Deep Dive: International Grocery Retailers in India ... · 5/26/2017 · vegetable and fruit...

May26,2017

Deep Dive: International Grocery

Retailers in India, Where 1.3 Billion

Consumers are Shopping for Dinner

Thisreportisthesecondinabriefseriesthatlooksatglobalretailers’operationsinIndia.Itfocusesoninternationalgroceryretailers’andwholesalers’entriesintothecountryandconsiderstheirdomesticcounterparts.

1) WeestimatethatIndianconsumersspentover$400billononfood,beveragesandtobaccointheyearendedMarch2017.

2) Inthe2014fiscalyear(latestconfirmed),Indiansallottedaround33%oftheirtotalconsumerexpendituretofood,beveragesandtobacco.

3) TheIndiangovernmentallowedforeigndirectinvestment(FDI)inthewholesaleofgroceryproductsbeginningin1997,whichpavedthewayforMetroGroupandWalmarttoopenwholesalestoresinIndia.

4) From2012onward,thegovernmentallowedFDIofupto51%inmultibrandretail,enablingretailerssuchasTescotooperateinthecountrythroughjointventures.

5) Inthisreport,wealsoshareimagesandobservationsfromouron-the-groundresearchatvariousinternationalanddomesticgrocerywholesaleandretailstoresinBangalore.

Deborah Weinswig

Managing Director

Fung Global Retail & Technology

deborahweinswig@fung1937.com

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

May26,2017

TableofContents

ExecutiveSummary.........................................................................................................................................3

Introduction:India’sGroceryRetailLandscape................................................................................................4

SizingtheIndianGroceryMarket....................................................................................................................4IndianGrocery:A$400+BillionMarket....................................................................................................................4

MainCharacteristicsofIndianGroceryConsumersandGrocers......................................................................5

EconomicReformsinGroceryWholesaleandRetail........................................................................................8EntryRoutesforForeignBrandsandRetailersinIndia............................................................................................9

KeyInternationalPlayersinIndianGroceryRetail..........................................................................................10StoreTours:InternationalWholesalers/Retailers..................................................................................................11StoreTours:DomesticRetailers.............................................................................................................................16

OpportunitiesinIndianGroceryRetailandBarrierstoEntry..........................................................................20

Outlook:WhatWeThink................................................................................................................................22

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ExecutiveSummaryInthisreport,weexamineWesterngroceryretailers’andwholesalers’pushintotheIndiaandlookatthefeaturesoftheIndiangrocerymarket.Wealsoshareobservationsandimagesfromouron-the-groundresearchinIndia,wherewevisitedthestoresofseverallocalandinternationalretailersandwholesalers.Finally,wediscussthebarrierstoentryandtheopportunitiesthatarepresentintheIndiangrocerysector.

ThelatestdatafromtheMinistryofStatisticsandProgrammeImplementation(MOSPI)showthatIndianconsumerspendingonfood,beveragesandtobaccojumpedby17.6%yearoveryearto$336billioninthefiscalyearendedMarch2014.Weestimatethatspendingonthesecategoriesrosetoover$400billionintheyearendedMarch2017.(Thesedataareatconstant2016exchangeratestoremovetheeffectsofcurrencyfluctuations.)

AccordingtoMOSPI,Indiansallottedfully33%oftheirtotalconsumerexpendituretofood,beveragesandtobaccoinfiscalyear2014.

SeveralfactorshavehistoricallylimitedtheentryofinternationalgroceryretailersandwholesalersintoIndia.ThegovernmentallowedFDIinthewholesaletradefrom1997onward,whichpavedthewayforMetroGroupandWalmarttoopencash-and-carrybusinessesinIndia.FDIwaspermittedinthemultibrandretailsectorbeginningin2012,whichallowedinternationalretailerstoinvestindirectoperationsinIndia,albeitonlyupto51%.Sofar,onlyTescohasusedthisroutetoenterIndia,whichithasdonethrougha50/50jointventurewithTrentHypermarkets.DutchretailerSparhasapresenceinIndiathroughafranchisemodelwithMaxHypermarkets.In2017,theIndiangovernmentbeganallowingFDIinfood-onlyretailat100%,butthecapfornonfoodgroceryisstill51%.

