as a proxy for all these. In apparel, brands
36
serve as a proxy for the latest fashion as well as the right quality. In food and
grocery, Indians seem to be willing to live with a little less. For example, in
shampoos, 57 per cent of shoppers surveyed said that buying a well-known
brand is important while as many as 49 per cent were willing to buy lesser
known brands. The only exception to this is electronics, where as many as 85
per cent of shoppers stated that they always want a well known brand. The
risk of a high-cost purchase is mitigated through the trust offered by a reputed
brand.
Clearly, not thinking in terms of averages provides a more accurate assessment
of how Indian shoppers think and how they are likely to evolve. The key is to keep
refreshing these insights as these shoppers are evolving very rapidly.
In view of these shopping habits and preferences, what products are Indians
buying now and which are they likely to favour in the future?
INDIANS ARE STILL SPENDING MAINLY ON BASIC GOODS AND SERVICES
BUT THIS IS CHANGING RAPIDLY
For retailers in India there are two big questions: What will Indian shoppers buy?
How much of this will they buy from organised retail? The answer to both will be
determined by income increases as the economy grows and the actions of retailers
(and brand manufacturers) in shaping consumption. Our study shows that:
The consumption basket in India is changing and will be very different across
income segments
Popular categories will refect current preferences unique to India
Non-food products will lead the shift to organised retail, especially in apparel
and electronics. However, organised food will be the largest category in
absolute terms, although with a much smaller share of total food spend.
Consumption in India is changing signicantly and will differ across income
segments
Today, household income primarily determines the retail categories Indian
shoppers buy. With incomes still relatively low for the vast majority, food forms
the bulk of purchases, although apparel and electronics have also become
popular categories. But as incomes rise, people will have more money to spend
on things other than food, even while the absolute spend on food is likely to
double at a per capita level (Exhibit 2.7).
37
Today, the amount of discretionary spending by consumers varies widely by
income segment, driven both by affordability and openness to new categories.
The differences can be extreme. Our research identifed a fve-fold difference in
the per capita spend on apparel between different categories even within the
top income segments (Exhibit 2.8). Clearly, not all shoppers are equally valuable
to retailers.
Exhibit 2.7
Food, beverages, and tobacco
Apparel
Housing and utilities
Household products
Personal products and services
Transportation
Communications
Health care
Education and recreation
56
42
34
25
5
6
5
5
14
12
12
10
8
9
11
11
17
19
20
6
6
9
7
9
13
4
1
5
3
3
4
100%
2025F
248
3
2015F
60
1995
2
2
82
2005E
3
140
3
Share of average household consumption
%, thousand, Indian rupees, 2000
SHARE OF WALLET IN INDIA IS SHIFTING FROM FOOD TO MORE
DISCRETIONARY SPENDING
Non-food spending
Food spend
Note: Figures are rounded to the nearest integer and may not add up to 100%.
Source: McKinsey Global Institute
EVEN WITHIN THE TOP INCOME SEGMENTS, THERE IS A FIVE-FOLD
DIFFERENCE IN PER CAPITA SPENDING ON APPAREL
Rs per capita per year, apparel spend
300
780
22,250 Globals
9,200 Strivers
4,400 Seekers
Deprived
Aspirers
2008 2013
350
950
24,750
10,500
5,000
5X
Market for
modern retail
Source: McKinsey Global Institute 2007; How Half the World Shops 2006
Exhibit 2.8
38
While income is a primary driver of consumer choices, a key insight from our
research is that the average household does sample most categories and the
width and depth of category consumption is increasing as Indian households
get richer.
For the (near) future, retailers should remember that Indian shoppers are now
sampling different categories very early in their shopping histories. Shopping for
a new category or a premium brand can celebrate the ability to indulge or signal
increased status. This is true of shoppers in Brazil, India and China. So a shopper
in a favela or a slum in Rio De Janiero buys only limited types of processed
foods but buys the best brands within them as these are her little indulgences
in life. A shopper in a Mumbai slum buys foreign brands as a way of signalling
that she can afford these things. For weddings, many shoppers in India will buy
branded His and Her watches for the bride and groom, ensuring that over 40
per cent of that brands sales are now linked to the wedding season.
Retailers need to catch these customers early, and shape their buying behaviour
as the leaders in the telecom and fnancial services industries in India have
done over the past three years.
Popular categories will reect current preferences unique to India
Our detailed study of total category spending by Indian shoppers reveals a
market structure that is uniquely Indian, with fresh food, apparel and electronics
emerging as key categories for organised retail (Exhibit 2.9). This is based on a
category (and sub-category) assessment of the market in India as well as drivers
of growth in the future. Our current estimates suggest the following:
Food: Given the preference for fresh products and the relative lack of concern
about top brands among Indians, fresh, staples and basics will remain the
largest segment in total food consumption.
Apparel: India is the only market in the world where mens apparelaround
40 per cent of spendingis a much larger category than womensaround 30
per cent (Exhibit 2.10). This of course does not include the huge spending on
jewellery in India. Also, in womens wear, ethnic apparel (salwar kameez and the
saree) constitute around 90 per cent of total spending.
Mens apparel will likely continue to account for 40 to 50 per cent of the apparel
market in 2015. At current rates of adoption, non-ethnic apparel for women is
likely to comprise less than 10 per cent of the market in 2015.
39
Electronics: Mobile phones are likely to have a disproportionate share of the
market, accounting for 40 per cent of sales in 2015. Indeed, more homes will
have mobile phones than television sets in India. Home electronics will come
a close second, with a 38 per cent share. This is partly driven by demographic
INDIAS APPAREL MARKET IS DOMINATED BY MENS WEAR
Apparel market size and growth rate by demographic and occasion-based categories
US$ billions, per cent, 2005
0.7
5.8
Mens wear
1.3
4.6
1.4
0.4
4.6
Unisex**
0.4
1.5
Womens wear
0.4
2.5
1.7
0.6
6.3 7.2
Kids wear
Other*
Casuals
Formals
(including
ethnic)
100%=
00-05
CAGR
Revenue
9% 12% 10% 8%
0.5
* Includes innerwear, nightwear, jackets, socks etc.
** Unisex formals: wollens, unisex casuals: jeans, unisex other: scarves, ties etc.
Source: Images Fashion report 2006
Exhibit 2.10
Exhibit 2.9
FRESH FOOD, ETHNIC APPAREL AND MOBILE ELECTRONICS WILL BE
KEY CATEGORIES FOR ORGANISED RETAIL
~30% share of fresh
fruits, vegetables and
perishables
38
Fruits,
vegetables &
perishables
38
Staples
25
FMCG
& foods
Food, 2015
Per cent share of consumption
100% = US$ 252 bn
One of the only markets
where mens apparel is
much larger than womens
Womens ethnic is 3x non-
ethnic
20
9
26
45
Mens
wear
Womens
ethnic
Womens
non-ethnic
Children
and
infants
Apparel, 2015
Per cent share of consumption
100% = US$ 40 bn
Disproportionate share of
telecom/mobile phones
40
Tele-
com
38
Home
electronics
15
Consumer
durables
3
Personal
electronics
Electronics, 2015
Per cent share of consumption
100% = US$ 20-25 bn
Source: McKinsey analysis
40
trends. The vast majority of young Indians live with their parents and so already
have access to many consumer electronic products such as TVs and DVD players,
whereas a phone remains an individual purchase and a statement of arrival. It
also refects the tougher choices consumers make when their spending power
is limited.
Non-food categories will lead the shift to organised retail
Our study also shows that a smaller share of spending on food will switch to organised
retail while that on non-food categories will switch a lot faster (Exhibit 2.11).
Food: In food retail, we believe that price and convenience will be key factors of
success. We expect that organised food retail will amount to only 5 to 15 per cent
of total food retail by 2015, limited by its inability to match kirana (convenience)
stores in providing fresh goods on a daily basis, offer home delivery and be
located close to home. Packaged food will do much better, with organised retail
accounting for as much as 20 to 30 per cent of total retail in the sector by
2015. The categorys advantage will be an ability to offer prices lower than the
maximum retail price and to create private labels. In some of the top 10 cities
where real estate is available, share of organised retail in food could be as high
as 20 to 30 per cent as seen already in Bangalore, Hyderabad and Chennai.
Exhibit 2.11
0
5
10
15
20
25
30
35
40
45
50
55
Food and grocery
Apparel Electronics
Jewellery
Watches
Footwear
GM
Share of
organised retail
0
5
10
15
20
25
30
35
40
45
50
55
Food and grocery
Apparel
Electronics
Jewellery
Watches
Footwear
GM*
Share of
organised retail
NON-FOOD CATEGORIES WILL LEAD THE SHIFT TO ORGANISED RETAIL
2015
average
Share of wallet (overall)
High Low
Per cent
Organised
retail size in 2015
2005
average
* General merchandise: includes home utility categories such as cutlery, cleaning products and buckets
Source: McKinsey analysis
Organised
retail size in 2005
GM*
41
Apparel: Price and authority/range will be crucial in apparel retail, where organised
retail is likely to account for 20 to 30 per cent of total garment retail in 2015.
Since shopping is occasion-oriented, convenience is not as important. Retailers
will need to create their own occasions to drive consumption and build core
franchises. Knowledge about fashion cycles and quality must be built. Offering
markdowns in a controlled way will likely be a key driver of price perception, as
will broadening the range through expanded use of private labels.
Electronics: Already fairly organised in India, the electronics market is likely to
see 40 to 50 per cent of sales through organised retail in 2015. Large format
retailers will use electronics as a loss leader and to increase basket size.
Price will be even more important than other categories given the high levels
of involvement. Shoppers surveyed exhibited a desire for better shopping
ambiencefrom good lighting and cleanliness in stores to range and brand
availability as well as credit and after-sales service. All of this will offer organised
retailers a chance to win by providing a premium look and feel in their stores.
Shoppers do trust in sales peoples advice but, overall, trust in local stores
is low. Half the surveyed shoppers said they fnd it diffcult to fnd the right
products. Organised retail should be able to fll these gaps.
Some product categories such as furniture are largely sold through carpenter
orders and are as yet an insignifcant part of retail. These categories could move
directly to organised retail. In fact, players will attract more and more shoppers
towards organised retail as they address the current defciencies of Indian retail.
But their job will not be done until they know how to turn these volumes into
profts, the subject of the next chapter.
42
3. Retail Economics: Innovation at
Every Step
As we have seen, India is an exciting high-growth market with millions of new
consumers whose behaviour is being shaped every day. But retailers cannot only
grow volumes; they must also make money. The graveyards of several emerging
markets (and even markets such as Korea and Japan) are flled with retailers
who could not build a proftable business.
Talk to anyone about retail in India and, after the enthusiasm about the retail
opportunity, the discussion quickly moves to how making money is diffcult
in Indian retail. Several factors are responsible: sky-high rentals, increasing
talent retention costs, stretched supplier fnancing, rising operating costs and
pressure on prices (except for food). Many existing players are suffering from
poor proftability and we expect to see some changing ownership, especially
once regulation allows foreign players to enter.
This is before real competition has emerged. As competitive intensity increases,
retailers will have to live with an annual 1 to 2 per cent price squeeze each year.
So can retailers make money in India? We believe they can. We do see successful
retailers in India, who have built winning formats for this country. But successful
formats from developed countries may not suffce here. Proftable retailers will
innovate both on earn and turns of the retail ROCE tree.
1
We believe winning
retailers will offer a compelling format to shoppers. This might require that they
evolve their formats more quickly than they have done in other markets. Early
evidence suggests that the life of a format in India is much shorter than the
usual fve to seven years in developed markets, and that winners will have to
redesign formats frequently to keep pace with the fast-evolving shopper. This is
not new. We have seen similar innovations and tailoring in other sectors in India.
We believe the winners in India will be those who recognise that making profts
will require a different approach since this is a market of millions of small
transactions and rapidly evolving customers, whose spending across categories
43
1 Return on Capital Employed; the ROCE tree framework disaggregates retail performance on
various indicators of proftability.
44
is different from that of shoppers elsewhere and whose shopping habits vary
across clusters. Also, cost drivers in India may differ since it is early days of retail
evolution here. Models imported as is from other countries will not work in India.
Why is this level of tailoring required in India? The answer lies in the evolution
of various drivers of proftability here. The rest of this chapter discusses fve
of these drivers and the likely imperatives for retailers in India. Assuming such
mechanisms are in place, we suggest fve ways that will help retailers create a
proftable operating model:
Integrating real estate into the business model
Creating an effective and scalable supply chain
Increasing basket size by shaping consumption
Developing and retaining talent
Infuencing regulation to ensure healthy development of the sector.
INTEGRATING REAL ESTATE INTO THE BUSINESS MODEL
As in retail anywhere in the world, rentals are one of the highest costs. That
they are much higher than expected is no surprise in a country where the real
estate sector has just started to become organised. Today rentals as a share of
costs are twice as high as elsewhere. This situation will ease but high rentals
will remain a reality in highly desirable locations.
Retailers face two separate real estate challenges in India. The frst is securing
retail space in Indias top-10 cities, where competition is high and focused
on a limited number of sites; rents here have already reached international
benchmarks. The second is in fnding a viable business model for the remaining
200 cities (of the total 5,400 cities or towns), where land is available at low
rents but sales density is even lower.
Real estate players in turn face two retail challenges. The frst is stabilising
rentals which tend to be riskier than in commercial development, depending
on location in the mall and success with shoppers. Secondly, successful malls
add a lot of value to surrounding real estate whether retail, commercial or
residential, creating the need to fnd successful anchor tenants that can help
drive footfalls and monetise the remaining real estate. While this effect is not
unique to India, the quantum of it is.
45
Integrating real estate into the retail business model therefore creates huge
value in either business.
Securing space in the top 10 cities
Demand for retail space is high in Indias top-10 cities, which are currently the
focus of retail development. Unfortunately, restrictive land-use regulation, a lack
of effective city planning, and high demand for other forms of real estate (such
as commercial offce space) have led to limited supply of retail space in many
of these cities. This combination of high demand and low supply has raised
rents both in absolute terms and as a percentage of costs and they are now
comparable to the worlds highest (Exhibit 3.1).
From the point of view of the developer, real estate parcels are small in these
dense cities, leaving little room for monetisation through a strong retail offering.
The ability to charge rentals varies drastically by foor and store location. Lastly,
malls take time to mature and even then risk being upstaged by the newest
mall on the block. Hence mall development is seen as riskier as compared
to commercial offce and residential space, which translates into higher
expectations of retail rentals than of commercial and residential development.
Retailers hence end up paying high rentals which may not be sustainable as
RENTALS ARE VERY HIGH IN ABSOLUTE TERMS AND AS A
PERCENTAGE OF SALES
High street locations
in top cities
626
244
63
277
739
748
945
2,344 Tokyo (Ginza)
2,188
Hong Kong
(Causeway Bay)
1,500
New York**
Singapore
(Orchard Road)
Taipei
(Zhongxiao Road)
Shanghai
(Nanjing Road West)
Beijing
(Wangfujing)
Manila
(Makati CBD)
Jakarta
(CBD)
Bangkok
(Pratumwan)
Absolute retail lease rentals
Rs per sq.ft. per month; 2007
Delhi*
1,200
Indian retailer
Rent as per cent of sales (for top cities)
Per cent
1-5
5-10
Hypermarkets
10-12
15-30
Specialty retailer