InordertoincreaseIndia’sattractivenessasaninvestmentdestination,wethinkthegovernmentneedstofurtherliberalizeforeigninvestmentpolicy.Inourview,italsoneedstoworkonimprovinginfrastructureconsiderably,includingbysubsidizingbothhigh-qualitystoragefacilitiesclosertofarms—whichwouldhelpfarmersstoretheirproducesafelyandreducewastage—andretailspacesthatwouldencourageretailerstosetupoperationsinthecountry.

SparHypermarketatMantriMall,Bangalore.Source:FungGlobalRetail&Technology

WeestimatethatIndianconsumersspentover$400billononfood,beveragesandtobaccointheyearendedMarch2017.

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Introduction:India’sGroceryRetailLandscapeGroceryshoppingintropical,agrarianIndiaisverydifferentfromgroceryshoppingintheWest.Ruralandurbancommunitiesaredottedwithvegetableandfruitvendorspeddlingfreshproduceonpushcartsandtinystores,informalmarketsandstallsthatselltheprovisionsanaveragehouseholdneeds.Thesevendorsareusuallyfoundalongsidemoderngroceryretailers’outletsthatselllocalproduce,importedfoodandotherproducts.

Inthisreport,weexaminethepushofWesterngroceryretailersandwholesalersintoIndia’sgrocerylandscape,lookatthefeaturesoftheIndiangrocerymarket,shareobservationsandimagesfromouron-the-groundresearchonlocalandinternationalretailersandwholesalersinthecountry,andanalyzethebarrierstoentryandopportunitiesinthesector.OurcompanionreportoninternationalapparelretailersinIndiacanbefoundatFungGlobalRetailTech.com.

SizingtheIndianGroceryMarketWebeginbyexaminingsomekeydetailsoftheIndianretailsector,foodandbeverages’shareofthatsector,andsomeofthecharacteristicsthatareuniquetotheIndiangrocerymarket.

ThescaleoftheconsumermarketandthegrowthmomentuminIndiamakeitanattractivedestinationforinvestment.Thecountryhasthesecond-largestpopulationintheworld,with1.3billionpeople,andistheworld’sfourth-fastest-growingeconomy.AccordingtothelatestestimatesfromtheInternationalMonetaryFund,India’seconomywillincreaseby7.2%in2017.

IndianGrocery:A$400+BillionMarketIn2016,Indianconsumersspentapproximately$645billionatretail,accordingtotheIndiaBrandEquityFoundation(IBEF).ThatorganizationexpectstheretailsectortogrowataCAGRofabout12%through2020,whenitwillreachalmost$1trillion.TheaverageIndianconsumerspendssubstantiallymoreonfoodthanondiscretionaryitemssuchasclothingandentertainment,whichistypicalforadevelopingeconomy.

ThelatestMOSPIdatashowthatIndianconsumerspendingonfood,beveragesandtobaccojumpedby17.6%yearoveryearto$336billioninthefiscalyearendedMarch2014.WeestimatethatIndianconsumersspentover$400billiononfood,beverages,andtobaccointhefiscalyearendedMarch2017.Thesefiguresareatconstant2016exchangeratestoremovetheeffectsofcurrencyfluctuations.

Foodisastapleexpenditure,andasageneralrule,consumersinlesseconomicallydevelopedcountriesdirectagreatershareoftheirspendingtobasicretailcategoriesthandoconsumersinmoreeconomicallydevelopedcountries.Asweshowinthetablebelow,food,beveragesandtobaccoaccountforamuchhigherproportionoftotalspendinginIndiathaninWesternmarketssuchastheUKandtheUS.

Inthisreport,weexamineIndia’sgroceryretailandwholesalemarketandthecharacteristicsthatdefineit.

May26,2017

Figure1.Food,BeveragesandTobaccoasShareofTotalConsumerSpending(%)

IndiadataareFY14;USandUKdataarecalendar2016Source:MOSPI/UKOfficeforNationalStatistics/USBureauofEconomicAnalysis/FungGlobalRetail&Technology

MainCharacteristicsofIndianGroceryConsumersandGrocersTherearemanycharacteristicsuniquetodiverseandpopulousIndiathatdefineitsgrocerylandscape,including:

1. Lowmodernretailpenetration:ManyIndiansstilltransactthroughtraditionalretailchannelsratherthanthroughmodernretailchannels.AswediscussedinourpreviousreportsintheIndiaRisingseries,variousestimatessuggestthatmodernretailpenetrationisonlyabout6%–8%inIndia.Itisevenlowerinfoodretail,atabout2%–3%,accordingtoconsultancyWazirAdvisors.