International retailer
* Khan Market, Delhi
** SOHO-Upper Westside
Source:Real estate expert interviews, Cushman & Wakefield; LoopNet, CB Richard Ellis Asian Retail Property Review (2006)
Exhibit 3.1
46
illustrated in our projections for a Mumbai-based hypermarket (Exhibit 3.2).
Actual cases could differ from this illustration of store economics.
Compounding this problem is the uneven quality of mall space available. Malls
in India have suffered from a lack of clear positioning, and from unplanned
tenant-mix and adjacencies. Variable design and low-quality construction have
further reduced their attractiveness. Since builders, not real estate developers,
have constructed most malls, mall management has often been haphazard, with
builders selling parts of the mall early or handing over its management to a third
party. These problems should ease over time as Indian developers learn from
their mistakes and as malls are managed better.
Retailers in India suffer from very high real estate costs, ranging from 5 to 12
per cent of sales compared with 1 to 5 per cent for an international hypermarket
retailer. For a specialist retailer, real estate costs range from an estimated 15
to 30 per cent of sales compared with 10 to 12 per cent for a similar retailer in
other markets. In Delhis prime Khan Market area, for example, rentals in 2007
were Rs. 1,200 per square foot per monthnot much less than those in New
Yorks Soho or Upper West Side areas (Rs. 1,500 per square foot per month).
Rentals in prime locations in these cities will be high in the foreseeable future,
and will prove to be the biggest cost for retailers in the top cities.
Do such high prices pose a structural problem or are they merely a short-term
demand-supply gap? A bit of both, we believe. While India did start off with
a rather peculiar situation of very limited supply, retail space will increase as
RETAILERS MAY FIND IT DIFFICULT TO SUSTAIN HIGH RENTALS
ILLUSTRATIVE
2007 2015 conservative 2015 best-case
5,000
700
50
10,000
100
12
5,600
2
900
75
4
15,000
150
5
12
8,000
3
1,200
160
4
28,000
150
5
6
Footfalls (customers per day)
Basket size (Rs./customer/visit)
Sales (Rs. crore)
Sales density (Rs./sq.ft./year)
Rent (Rs./sq.ft./month)
Rent as per cent of sales (per cent)
High values will
be difficult to
sustain
Typical hypermarket economics in Mumbai (50,000 sq.ft. store)
1
Scenarios
Illustrative metrics
1 All figures are rounded
2 In line with population growth @1.5% per year
3 In line with increase in addressable market
4 Assuming group sizes of 2-5
5 Annual rental increase of 5% per year as in typical contracts
Source: Real estate and retail expert interviews; McKinsey analysis
Exhibit 3.2
47
the real estate sector becomes more organised and fnds resources to drive
growth. There is clear evidence of this in the stock market listings and its
positive impact on real estate players. As a result, a huge build-out is currently
underway, which will rise signifcantly in the next two to three years. Indeed, the
hectic retail development in the top-10 cities suggests that adequate amounts
of mall space are likely to be available in two to three years. Retailers might face
a new challenge soon: plenty of mall space but uncertainty regarding which mall
to bet on. A large part of this new real estate is in large constructions above
1 million square feet and often concentrated in some parts of the city (e.g., in
the eastern suburbs of Mumbai or the south-west corner of Delhi). While rentals
might ease, clearly not all these planned malls will survive. Nevertheless, real
estate players have shown an ability to modify end-use based on demand and
a glut may not develop.
That said, supply gaps will persist in parts of the top-10 cities, where land
availability remains restricted for reasons mentioned above. Rentals are likely
to remain high and unless real estate is integrated into the business model by
retailers or vice versa, new supply is unlikely to meet the underlying demand,
maintaining the high premiums in these locations.
Finally, in supply-rich suburbs and tier II towns, developing the right format will
be a bigger challenge to making money than fnding the space.
Finding a viable rental model outside the top-10 cities
In the remaining 5,400 urban centres (outside the top-10 cities), the challenge
will be making adequate returns given low sales densities. Retail space is
available at competitive rents. But sales density varies from that of a tier I
town. For example, for a hypermarket, retail sales density in a tier II town ranges
between Rs. 6,000 and Rs. 8,000 per square foot compared to Rs. 10,000 and
Rs. 15,000 per square foot in a tier I city such as Mumbai. With other operating
costs only marginally lower, it becomes diffcult to make an adequate return
even with lower rents (Exhibit 3.3).
It is a similar situation in China: approaches to real estate (and economics)
vary signifcantly between the denser and more expensive tier I cities and the
emerging tier II and III cities. In the smaller cities, land is cheaper (and so is
labour usually), and so fxed operating costs are typically 30 per cent lower than
those in tier I cities. However, lower density and sometimes lower incomes also
mean that average sales productivity is lower by 45 per cent. There are other
differences in frequency of purchase and width of consumption baskets, all
of which have implications for the width and depth of range needed. In short,
format economics differ vastly between big cities and smaller towns in China.
48
The same will be true for retailers in India. We believe retailers will need to think
of a portfolio of formats early on, as different clusters of catchments emerge.
And they will need to innovate to make profts. An example is a retailer that
uses air-coolers instead of air-conditioners in one of its tier III city stores to
keep costs down. Stores in smaller cities may need to offer more categories to
sustain profts while they wait for the customer base to grow. Further, real estate
will be one of the key factors defning clusters, leading to different format sizes,
tailored product ranges and varying merchandise density.
Integrating real estate into the business model
Having recognised the importance of retail space in India, retailers with big
ambitions are integrating real estate into the business model (Exhibit 3.4).
Clearly, at this phase of retail evolution, real estate is a competitive, strategic
asset and the right land grab is critical, especially for the more attractive sites
in the top-10 cities. Our analysis suggests that most consumption in India is
concentrated in the top-200 cities and, within them, in an estimated 500 to 600
catchments (based on city maps, income profles, competitive intensity, and a
few other factors). Winners will need to build a presence in these catchments
at the right cost.
Real estate having been scarce up to now, several retailers have actively shaped
the supply of real estate by setting up their own real estate funds, participating in
10,000-15,000
Mumbai Tier II
6,000-8,000
-48%
IN TIER II CITIES AND BEYOND, RETURNS ARE LIMITED
BY LOWER SALES DENSITY
80-150
Mumbai Tier II
30-60
-61%
Rs per sq.ft. p.m.
Retail rentals for hypermarkets* Sales density for hypermarkets*
Rs per sq.ft. p.a.
Lower rentals
Lower sales
density
New format
needed to make
money
ESTIMATES
* For prime locations as anchor tenants
Source: Real estate expert interviews; literature search
Exhibit 3.3
49
land auctions and building partnerships with developers. These innovations are
necessitated by the capital requirements of real estate and retail respectively.
Top real estate developers, in their turn, have entered retail or are planning to do
so. If there is a substantial increase in the availability of real estate, the need to
integrate vertically might ease, but it may still prove critical for creating capacity
in the right catchments. Hence, we expect big retailers to continue to play a
signifcant role in real estate.
With the real estate strategy determined, the next big task will be creating an
effective supply chain, building afresh and flling in the gaps in Indias creaky
system.
CREATING AN EFFECTIVE AND SCALABLE SUPPLY CHAIN
Supply chain and sourcing systems have always been the two big advantages
of organised retail worldwide. They have helped retailers leverage scale, better
understand what shoppers want, and offer tailored ranges and more attractive
prices over time. This is likely to be true in India as well.
Indeed, getting supply and sourcing right might be even more critical in the next
couple of years as we believe retailers will be under signifcant price pressure.
RETAILERS ARE VERTICALLY INTEGRATING INTO REAL ESTATE
AND VICE VERSA
Top
retailers
Real estate presence
Real estate funds
Tie ups with developers
Owned by real estate
developer