2. Highlyfragmentedmarket:GroceryvendorsinIndiarangefromafewlarge,modernhypermarketsandsupermarketstomanysmallerconveniencestorestonumerousfarmer’smarkets,roadsidesellersandvendorsthatsellproduceonpushcartsnearpeople’shomes.

3. Smallbasketsizes:DespiteIndia’shighgrowthtrajectoryandsize,itsconsumersarelessaffluentthantheirpeersinmanyotherlargeeconomiesandintheotherBRICnations.TheaverageIndiangrocerybasketsizeislessthanINR1,000($16),accordingtotheBusinessStandard,anIndiannewspaper.OuranalysisbasedondatafromnationalstatisticsbodiesindicatesthattheIndiandailyaveragespendperpersononfood,beveragesandtobaccowasafractionofthatseenintheUSortheUK.

Food,beveragesandtobaccoaccountedfor33%ofIndians’totalconsumerspendingin2014.

India UK US

May26,2017

Figure2.DailyAverageSpendperPersononFood,BeveragesandTobaccointheUS,theUKandIndia(USD)

InUSDat2016exchangerates.IndiadataareFY14;USandUKdataarecalendar2016.Dataareforat-homefoodandbeverages,excludingfoodservice.Source:USBureauofLaborStatistics/USCensusBureau/UKOfficeforNationalStatistics/Eurostat/MOSPI/FungGlobalRetail&Technology

4. Regionalcultureandweatherdefinefoodhabits:India’scultureandweathervarygreatlyacrossregions,andheavilyinfluencethefoodanddietofitspeopleindifferentareas.Forexample,riceisastaplegrainintheSouthofIndia,whilewheatispredominantinotherpartsofthecountry.

5. Indiaisheavilyvegetarian:AccordingtotheRegistrarGeneralandCensusCommissionerofIndia,some30%ofIndiansarevegetarians.Incomparison,some10%–12%ofUKandUSconsumersarevegetarians,accordingtoa2013HarrisPoll.DatafromtheOrganisationforEconomicCo-operationandDevelopment(OECD)indicatethat,in2016,Indiahadoneofthelowestmeatconsumptionratesintheworld,atthreekilogramspercapita.Whilereligiousobservanceisaprimaryreasonforthis,lowmeatconsumptionalsotendstobeassociatedwithlowerdisposableincomes.

US UK India

Indiahadoneofthelowestmeatconsumptionratesintheworldin2016.

May26,2017

Figure3.Per-CapitaMeatConsumptionbyTopandBottomFiveCountriesandbySelectedRegions,2016(Kilograms)

Source:OECD.org

6. Dryfoodconstitutesthelargestpartofthegrocerymarket:Dryfoodcomprises35%ofthegrocerymarketinIndia,whereconsumersrelyheavilyoncereals,grainsandgrams(driedlegumes)toformtheirstaplediet.Freshproduceanddairyarealsokeyconstituents,accountingfor33%oftheIndiandiet.

Ouron-the-groundresearchinIndiasuggeststhatmostconsumerswhoshopthroughmodernretailstorestendtobuythemajorityoftheirdryfoodandnonfreshproduceatlargershopsandsupermarkets,whiletheytendtobuytheirfreshproduceatneighborhoodconveniencestoresandvegetablecartvendors.

Figure4.IndianGroceryMarketCompositionbyTypeofFoodandDryFoodGroceryMarketSplitOutbyType

Source:MOSPI/IndiaFoodForum

97 9387

82 8169 68

7 6 4 3 3

Spices6%

Beverages8%

OtherProcessedFoods9%

Perishables9%

Dairy16%

FreshProduce17%

Cereals,GrainsandRelatedProducts

EdibleOils6%

Pulses5%

Sugar3%

DryFruits1%

Grams1%

DryFoods35%

Dryfoodcomprises35%ofthegrocerymarketinIndia,whereconsumersrelyheavilyoncereals,grainsandgrams(driedlegumes)toformtheirstaplediet.

May26,2017

7. Theconceptofmaximumretailprice(MRP):InIndia,federallaws

stipulatethatconsumerproductmanufacturersdeterminethemaximumpriceatwhichtheirproductsaresold,andthattheyprintthatpriceontheproductpackaging.Thegovernmentinstitutedthisregulationtoprotectconsumersandrestrictretailersfromsellinggoodsatartificiallyinflatedordeflatedprices.

TheatmosphereatIndiangroceryretailandwholesalestoresistypicallyhighlypromotional,soafixedceilingpriceprotectsconsumersfrombeingovercharged,whileafloorpriceprotectssmallerretailersfromthelargerretailersthatchargelessinordertoattractcustomers.

InourreportDeepDive:InternationalApparelRetailersinIndia—JumpingtheHurdlesinPursuitofGrowth,wediscussedhowtheIndiangovernment’seffortstoopenuptheeconomyhelpedeaseinternationalretailers’entryintothecountry.WebrieflyrecapthisliberalizationbelowandhighlightforeigninvestmentregulationsregardingfoodretailinIndia.

EconomicReformsinGroceryWholesaleandRetailThefigurebelowillustratessomeofthemajormilestonesintheliberalizationofIndia’seconomy,whichwethendiscussinmoredetail.

Figure5.TimeLineofFDILiberalizationinIndia

Source:TechSciResearch/IBEF/MinistryofCommerceandIndustry,GovernmentofIndia/FungGlobalRetail&Technology

InIndia,federallawsstipulatethatconsumerproductmanufacturersdeterminethemaximumpriceatwhichtheirproductsaresold,andthattheyprintthatpriceontheproductpackaging.

• GovernmentallowsFDIofupto100%infood-onlyretail,includingthroughe-commerce,subjecttoapproval.• Akeycondiion:thefoodsoldmustbeproducedandmanufacturedinIndia.

• MakeinIndiaandStartupIndiacampaignsareintroduced.• ThegovernmentalignstheFDIpolicywiththeNaionalIndustrialClassificaioncode,afederalstaisicalstandardtodevelopandmaintaindatabasesofeconomicaciviies.

• GovernmentallowsFDIofupto51%inmulibrandretail.• ThecaponFDIinsingle-brandretailisremoved,increasingthelimitto100%.

• RulingpartyproposesintroducingFDIinmulibrandretail,butfailstogainparliamentaryapproval.

• GovernmentcapsFDIinsingle-brandretailat51%,subjecttoapproval.

• GovernmentpermitsFDIofupto100%inwholesale,undertheautomaicroute.

• Selectedsectorsareopenedtoforeigninvestmentofupto51%,undertheautomaicroute.

May26,2017

ForeigninvestorswereallowedtoinvestinandoperatedirectwholesalestoresinIndiabeginningin1997.Thispavedthewayforcash-and-carrybusinesses,suchasMetroCash&Carry,toopenstoresinIndiamuchearlierthaninternationalretailers.Inordertotakeadvantageofthisopportunity,WalmartandCarrefoursetupcash-and-carryformatstocatertowholesaleconsumers,astheretailsector—inwhichtheytypicallyoperateintheirhomeandglobalmarkets—wasnotyetopentoforeigninvestment.

TheIndiangovernmentenforceditshighlyprotectionistregulationoftheretailsectoruntilabout2006,whenitfirstallowedFDIofupto51%insingle-brandretail,subjecttoapproval.So,retailerssuchasGapandZara,whichsoldonlytheirown-brandproducts,wereallowedtoopenstoresinIndiainpartnershipwithalocalcompany,withamaximumownershipstakeof51%.Themoveappliedtoothercategoriesofretail,too,butingrocery,itisimpracticalformostretailerstosellonlyown-brandproducts.

In2012,thegovernmentremovedthecaponsingle-brandretailinvestment,andalsoallowedFDIofupto51%inmultibrandretail(whichincludesdepartmentstoresandsupermarketsthatstockandsellproductsofvariousbrands),subjecttogovernmentapproval.