None
Planning US$1 bn real estate
fund
Plans to tie-up with real estate
players

None

Real estate Venture Capital

fund
Buying out several
hypermarket properties
Partnership with developers

Source: Literature search; Interviews

Top
developers
Plans to enter into
retail soon
Plans to build Ansal
Highway Plaza and
Budget shopping
destinations
Owns Shoppers
Stop Limited
Owns Haico Supermarket
and Loft (footwear shop)
Retail presence

Both retailers and real estate players are

realising the strategic importance of real
estate in retail
Purchased Piramyd chain of
department stores
Announced aggressive plans

Exhibit 3.4
50
Our recent work in several food categories (including grains, dairy, poultry, and
some categories of packaged goods) suggests that in several food categories
there is likely to be upward pressure on price, due to much faster growing
demand than supply. This will be a secular trend across all types of retailing,
and not just restricted to organised retail. Similarly, in non-food categories (such
as apparel, home and general merchandise), there is likely to be downward
pressure on prices as current prices are perhaps higher than incomes or current
demand for quality can support. With prices likely to be under pressure, a lot of
the focus will be on getting sourcing costs right.
Building an effcient supply eco-system in India where almost none exists today
can be an important source of differentiation for retailers as it goes beyond
managing costs. Given the small and limited vendor base, the real issues retailers
will face are securing supply given limited vendor depth in most categories as
well as creating an eco-system of capabilities and capital to grow this vendor
base.
Hence retailers must prepare for two different tasks:
Tailor the existing supply chain to ensure the right stock reaches the right
shelf at the right time at a low cost
Build a supplier base to secure future supply and create a differentiated
range of goods (including private labels in certain categories).
Getting the right stock to the right shelf at the right time at a low cost
An effcient supply chain can signifcantly boost margins, potentially creating
incremental margins of 8 to 10 per cent in packaged foods, fast-moving
consumer goods and electronics (Exhibit 3.5).
The challenge in India, however, goes far beyond getting the right margin structure.
The traditional Indian supply chain, created largely by packaged goods players,
was different from todays but was effective in meeting the needs of players then.
It had small suppliers and several intermediaries, there were multiple handoffs,
and logistics required detailed planning and much outsourcing. Yet, stocks were
delivered at reasonable costs across the country. Indeed, we have seen several
companies (especially packaged goods frms) convert this into a competitive
advantage by creating a closed eco-system of suppliers that scaled up with the
company and produced to specifcations, with an elaborate but effective supply
chain consisting of third-party distributors and logistics suppliers.
51
But this supply eco-system does not work for retailers today. It has too many
hand-offs and too little end-to-end information fow to meet the critical metrics
that retailers look for: fll-rates of stock keeping units (SKUs) on store shelves,
automatic re-order of core SKUs, assortments tailored to individual stores and,
most importantly, control of inventory levels at various points in the supply chain.
To build an effcient supply chain, retailers will need to consider differentiated
sourcing strategies, design optimal logistics links for each part of their network,
and strengthen inventory management.
Consider differentiated sourcing strategies. Retailers with scale need
no longer buy everything from distributors and intermediaries. They have
several alternatives, from (more) direct sourcing to consignment to in-
store cut-ins (demarcated concession area given to a third party). In fresh
foods, for example, retailers in Mumbai can buy staples such as onions
and tomatoes wholesale from markets outside the city, saving losses
from additional handling and transport. This is especially critical for higher
value fresh foods (such as lettuce), where losses can be much higher and
production is more concentrated. Some retailers are even buying directly
from farmers and carrying inventory for the year for more seasonal crops
such as mangoes and apples. Moreover, importing is an emerging option.
AN EFFICIENT SUPPLY CHAIN CAN BOOST MARGINS
Source: McKinsey analysis; interviews; Mandi visits
Base case
margins
Incremental
margins Some sources of additional value
5-8 Direct sourcing from wholesale markets
Better demand-supply matching
Increasing yields
Fresh fruits and
vegetables
6 Build own distribution centres
Meat and poultry
5-8 Direct sourcing from wholesale markets,
mills processing
Process in-house
Staples
8-10 Centralised negotiations
Build own distribution centres
Contract manufacturing
Packaged foods,
FMCG
6-8 Build own distribution centres
Milk and dairy
products
~20
Per cent
10-12
12-15
10-15
12-15
Per cent
FOOD EXAMPLE
Exhibit 3.5
52