BeginninginFebruary2017,thegovernmentallowed100%FDIinthesale(includingthroughe-commerce)offoodproductsthataremanufacturedorproducedinIndia.Thegovernmentstipulatesthatretailersclearlyseparatetheirfood-onlybusinessfromtheirnonfoodbusinessforregulatorypurposes.

Duetothesemeasures,variousinternationalretailershaveemployeddifferentroutestodoingbusinessinIndia.

EntryRoutesforForeignBrandsandRetailersinIndia ThegovernmenthasestablishedseveralroutesthroughwhichinternationalfirmscantradeinIndia.Underthenon-FDIroute,therearetwomethods:licensingandfranchising.

Licensing:Underthismethod,theownerofthebrand(thelicensor)leasestherightstousethebrandnametotheretailer(thelicensee),allowingtheretailertostockandsellthebrandedmerchandise.

Franchising:Similartolicensing,franchisingallowsaretailer(thefranchisee)touseabrand’s(franchisor’s)intellectualproperty,aswellasitsbusinessmodel,marketingstrategyanddistributionmodel,inordertosellthebrand’sgoods.InIndia,MaxHypermarketsownstherightstooperatestoresundertheSparbrandname.

UndertheFDIroute,therefourmethodsthroughwhichinternationalretailerscansellgoodsinIndia:jointventure(JV),whollyownedsubsidiary,limitedliabilitypartnership,andextensionoftheforeignentityviaaliaisonoffice,branchofficeorprojectoffice.

JV:AJVisanenterpriseinwhichtwoormorefirmshavepooledtheircapitalandotherresources.The50/50JVbetweenBritishgrocerTescoandTrentHypermarketisthemostfamousexampleofthismethodbeingemployedingroceryretailinIndia.ThroughtheJV,thecompaniesoperatestoresundertheStarBazaarandStarDailybanners.

DuetorestrictionsonincorporatingforeigncompaniesinIndia,thegovernmenthasestablishedseveralroutesthroughwhichinternationalfirmscantradeinthecountry.

Asoneofitsfirstmovestoopenuptheeconomy,theIndiangovernmentimplementedapolicyin2006thatallowedFDIofupto51%insingle-brandretail,subjecttogovernmentapproval.

May26,2017

Whollyownedsubsidiary:Withthismethod,anorganization(theparentorholdingcompany)setsupanewcompanythatisincorporatedasadomesticbusinessinIndia.Theentireequitystakeofthesubsidiaryisownedbytheparentcompany.MetroCash&CarryandWalmart’sBestPricestoresoperateaswhollyownedsubsidiaries.CarrefouralsooperatedunderthismethodintheyearsitdidbusinessinIndia.

Limitedliabilitypartnership:Withthismodel,thepartnersinafirmhavelimitedliabilities,i.e.,onepartnercannotbeheldresponsibleforanotherpartner’smismanagementofthecompany.

Extensionoftheforeignentityviaaliaisonoffice,branchofficeorprojectoffice:InternationalcompaniescanalsosetupanofficeinIndiathatrepresentstheirinterestsunderoneoftheabovestructures.Theestablishmentofaliaisonoffice,branchofficeorprojectofficeissubjecttofurtherruleslaidoutbytheIndiangovernmentandcentralbank.

KeyInternationalPlayersinIndianGroceryRetailInthissection,wediscusssomeofthemajorinternationalnamesoperatinggroceryretailandwholesalestoresinIndiaandthosethattheyhavepartneredwith,andsharephotosandobservationsfromourstorechecksinvariouslocationsinBangalore.

Currently,therearefourkeyinternationalplayersinIndiangroceryretailandwholesale:Spar,MetroCash&Carry,Walmart(throughitsBestPricestores)andTesco.FrenchretailersCarrefourandAuchaneachoperatedinthecountryforafewyears,butexitedduetoalackofclarityaboutforeigninvestmentinfoodretail.

Figure6.KeyInternationalPlayersinIndianGroceryRetail

InternationalCompany

IndianPartnerandRoute YearofEntry Revenue No.ofStores

AverageStoreSize(Sq.Ft.)

MetroCash&Carry

N/A–whollyownedsubsidiary

2003 INR40billion/$616million

23 50,000–80,000

Spar FranchisewithMaxHypermarkets

2008 $118.9million 18 50,000

BestPrice(cash-and-carrystoresrunbyWalmartIndia)

WasBhartiEnterprises;nowawhollyownedsubsidiary

2007 $586.2million 21 50,000

Tesco WholesaleagreementtosupplytoTrentHypermarket’sStarBazaarandStarDailystores,thenJVof50%withTrent(suppliertoStarBazaar)

2008(wholesaleagreement)and2012(JV)

N/A 11 40,000–80,000

Auchan* FranchisewithMaxHypermarkets

2012(exitedin2014)

N/A 13(convertedtoSparonexit)

50,000

CarrefourWholesaleCash&Carry*

N/A–whollyownedsubsidiary

2010(exitedin2014)

N/A 5 5,200

*NolongeroperatinginIndiaSource:Companyreports/S&PCapitalIQ

Inalimitedliabilitypartnership,thepartnersinafirmhavelimitedliabilities,i.e.,onepartnercannotbeheldresponsibleforanotherpartner’smismanagementofthecompany.

May26,2017

MembersoftheFungGlobalRetail&Technologyteamvisitedsomeofthestoresoftheaboveretailersaswellassomeoftheirdomesticcompetitors’locations.Wediscussourkeyobservationsbelow,andreaderscanfindmoreimagesinourFacebookgallery.

StoreTours:InternationalWholesalers/Retailers

MetroCash&CarryWevisitedthefirststorethatMetroCash&CarryopenedinIndia,locatedintheYeshwantpursuburb,inBangalore.ThecompanyalsooperatestwootherstoresinBangalore.

MetroCash&Carryprimarilysellstosmallbusinesses,traders,resellers,hotels,restaurants,canteens,caterersandself-employedprofessionals.Shoppersmustregisterasmemberstobuyfromthewholesaler.Registrationisfreeandapplicantsneedtoprovidebasicinformationaboutthemselves,aswellasproofofIDandabusinesslicense.

Registeredmembersareprovidedwithacardthattheymustshowattheentranceofastoreinordertoenter.Membersmaybeaccompaniedbyonenonmember.

Layout:Thelayoutofthestorewevisitedresemblesthatofwarehouseclubstore,withproductsinlargercontainersandboxesstackedhighonshelvesandontheflooraroundthestore.Theaisleswereclearlylabeledwithlargesignsindicatingthemaincategoryandsubcategoriesofproductslocatedwithin.Therewereseveralkiosksaroundthestorewhereshopperscouldtastenewproductsthatwerebeingtrialed.

MetroCash&CarryinBangaloreSource:FungGlobalRetail&Technology

MembersoftheFungGlobalRetail&TechnologyteamvisitedthestoresofforeignretailersMetroCash&CarryandSparanddomesticretailersBigBazaarandHyperCityinBangalore.

MetroCash&Carryprimarilysellstosmallbusinesses,traders,resellers,hotels,restaurants,canteens,caterersandself-employedprofessionals.

May26,2017

Storetraffic:Wevisitedthestoreataround4p.m.andfoottrafficwasheavy(despitethequietappearanceinsomeofourphotographs),whichisnotunusual.Thestorehaswideaisles,butitwaschallengingattimestopushacartaroundduetothehighnumberofshoppersinthestore,andnearlyallregisterswerebusy,withlonglinesofcustomerswaitingtocheckout.

MetroCash&CarryinBangaloreSource:FungGlobalRetail&Technology

Assortment:Thestorehadagoodmixofconventionalfoodsandasmallselectionoforganicfoods.WenoticedastrongpresenceofMetro’sownbrand,Aro,acrossthedryandpackaged-groceryandhouseholdcarecategories.Indianbrandsdominatedotherpackaged-foodcategories,whiletherewasamorepronouncedpresenceofinternationalbrands,suchasDove,NiveaandL’Oréal,inthebeautyandpersonalcareaisles.

Inclothingandfootwear,wenoticedafewprivatelabelsandseveralbrandsfromwell-knownclothingcompaniesinIndia.Intheelectricalssection,wesawmanypopularglobalbrandssuchasSamsungandLG.