In each case, the retailer has to fnd the right tradeoff between sourcing directly
and the scale of operations. Our work reveals that this is best done in three stages
depending on scale in a city (Exhibit 3.6). A word of caution, however: while
disintermediating saves margins, it requires deep category understanding (in
a market with opaque pricing and shallow supply of quality products). It also
requires investment in active internal teams. Moreover, retailers will need to
take on the risks associated with buying large volumes even when demand
has fallen to ensure continuous support to farmers and/or aggregators.
This is not easy and retailers should think carefully about the timing of
such decisions. There is growing evidence of experiments in this area. A
retailer in south India, for example, sources fresh fruits and vegetables
directly from 400 farmers in Karnataka. Another big retailer procures
apples directly from orchards in Haryana and has invested in a world-class
storage facility there. Yet another retailer has a pilot contract farming
project on 5,000 acres of land in Indore; this retailer plans to supply
seeds and other inputs for crops to be grown in line with its requirements
and will directly source 50 per cent of the fresh produce grown.
This is true in categories beyond food too: whether in fast-moving consumer
goods, electronics or apparel, retailers are exploring ways to reduce total cost
in the system between their stores and their suppliers. Over time, as they
scale up and set up local warehouses and sorting centres, more retailers will
start taking responsibility for stocks a lot earlier in the chain.
73
53
41
Production
cost
12
20
Transport,
packaging,
wholesaler
margin
27
Mumbai mandi
price
Retail gross
price
100
Packaging**,
transport,
commission,
APMC tax***
Nashik
mandi price
Per cent, cost build-up of tomatoes at a Mumbai modern retail store
Shelf price creates substantial opportunities for removing cost
TOMATOES
NASHIK TO BOMBAY
EXTENT OF DIRECT SOURCING IS LINKED TO SCALE
IN A CITY AND CAN YIELD UP TO 8% MORE MARGIN
Stage 1: Sourcing at
mandi in destination
city (Vashi in Mumbai)
can yield 5-7%
savings
Direct sourcing can
remove up to 8% of price
and maintain margins
Stage 2: Sourcing
at mandi* in source
city (Nashik) can
yield additional 1-
2% savings
Stage 3: Direct
sourcing from
farmers can save
an additional 1-2%
Exhibit 3.6
Transport, pack-
aging, wholesaler
margin, APMC tax
* Mandi is a traditional wholesale market
** Packaging is the amortised cost of plastic crates; 4 uses per crate
*** Tax is levied at the mandi under the Agricultural Produce Market Committee Act
Source: Interviews; field visits; team analysis
Exhibit 3.6
53
Disintermediation: Much ado about nothing
For a long time, there have been debates about whether removing the
three to seven intermediaries in the Indian food chain will solve all of
Indias problems. Clearly it will not. True, some intermediaries make
disproportionate margins. But they also played a critical role in the market
when no one else would invest. The real issue with the Indian food chain
is the information and timing gap between demand and supply. For too
long Indian farmers have grown what they have traditionally done, with few
market signals on what to grow, in what quantity and quality, when and at
what price. In addition, pricing has been opaque and it has remained a
buyers market.
Those interested in shaping the Indian food chain need to evolve a more
market-responsive model. This should be one that helps the system
grow what the market pays for, in a manner that it reduces risk for the
farmer. This model is not diffcult to craft and will reduce the overall risk
of farming in India by establishing clear links between demand and supply,
quantity, quality, and timing. Then the price to farmers will refect price to
customers. Indeed, there is evidence that this is possible in India as seen
in sectors such as poultry in south India, dairy in parts of India and certain
vegetables linked to exports.
The key question is who will catalyse it? Retailers will play a role, in pockets
of the country and in certain crops. But we must also recognise that while
they will complete the chain for farmers and play a catalyst role they
are also in phase 1 of their growth and have a host of other challenges to
manage in parallel.
Optimise logistics management. Getting stocks into a store in India is a
massive challenge, given poor city roads and complex intra-city transportation
regulations, the high costs of moving goods between states, and ineffcient
storage (e.g., small store backrooms owing to expensive real estate). Too
often retailers debate cost of transport. We believe, however, that at this
stage of retail evolution in India, the real value lies in designing an effcient
network and not in optimising the cost of moving goods around.
Our work in India suggests that three things determine network design: the
category sourcing strategy, the type of city/town in which the store is located
and level of inventory needed. This has to refect the fact that the logistics
54
network varies for different sub-categories. To illustrate, within apparel, mens
and womens formals are sourced from around Mumbai and Bangalore while
low-cost kids wear can be imported or purchased from near Kolkata and
winter wear from exporters in Ludhiana. Even within a category such as
apparel, there will be several fow networks that send basic products
directly from the factory to the store while pushing riskier fashion items into
high-tech warehouses. Given the speed of growth within this and supporting
sectors, the network design will need to be redrawn each year.
Similarly, the existing infrastructure while labour intensive and low on
technology is also very low on operating costs and operates effciently at low
volumes even absorbing the inventory carrying cost in many cases. Benefts
to retailers in modernising it depend highly on scale and the characteristics
of product category.
Indeed, our recent work in Indian retail suggests that retailers may have
a blended supply chain across all its elements (Exhibit 3.7). Vendors and
intermediaries hold signifcant cost advantages due to cheaper labour,
lower expectations of return and even tax advantages. There is obviously
no perfect system. What is critical is to evolve the internal mechanisms
to maintain complete control of the fow of goods while ensuring the cost-
RETAILER SUPPLY CHAINS WILL BLEND THE TRADITIONAL
WITH THE MODERN
Component of
supply chain Adapt to situation Current scenario Selective modernise
Vendor/
suppliers
Develop vendor
management systems to
handle several launched
suppliers and tens of
thousands of SKUs
Fragmented base Help a few become large
Transportation
Small fleet sizes run
by entrepreneur
drivers
Maintain dedicated
outsourced fleet for last mile
Tie up with emerging large
fleets
Optimise routes and locals
but continue using small
fleets
Warehousing
Bare-boned, labour-
intensive warehouses
No palletisation
Modernise only in select
cases (e.g., apparel central
warehouse)
Palletise selectively
Operate low cost godowns
but optimise picking and
storage through world class
IT
Flow patterns
Stocks pushed
through network
Flows through several
intermediaries (CF&A,
wholesales, etc.)
Pull standard items through
auto replenishment systems
Move products direct from
supplier to store (via cross
docking) for certain
categories
Push seasonal and
promotional merchandise
Continue using
intermediaries but maintain
complete information
ownership
Exhibit 3.7
55
advantage of the lowest cost natural operator. The trick might be to keep
it tailored and simple: align all the human linkages end-to-end even as the
system gets automated and IT-enabled.
Strengthen inventory management. Retailers in India also need to manage
inventory better, particularly in view of the relatively high stock-outs faced by
customers. It is also true that planning for logistics in India is comparable
to such planning in pre-EU Europe, given the many regions and many rules
involved. Larger FMCG suppliers are increasingly well placed to do this as
they rationalise their distributor network and move to fewer and/or bigger
distribution centres (in step with sales tax regularisation).
The biggest challenge will be inventory management. Even as a lot of working
capital will be supplier-funded, credit periods for food, grocery and FMCG
stands at just 7 to 10 days as against 45 to 60 days internationally, ensuring
that retailers will invest as much in working capital as they will in their stores.
Fixing this will be slow and painful. Indian retailers will need to build a world-
class IT system all the way from point of sale to supplier ordering that will
coexist with an underdeveloped physical supply chain to deliver the right
products to customers at the right time at the lowest cost.
Once retailers have fxed the fundamentals, i.e., created a differentiated sourcing
strategy and a working logistics system with a system view of inventory, they
can think of tomorrow, i.e., how to secure future supply and create a winning
range.
Building a supplier base to offer a differentiated range of goods
Retailers in India need to actively support the development of suppliers to secure
supply as they scale and broaden their assortments/range.
Secure supply. India has few differentiated or specialised vendors across
most key retail categories. Helping to develop vendors will secure supplies as well
as cut costs, while locking in a good vendor base will be a future differentiator.
This approach has been used successfully in several other industries in India.
An auto player faced with a fragmented supplier base followed a three-pronged
strategy. First, it set up alliances with 12 suppliers, called joint ventures or
associates depending on the auto players stake in the outft. Some were
even located in its own manufacturing facility. Second, it developed supplier
56
capabilities by arranging technical collaborations with them, helped suppliers
implement Japanese production systems to raise productivity and cut costs,
and allowed them to gain business by supplying to others frms. Third, it
helped improve supplier operations by holding them to manufacturing and
quality standards and helping them reduce inventory levels by adopting the
Just-In-Time approach.
Similarly, a global electronics player integrated backwards to secure supply of
critical components. The frm set up a new compressor plant in north India for
captive sales and exports to the Middle East and other European countries.
The plant is part of a global strategy: worldwide, the frm has compressor
plants in only two other countriesChina and South Korea.
Signifcant investment may be required in creating a large supply-chain team
(three to four times the size of those in other markets). Cooperating more
actively with third parties on logistics, transportation, labour, and so forth,
may also be needed. This will help improve margins but also reduce the cash
fow at risk, an important metric for retailers.
Importing from other countries such as China will have its own challenges.
Retailers fnding their requirements too large for local vendors will also fnd
themselves sub-scale for global players. They may choose to collaborate in
sourcing with other retailers. Learning to manage this balance will be a key
skill in creating secure supply.
Broaden range including private label. Range in India is narrow across
categories compared with developed markets. A leading Indian hypermarket
would have 8,000 to 10,000 food SKUs on offer compared to as many as
25,000 at Tesco in the UK. Consumer companies have traditionally focused
on few SKUs due to lower affordability and fragmented retail. In future,
shoppers will increasingly demand a broader range of products (our research
shows they are already doing so in several categories from watches to
apparel to packaged foods to soaps) and retailers will use this as a source
of differentiation.
Range will enable retailers to distinguish themselves through a unique
product assortment, and to attract and retain customers through private
labels, which acquire their own brand status. Range breadth is one of the key
drivers of modern retail. A broader range can also help create the perception
of low pricea key factor of success as we will show in the next section.
Private labels or store brands can also help reduce entry prices and raise
57
margins: high-volume private-label manufacturing contracts increase retailers
bargaining power with vendors and attract more shoppers owing to lower
prices. In a recent case, a branded food manufacturer that tried to drop its
retailer margins found that the retailer dropped the brand but maintained sales
in that category by flling up the gap through a broader private-label offering.
Several retailers in India are focusing on private labels in apparel, home
products, cosmetics, fresh foods and appliances. Contrasting India with other
markets reveals a startling fact: India is a highly unbranded market. In most
categories, branded players hold less than 10 per cent of the total market,
compared to 40 to 60 per cent in other markets. Again, this is just a sign
of the early days of organised retail in India. However, in most categories,
brands and organised retail are likely to grow at the same time with the
possible exception of mens formal wear, consumer electronics and some
FMCG products.
This is a unique phenomenon, suggesting that the big Indian brands of
tomorrow could well be retailer brands. In Brazil, retailer brands are tough
to build as they have to compete with strong established consumer brands
as well as B brands developed in the informal sector. This is also true of
Russia, where shoppers do not trust local brands (including retail brands). But
in India, there is an intriguing combination of factors: shoppers like brands
(as they represent quality and often status); they accept new brands easily;
and they do not seem to differentiate between retailer brands and those from
branded companies. Smart retailers will actively develop strong store brands
in India.
Even while retailers fx the backend, they will need to expand consumption at the
frontend. Indian shoppers have for long been subject to a small range of goods
constrained by income on one side and the limited range provided by traditional
retail on the other. With both constraints relaxing, shoppers are experimenting
with new product categories such as pastas, preserves and ready-to-eat foods.
As the primary source of information and availability of these categories, modern
retail will play a defnitive role in shaping them.
INCREASING BASKET SIZE BY SHAPING CONSUMPTION
Average basket sizes in India are a fourth of those in developed markets and half
of those in China. While income growth will increase them, greater increases will
come from shoppers learning how to use categories they have never bought
before. Hence, a critical requirement for making money in India is to increase
58
average basket size, both by managing overall price perception to induce the
large number of window shoppers to make their frst purchases, and by actively
increasing consumption, i.e., persuading existing shoppers to buy more.
Managing price perception
Price is an important consideration for shoppers worldwide. In over 15 countries
where McKinsey has conducted shopper research, price is the second most
important factor (after location) in choosing a store. In India, price is even more
important at this stage of market evolution, where modern retail is not found at
the most convenient locations. Our research reveals that most shoppers believe
organised retail to be more expensive than traditional retail (at least until they
become regular customers). Unless told otherwise, shoppers believe that an
improved shopping experience (e.g., big stores, air conditioning, high quality
interiors, a doorman and security) means higher prices. As a result, retailers
need to especially focus on reassuring consumers about prices.
Offering low prices, however, does not by itself create a low-price perception
among shoppers. Our research showed in one case that, although a hypermarket
was offering prices considerably lower than those of its competitors, shoppers
perceived that all retailers were offering the same prices (Exhibit 3.8). Despite
having become the cheapest player in the market, this retailer was not beneftting
from its investment.
LOW PRICES ALONE ARE NOT SUFFICIENT TO CREATE
LOW PRICE PERCEPTION
Real price position compared to consumer price perception
Hypermarket real price position is
5.5-7% below that of key competitors . . .
Price position compared to average
hypermarket basket*
. . . but consumers perceive that all
retailers have similar prices
Consumer price perception
compared to average hypermarket
Retailer A
Retailer B
Retailer C
Retailer D
+0.5%
+1.8%
-2.3%
-5.0%
Key
compe-
titors
+2-3%
Average
hypermarket
price
perception
Retailer A
Retailer B
Retailer C
Retailer D
DISGUISED
EXAMPLE
Retailer A is
the cheapest
player in the
market, but is
not getting
credit for its
investment
Retailer D is
cheaper by
2-3% but is
perceived to be
2-3% more
expensive
Average
hypermarket
price position
0.0%
0.0%
0.0%
* Includes promotions price position is the effective price that consumers pay
Source: Market research and price checks in Latin America (2004)
Exhibit 3.8
59
So how can retailers build the right price perception? Our work across the globe
suggests that most retailers signal pricing in fve ways (Exhibit 3.9):
1. Reference price strategy: Creating the right reference prices on key value
items. Like shoppers elsewhere, Indian shoppers remember prices of key
value items (KVIs). But how can one have KVIs in a largely unbranded,
commoditised market? We found that shoppers have their own ways. For high-
involvement categories such as electronics or jewellery, shoppers benchmark
what they consider plain vanilla products. In electronics they note the price
of the no-frills products in the company showroom, while for jewellery they
consider the price of gold per gram and the charges for making a simple gold
chain in the most trustworthy store in the city. For packaged foods, usually
under the maximum retail price (MRP) regime, it is a lot easier to compare
prices. Surprisingly, shoppers list of packaged goods includes more of the
basic products (on which they spend a lot of money) such as rice, oil and
sugar, and not just the largest brand of soap or coffee.
The lack of reference pricing across a broad range of products coupled
with the lack of trust described earlier may make it diffcult for a player to
deliver the lowest price proposition across all categories. It is reasonable to
assume that similar to other BRIC markets, an Every Day Low Price (EDLP)
proposition will be diffcult to deliver.
Leverage private
labels
Attract through
opening price points
Align in-store
environment with price
offering
Introduce customer
lifecycle
management
Offer Key value items (KVI)
Offer Every Day Low Prices (EDLP) or high-low prices
FIVE LEVERS INFLUENCE PRICE PERCEPTION
AND INCREASE FOOTFALLS
Reference
price
strategy
Range
architecture
Promotion/
marketing
Loyalty
programs
2
3
Price
communi-
cation
4
5
1
Conduct catchment-
specific promotion
Source: McKinsey Getting Credit for Value Framework
Exhibit 3.9
60
Hence, in India we fnd that a few KVIs such as the leading brand of sunfower
oil or butter disproportionately affect store perception. What is critical to
remember though is that, while the number of KVIs per customer is few, KVIs
can vary by age, income, education, geography and state of origin. Retailers
need to understand their catchments to know their customers KVIs and
price these locally. For one electronics retailer, getting the KVIs right required
understanding what the most important products were for the biggest
community in that cluster, ensuring daily price benchmarking against each of
the stores nearby, and then changing the way the KVIs and the fxtures were
displayed in the store design.
It is also critical to price KVIs right through store incentives and management.
While the guidelines for store management can be set by the central team,
execution and benchmarking often rest with the store staff. Our recent work
in helping retailers in India develop this capability suggests that it is best
to offer the right incentives to buyers and store staff. Even with well done
analysis, setting incentives is such a detailed and frequent exercise that,
unless the store staff and shoppers are aligned with the approach, prices and
promotions may be driven more by suppliers than by the store.
2. Range architecture: Carefully designing the range available. Range is
a critical element of signalling price perception. While it includes several
measures such as the width and depth of each category, perhaps the most
important one is the Opening Price Point (OPP) often used by shoppers to
assess prices. Not getting the OPP right will hurt retailers. A retailer in India
that discontinued the entry price points in four key segments found it lost
almost 30 per cent of sales by value in those categories, almost thrice the
actual sales at those price points. Shoppers simply assumed the whole range
had become more expensive and walked away.
We have learnt that the key is to frst have a competitive OPP in categories
retailers want to dominate, and then create a compelling range with tangible
benefts to upgrade. The trick here is not just in merchandising (i.e., building
the range ladder) but in equipping the front-end team with the skills to convince
shoppers to upgrade. Our work in building front-line capabilities suggests that
three things are needed: the right mindset (I generate profts for my store, as
opposed to, This is just a job for six months before I move on); triggers (easy
ways for the staff to know what to cross sell, e.g., we often mark shelves holding
high and low proftability SKUs with different coloured dots); and incentives
(e.g., competition among staff over who sold most and linked bonuses).
61
Retailers in India (and China) also use private brands and labels to establish
a good price proposition in key categories. The role of private labels in each
category depends on the nature of the item and frequency of purchase (Exhibit
3.10).
3. Price communication: Communicating price through in-store environment,
e.g., signage, point of sale displays, fxtures, stocking levels. Our work in
emerging markets suggests that in-store environment is often the frst source
of price communication. Notably, it is not necessarily the location of stores
or even the fxtures inside that matter. What matters is the smaller details: a
simple or grand entrance; the language spoken by staff (English or a local
language); signage: hand-drawn and colourful, or printed and formal; widely or
narrowly spaced aisles; and welcoming or aloof staff.
One store in Mumbai struggles with a high price perception (even though
its prices are lower than those of the competition nearby) because it has
expensive-looking granite at the entrance, two majestic-looking doormen, the
signs are in English only, and the music played is Western pop (and even jazz).
As a result, some shoppers say, Not for me!
Another store in Bangalore changed its price perception literally overnight by
placing large hand-drawn posters showing the price of rice on its glass walls.
In China we have seen retailers create the right price perception through several
THE FREQUENCY/NEEDS MATRIX HELPS DETERMINE
PRIVATE LABEL PLAY FOR DIFFERENT CATEGORIES
Carbonated
drinks
Cheese
Breakfast cereals
Tea
Honey
Sweets, candies
Pickles
Butter
Sugar
Rice, wheat
Meat and poultry
Milk
Aluminium foil
Toilet tissue
Rava, suji
Frequent Occasional
Purchase frequency
I
m
p
u
l
s
e
s
/

w
a
n
t
s

B
a
s
i
c
s
/

n
e
e
d
s

Aggressive
prices
Widest range to
maintain parity
with
competition
Range
innovation
to facilitate
impulse
Communicate
quality and
maintain
discounted
pricing
I
t
e
m

n
a
t
u
r
e
Category role is based on position in frequent/
needs matrix . . .
. . . resulting in different private label
plays for each
Source: McKinsey
Exhibit 3.10
62
in-store features: a global retailer created a wet foor (literally with water on the
ground) in the seafood and fresh section while another ensured a long queue
in front of its key counters to suggest a good bargain. Similarly, in Brazil, large
retailers often have open doors, warehouse-type fttings and no air-conditioning
to signal attractive pricing, even for formats created by global players.
4. Promotions and marketing: Offering high-impact promotions and marketing
focused on price (without unnecessary discounting). Promotions are a tricky
lever to use with shoppers. Done occasionally and for specifc reasons (driving
footfalls, creating a special sale where you sell a hundredfold more than
usual), they work. But done too often, they can create more confusion, and
more importantly, convert sensible shoppers into bargain hunters. In Latin
America, our research showed that, 30 per cent of shoppers were bargain
hunters in City A while twice as many were bargain hunters in City B. Retailers
in City B had got into a vicious cycle of promotions. As a result, shoppers had
been taught to hunt for bargainsand they did.
This is also true in developed retail markets. Some of our recent work on
value shoppers across eight European retail markets showed that retailers
get the consumers they create: those that offer too many promotions get
bargain huntersnot necessarily the most proftable or loyal customers nor
those that one can up-sell or cross-sell to. Indeed, a big retailer was quite
astonished to see that it had twice as many bargain hunters (80 per cent of
its customers were a combination of avid bargain hunters and high income
bargain hunters), while its closest competitor had a much higher share of
the more attractive quality seekers and time savers.
Using promotion as a tool to drive price perception will become imperative as
the market matures and different segments emerge. It is critical that retailers
in India do not foster adverse behaviour in their customers by indulging in
price wars too early. As in other sectors in India, it is critical that the price card
is used when the market is more mature lest a market of bargain hunters is
created. This is already visible in the low-fashion mens formal apparel (where
an estimated 40 per cent of annual business now occurs at so-called end
season sales).
5. Loyalty programmes: Building loyalty offers and CLM programmes. India
is still a relatively small market, albeit one with fast-growing wallets. In the
large retail markets, especially in the top-10 cities, competition is likely to be
intense in the next few years. Smart retailers will build loyal customers, both
63
to get their repeat business month after month and to continue attracting a
share of their growing incomes.
Owning core customers is very valuable in a growing market such as India.
During our research, every successful store manager talked repeatedly about
the 60 per cent principle: they each had a few core customers who accounted
for 60 per cent of their business. The best store managers knew these
customers by name and, in one instance, the store manager would even call
customers if he needed to meet his monthly target or make an extra sale.
Similarly, another national retailer gets 40 per cent of its sales in north India
in a period of fve weeks in winter, and 60 per cent of this from a bunch of
core customers who come back every week to check on new stocks for the
wedding/party season.
Doing this will require a Customer Lifecycle Management (CLM) approach
and not a loyalty programme mindset. Too often retailers we talk to, plan to
launch a card and award customers points. There are too many of these cards
today; since every retailer offers them, shoppers have wallets full of them.
(Incidentally, retailers usually lose an additional 1.5 to 3.0 per cent margin
in the process). Instead, retailers need to better understand customers and
create a win-win retention programme.
Drawing on our work in the telecommunications sector, we have created a
CLM approach that helps retailers develop literally thousands of offers for
shoppers based on actual consumption and not predicted bundles. This
should not affect margins as the targeting of the offers ensures that they are
given only to those who value them most. This also helps customers graduate
as they pass through various stages in their lifecycle. In the long term, we
believe this will be the true source of differentiation for retailers as it will help
them understand the needs of their shoppers and hence offer them better
range and services.
The question is in what combination will these fve pricing mechanisms work
best? Our research across fve Latin American countries in 2004 revealed that
just tworeference price with KVIs and range architectureaccount for as much
as 75 per cent of shoppers price perceptions. However, this is not true of China.
Given the early stage of evolution of organised retail there, in-store environment
matters as much as reference price and range architecture. We believe this
holds true for India as well (as we will soon test through new research on price
perception to be released later this year).
64
Ensuring the right price perceptions will generate footfalls and sales. In addition,
retailers will need to increase consumption to maximise sales per square foot.
Actively increasing consumption
In more developed markets, organised retailers arrived after the brand players
had established themselves and expanding consumption was left to brands.
But in emerging markets we have seen retailers play this role actively as they
cannot wait for consumption to grow. They also recognise that shoppers today
have many other choices such as mobile phones, entertainment, and travel. And
in markets with small wallets, retailers need to fght for each dollar.
Retailers can shape consumption in four ways:
Creating new shopping occasions. Retailers can create occasions for existing
categories and introduce new categories, working with product makers or
alone. Specialist retailers have done this in the last decade. An apparel retailer
created and promoted Friday dressing to get urban professionals to build
a new wardrobe. Jewellery retailers revived an ancient (and largely unknown)
gold-buying occasion, Akshay Tritiya, which in its third retail-promoted year
emerged as the highest sales day in the year for several jewellers. Retailers
selling sunglasses tried to attract the young with their How many you have?
slogan. Similarly, in grocery, we have seen the largest Indian retailer take
the lead in creating huge shopping occasions on 15 August and 26 January,
when an estimated 10 million shoppers throng hypermarkets, often waiting
in queues for over four hours. Equally well known is the 1 January celebration
of a large South Indian electronics retail store. Seasonal calendars in Brazil
now contain all kinds of events such as Mothers Day and Boyfriends Day.
All this attracts footfalls from regular shoppers more often, or introduces the
shoppers of tomorrow to organised retail.
Other options that have worked include ensuring convenience for occasional
shoppers, primarily by locating stores close to a mass transit point such as a
bus stop or train station. One of the most active retailers in Chennai locates
its stores in this manner and specialises in big spending occasions such
as weddings or religious ceremonies or back-to-school days. Creating such
occasions has implications for range and assortment as well as for smart
inventory planning.
Increasing purchases per occasion. Retailers can induce larger purchases:
bulk buys through amazing offers or bulk discounts, diffcult-to-refuse offers
65
in impulse categories and product bundles. These are traditional approaches
of retailers across the world, which appear to work in India too, and will be
investigated further in our 2008 pricing research. The key thing to remember
is that persistence pays.
Getting shoppers back to the stores more often. If shoppers walk into a
store, they often buy something. They might want to preview the new range or
to check the offers on sale before everyone else does. Hence, many retailers
across the world now offer perimeter services (located in and around the
store) including payment of bills, purchase of telecom cards, and banking
services to draw shoppers in.
Financing consumption. Credit is offered in India by small retailers but is
yet to take off in organised retail. It has been a huge driver of growth in
other emerging markets such as Brazil, Mexico and South Africa. Retailers
are the biggest fnanciers of consumption in apparel, electronics, furniture
and even grocery in these markets. In Sao Paulo, a kitchen towel sells in
fve monthly instalments of about Real 0.99 each (i.e., 60 cents). In India,
some asset nancing is offered in consumer durables and automobiles
through banking services implanted in stores. The trick of retail fnancing
is to nance consumption. Over time this would also attract those who are
unable to produce the cash upfront. Our experience with helping retailers
build this capability in Latin America suggests that it requires a new mindset
as well as skills in risk assessment and payment collection. But it is doable
and will be one of the biggest drivers of consumption in India.
Other ideas for fostering consumption include online retailing (along with
store presence), where we have seen a huge surge in China and Brazil. For
a young country such as India, where shoppers are increasingly comfortable
with mobile transactions and online browsing, a combination of touch and
feel as well as new ordering and delivery channels could create new points
of ordering (if not consumption).
After all this work to bring in shoppers, retailers also have to ensure a positive
experience for them. Developing and retaining talent will be crucial here.
DEVELOPING AND RETAINING TALENT
Talent costs in India are low. For a successful hypermarket in the top-10 cities
they may be as little as 3 to 4 per cent of sales. However this low cost hides
a critical challengeone of retention and availability issues in certain skills.
This cost will only increase as the total cost is calculated (including recruiting,
66
training and retaining). If organised retail grows as expected in India, at least
1.6 million people will be required to fll the positions created by 2015 (Exhibit
3.11). According to international benchmarks, at least one customer associate
is needed for every 250 to 350 square feet of retail space. Finding staff in such
numbers should be possible in India, where 5.2 million students graduate from
high school each year and 2.2 million from college. The main cost for retailers
will lie in equipping these entrants into the workforce with the requisite skills.
Retailers have now recognised this. Established retailers are the natural hunting
ground for staff and retailers often talk about the quick departures of their best
people. This results in a vicious cycle. Retailers often under-invest in training their
employees and often hire over-educated graduates for stocking and cashier
roles meant for medium or high school-educated candidates to compensate for
this lack of training. Graduate employees in turn are not skilled to their potential
leaving vacancies in higher skilled sales roles. In addition, there is a growing
shortage of specialist skills: store managers, visual merchandisers, category
managers and those with other retail-related skills such as air-conditioning
contractors and store and warehouse designers. The industry should act
together to bridge this gap.
For now, retailers are tackling these challenges individually. To attract talent,
many are tying up with retail institutes and management schools. To train their
staff, some are developing curricula in collaboration with institutes such as
ORGANISED RETAIL MAY REQUIRE AS MANY AS
~1.6 MILLION EMPLOYEES BY 2015
Assumptions
1 front-end customer
associate per 250-300
sq.ft. internationally
assumed 250 for India
Support staff/manager
requirements in line
with global standards
700,000
325,000
100,000
2002 2007 2010
1,600,000
2015
Employee Requirement
Cumulative; number of people required *
* Excludes employee churn, currently between 10 and 20% per annum
Exhibit 3.11
67
the National Institute of Fashion Technology (NIFT), while others have acquired
training institutes such as NIS.
These steps and those described earlier in the chapter are direct actions retailers
can take to make their retail offerings competitive and encourage retail growth.
The latter will also require working with the government to shape regulation in
ways benefcial to consumers, the economy and the industry.
INFLUENCING REGULATION TO ENSURE HEALTHY DEVELOPMENT
OF THE SECTOR
Retail is a thin-margin business and so the room for error is equally low. A lot
of value creation at this stage of growth hinges on an effective eco-system for
the sector. As in every other sector in India, regulation holds the key to a lot of
value. In the case of retail, the lack of regulation in several areas associated
with unstable evolution of the sector increases business riska thin-margin
business like retail needs fewer risks than the current Indian environment
poses. It is important for retailers to help reform regulation through effective
conversations with the regulators and the government.
First of all, organised retail needs to be made into a sector that India celebrates
and not fears or curtails. This will require the industry to obtain the support
of all stakeholders and get the country to recognise the potential benefts for
Indias shoppers but also for the economy, mainly in creating high quality jobs
(as highlighted in the Introduction to this report).
Second, risks for retailers must be reduced in order to invite the right level and
quality of investment. There are several lacunae in the current regulationsindeed
what is left unsaid is of more interest than what is regulated. For example:
A lack of zoning and redevelopment laws hinders land acquisition and pushes
up rentals. Indian cities have no zoning laws, making real estate acquisition a
risky affair. Redevelopment laws restrict the use of residential land for retail.
Further, since retail is not classifed as an essential service, land is not
earmarked for retail sites in town planning. Most city development authorities
in India equate retail and commercial space, even while redrawing cities and
planning new townships, not giving retail importance as an essential service.
In China, a large part of retail growth has taken place in the new cities,
special economic zones and suburban townships where some parts of each
block are earmarked for high streets and retail in much the same way as
Indian authorities earmark sites for petrol pumps.
68
Restrictions on foreign direct investment limit the opportunities for
international retailers to develop the retail sector. As of now, only single-
brand foreign retailers such as Benetton or Tommy Hilfger are allowed to
set up shop in India. Multi-brand retailers can enter only through wholesale
models, i.e., selling to businesses not consumers. The uncertainty about
the opening up of this sector is keeping away expertise in merchandising,
sourcing, store management and other areas. Other countries have adopted
varied approaches to FDIfrom banning it to restricting the quantum of
investment/scale to linking it with certain conditions (e.g., local sourcing,
export commitments).
High tax burdens and excise duty, state taxes, service taxes on rentals and
octroi fees infate retail prices. India has recently moved to a value-added tax
system; this has not yet been uniformly applied across all states but is likely
to be rolled out by 2010.
Discriminatory power rates for retailers infate costs; power is the third
highest operating cost per head for retailers (after real estate and people).
Clearly, working with the government at the state and national level to rationalise
regulation is key to getting the full pay-off from investing in organised retail in
India. Lessons from other sectors that have managed and shaped regulations
(such as telecom and IT) suggest that this is possible but will require a joint
effort by everyone in the industry. Perhaps the time has come for retail industry
forums to craft their regulatory agenda.
Meanwhile, some retailers in India are making money already. Others can too by
creating a sustainable, scalable proftable business by tailoring formats to local
shoppers and costs; driving growth in basket size; and building a supply chain
with the right talent, supply depth and costs. Doing this will require thoughtful
individual choices as well as collaboration at the industry level.



4. A Call to Action: Emerging Priorities
for Retailers and the Industry
In the frst three chapters of this report, we have argued that organised retail in
India is set for rapid growth, offering a lucrative growth opportunity for domestic
and international players. To capture this opportunity, retailers need to do two
things: one, understand and shape the unique characteristics of the emerging
Indian shopper; and two, create locally tailored business models (and formats)
that can generate long-term proftability. They will also need to create an enabling
eco-system for this sector, working with suppliers, government and most criti-
cally, with each other.
In doing so retailers should take note of four emerging imperatives for India and
focus on building the capabilities to address them.
EMERGING IMPERATIVES FOR RETAILERS
This is an exciting time to enter retail in India. Most Indian players are building
positions and have been doing so for the last few years. Global retailers are
equally interested and pause only for one of two reasons: because the regulatory
requirements do not appeal to them or because they do not have the capacity
(usually senior management strength) to explore several emerging markets in
parallel. Most of them are in China and Russia or part of the Eastern European
complex, which offer more familiar and immediate opportunities, albeit small-
er in the long term than India. But nevertheless, all big retailers with high growth
aspirations will enter India one day.
The key thing to note is that this phase of establishing wide presence will soon
give way to the next increasingly competitive exploratory phase (as is already
visible in some cities). The critical factors of success till now have been acquiring
locations and getting stores up and ready to acquire shoppers. Soon, this will no
longer be suffcient. In the next phase, the skills to retain shoppers (and grow
71
72
consumption) as well as tailor the offering will be essential and this is already
being recognised. It is also critical to note that the value of the retail brand is
likely to be the highest at the switch from phase 1 to phase 2 of market evolu-
tion, a key consideration for those driven by valuations.)
What will winning retailers do in India? We believe they would be wise to keep
four mantras in mind as they explore this high-potential market:
Develop innovative formats for material differentiation. Three decisions will
be criticalwhere to participate in the retail value chain; which geographies
to play in and what price points to offer. The biggest challenge for most
retailers will be to develop the right mix of formats that will win with Indian
shoppers even as they make money for the retailers. This will require a sharp
understanding of the core customer as well as clarity on how each store will
make money.
In the absence of a vibrant eco-system, retailers with big dreams should
determine in which parts of the retail value chain they want to participate.
Innovation will require fnding sustainable sources of value and capturing
value through strategic participation in the end-to-end value chain. At the very
least, most retailers will need to develop a supplier network and craft a viable
logistics network. In several cases, we expect retailers to actively shape
(if not participate in) real estate. The most aggressive will include fnancial
services in the retail offering as well as retail of services (with partners in
most cases). The relative value of participating in different elements of the
value chain will evolve over time. Innovation and fexibility will be key to
ensuring the model continues to stay relevant in India.
A second critical choice will be in which geographies to compete. Scale
matters in India; being subscale in the future could mean certain death.
Nevertheless, building a national footprint is not mandatory for retailers in
India. Indeed, we believe there is tremendous value in dominating a small
number of geographies (whether regions or even cities or even types of towns),
a strategy followed in other geographically dispersed markets such as Brazil
and China. The choice will also depend on which categories retailers operate
in and the (mix of) formats they offer.
Finally, a critical choice for any retailer will be price points. While this
might appear an operational choice in most markets, any retailer with big
aspirations must debate its pricing. Critical to note is that this debate is
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not just about the actual price but also about price perception. That will
dictate several elements of the retailer business model: from the location
(mall to high street to inner street) to format design to opening price point
and deportment of front-end staff.
These choices should help winning retailers craft an innovative (and evolving)
portfolio of formats that position them distinctively. It is interesting to see
the evolution of formats in India the starting point (i.e., multi-brand, multi-
format) is very different from that in most other markets. And retailers are
already working at addressing the complexity this demands: tailoring formats
to clusters; tailoring merchandise for each format; experimenting with margin
models and becoming comfortable with modifcations (when formats do not
work or when shoppers evolve). Again, learning and fexibility will be key.
Craft a customer-insight-driven merchandise strategy to stimulate
consumption and lock in core customers. To sell what is more proftable
and create the right mix of categories, retailers will need to shape shopper
behaviour. This will require gaining customer insight, activities similar to
those of brand companies in the West but with a much higher focus on
catchment activation and lower cost, targeted activities. It will involve
creating shopping occasions, continuously offering a differentiated range and
exciting price points (to stimulate trial) and offering price ladders (to upgrade
shoppers). Moreover these strategies will need to be tailored for tier I, II and
III cities, to localise the offer and to help shoppers make the right trade-off
across categories. In addition, activating local markets will be essential:
understanding local community and catchment fows, recognising the local
religious and cultural calendars and creating an empowered community-
inside team to execute low-cost events, a few times a month.
Winning retailers will also use customer insight to lock in core customers in
a market that is still growing in size and depth of consumption. They will invite
core customers to shop more often and with increasing basket sizes through a
range of efforts: special offers tailored to customers needs; intimacy through
recognising and rewarding them; and most importantly evolving their offers
as shoppers change. This will require skills at the store: retaining front-end
staff; data mining and using these insights to learn what to keep and what to
change at the store. This will also require that retailers learn specifc skills:
range defnition, clustering of stores, planning and allocation of merchandise
and fnally reducing merchandise risk.
74
Create an efcient endto-end retail operating platform consisting of a
self-sufcient eco-system of suppliers, logistics providers and even loyal
shoppers. Winners will also create and manage the proftability of the whole
chain from suppliers to shoppers. As retailers worldwide do, they will make
their money from buying low and selling higher while managing effcient stores
and maximising asset turns. But in India, for some time to come, they will
also have to shape the cost structure of their suppliers, logistics providers
and eventually their shoppers. To do this, retailers will need a much larger
(and more skilled) back-end team that creates this eco-system and manages
it proactively (as described in chapter 3). Many retailers have not planned
for the talent and commitment required to create this essential driver of
sustainable proftability.
Create a thinking, evolving organisation, especially an empowered front-
end selling team. As mentioned above, owning core customers will be key,
both in terms of involving them to try out new categories and SKUs, and
understanding them to create opportunities for bringing them back into
stores. The front-end teams will be pivotal in this.
Perhaps the greatest challenge for retailers will thus be to create an
organisation that is comfortable with a focus on proftability but with inbuilt
learning and fexibility. The role of the store manager is critical in any retail
business across the world. In India, given the early stage of evolution and
lack of stable, predictable catchments or store clusters, this and a few
other roles will be critical. For example, the local regional manager will be
pivotal in deriving lessons from the market as it is at this level that insights
on what is and is not working with shoppers will be codifed. Similarly, the
merchandise managers will struggle with shaping a winning assortment and
will need to learn for each frontier of retail, whether new tiers of towns or new
communities. The big challenge for retailers is likely to be retaining these
skills and building the organisations ability to learn from its early days. This
will require a targeted effort to create the right mindset for its leaders and
the kind of ownership created among the frst set of employees as well as
the behaviours that are rewarded (and not rewarded). Equally important,
retailers will need to acknowledge that a lot of things will not work at this
stage of growth and make the organisation comfortable with learning from
experiments that do not turn out as expected.
Whatever the choices, Indias retail sector will develop in a way benefcial to all if
the industry and government work to a common vision rather than let the current
75
haphazard development continue. For this to happen, retailers will need to help
create the right environment for the sector as a whole.
A VISION FOR THE SECTOR AND A CATALYST OF CHANGE
In addition to the specifc challenges for each retailer, a lot of value (and
considerable risk) is associated with the overall evolution of the retail sector in
India. The industry and the government can provide that direction by deciding
together a vision for the sectors development and then setting a common
agenda to realise that vision.
To start with, regulations will need to change to encourage investment where
it is most needed and create a level playing feld for all. We believe this is
the joint responsibility of all retailers, working together to guide industry-level
development. Success stories from other sectors underscore the importance of
such an effort at this stage of a sectors evolution. NASSCOMs effort for the IT
and BPO industries is a case in point (Exhibit). Five key factors in NASSCOMs
success suggest an agenda for retail industry forums:
Build a committed leadership. Indian retail needs a leader to represent it.
This leadership has to be inclusive and represent all industry players. For
example, NASSCOM was established by software industry leaders, headed
by a full-time, dynamic professional, and guided in its development by an
NASSCOMS SUCCESS CAN BE ATTRIBUTED TO FIVE KEY FACTORS
Build a
committed
leadership
Software Industry leaders established NASSCOM in 1988 with 30 members. Today the association
has 850 members that represent 95% of the industrys revenues
Hired a committed, media savvy, full-time professional to head the association
The executive council meets every 2 months to discuss aspirations and define agenda
Create a
common agenda
Developed a clear vision and mission and a well-articulated implementation plan
Got different entities to agree upon it
Widely
communicate
industry potential
Publicised industry achievements through national level events, thereby taking software to the
common man
Remained in the media glare, association head penned a column regularly in a national newspaper
Help shape
regulations and
environment
Identified key stakeholders and discussed agenda with them
Presented government with workable, practical solutions
Asked for concessions against performance of industry
Maintained continuous interaction with bureaucrats and ministry. Presently, have official
representation in many ministries
Prioritise role over
time
Prioritised agenda from time to time. E.g., Initially NASSCOM started as a local lobby association. On
achieving most of its purpose on that front it is presently focusing on building the India Inc. brand
Source: Interviews; websites; press searches; team analysis
Reasons for
success Descriptions
Exhibit
76
Executive Council that met every two months to discuss aspirations and
identify actions.
Create a common agenda. A clear vision and mission, with a well articulated
implementation plan, is critical to create a common aspiration (within the
sector) and a common voice (with the rest of the economy and government).
Such an agenda was developed by NASSCOM, debated within the sector and
agreed to by all members.
Widely communicate industry potential. The industrys growth potential
and achievements need to be acknowledged and publicised and the right
media presence must be created. There should be a situation where states
(and towns) should invite retailers to create better jobs, create the broader
eco-system (of suppliers and network providers) and eventually improve tax
collections for the state and a better shopping environment for its citizens.
Help shape regulation and environment. Given the multiple government
bodies and types of government (central, state, local, municipal) involved
in overseeing retailing, helping shape regulation is the best way to reduce
the risks in the retail business. Retailers need to identify all key industry
stakeholders and assess their agenda. The NASSCOM experience suggests
that success lies in understanding the key issues for each stakeholder and
offering them workable solutions. Concessions were won for the industry
based on its performance, with clear benefts for the economy.
Prioritise role over time. NASSCOMs agenda was refocused from time to
time. It started as a local lobbying association. On achieving its purpose,
NASSCOM began to focus on building the India brand. It is now increasingly
focusing on talent creation and issues such as security. Clearly the retail
association will also have a long-term role, albeit one that will evolve over
time.
With this kind of focus by industry forums, retailers and the government, India
could soon have a thriving organised retail industry. The benefts will be more
choices and better prices for consumers, job creation and signifcant contribution
to GDP growthin short, a winning situation for all.
Retail Practice
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