Price:Metro’sownbrandwas,ofcourse,pricedlowerthanorganicandpremiumbrands,buthigherthanlow-endbrands.WecomparedthepricesofBengalgramflour—astapleingredientinIndiancuisine—fromMetro’sownbrand,Aro,andthe24MantraOrganicandSriBhagyalakshmibrands,andfoundthattheAroflourwaspricedbetweentheothertwobrands.ShelflabelsindicatedtheMRPoftheproductdisplayed,thepriceatwhichMetrowassellingtheproductandthesavingsforthecustomer.

Otherfacilities:Thestorehadanon-sitecafé,customerrestrooms,acustomerservicecounterforstampingthewarrantycardsofpurchasedproducts,andaboardwherecustomerscouldwritetheirsuggestionsorlistproductstheycouldnotfindatthestore.Metroalsooffersdeliveryofproductsboughtatthestore.

TheMetroCash&Carrystorehadagoodmixofconventionalfoodsandasmallselectionoforganicfoods.

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DeliverysignageatMetroCash&CarryinBangaloreSource:FungGlobalRetail&Technology

SparSparisaDutchretailchainwithmorethan12,000storesin42countries.Alargepartofitschainisrunthroughfranchisepartners.InIndia,Sparispositionedinthepremiumvaluesegment—theproducts,customerexperienceandstoresareofbetterqualitythanthoseofmostdomesticgrocers,butitcannotbecategorizedaswhollypremiumorhigh-end.

WevisitedtheSparstorelocatedinMantriSquareMall,inBangalore.Sparalsooperatesfourotherstoresinthecity.

Layout:SparoperatesaspacioussupermarketonthelowergroundfloorofMantriSquareMall.Signagewasvisiblethroughoutthestore,andeachaislehadasignindicatingtheproductsthatcouldbefoundwithin.Thealcoholsectionwasoutsidethestore,separatefromthemainshoppingarea.

Whilemostofthesignagewasaccurate,wewerepuzzledtoseealargesignthatsaid“BabyCare”directlyaboveastockofpersonalcareandhouseholdcleaningproducts.(Thebabyproductswere,however,locatednearby.)

SparinBangaloreSource:FungGlobalRetail&Technology

InIndia,Sparispositionedinthepremiumvaluesegment—theproducts,customerexperienceandstoresareofbetterqualitythanthoseofmostdomesticgrocers,butitcannotbecategorizedaswhollypremiumorhigh-end.

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Storetraffic:Whenwevisitedaround11:30a.m.,trafficwasthinatthestore.

Assortment:WenoticedthepresenceofSpar’sownbrandacrossthefoodandhouseholdmaintenancecategories,butitwasnotdominantovertheotherlabels.Amongthepersonalcarecategories,wenoticedastrongpresenceofinternationalbrands,suchasNivea,Neutrogena,OlayandGarnier.TherewasawideselectionofclothingfromSpar’spartner,MaxHypermarkets,forsaleatthestore.

Price:Sparpridesitselfonoperatingundertheconceptof“EverythingBelowMRP,”andthiswasevidentatthestorewevisited.MostproductswerepricedbelowtheMRP,evenifonlyslightly,andthosethatwereheavilydiscountedhadalabelthatsaid“Promotion”highlightedinredoronethatsaid“BestDeal.”

Sparpridesitselfonoperatingundertheconceptof“EverythingBelowMRP,”andthiswasevidentatthestorewevisited—mostproductswerepricedbelowtheMRP.

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Otherfacilities:Thestorehadanon-siteconcessionforrefreshments,butitwasminimallystocked.Wedidnotseeanyrestrooms,butdidnoticeacustomerservicecounterandaloyaltyclubcounter.WealsonoticedasigninsidethestoreindicatingthatcustomerscouldshoponlineatSparIndia.com.

E-commercesitesignageatSparinBangaloreSource:FungGlobalRetail&Technology

CustomersinIndiacanshopatSparonline,throughSparIndia.com.

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StoreTours:DomesticRetailers

BigBazaarBigBazaar,operatedbyFutureGroup,isoneofIndia’soldestmoderngroceryretailchains,havingbeenestablishedin2001.Itisalsooneofthecountry’slargestchains,with218storesacrossIndiaspanningatotalof10millionsquarefeet.WevisitedtheMalleswaramstore,inBangalore,acityinwhichthecompanyoperate16stores.

Layout:TheBigBazaarstorewevisitedishousedinafive-storybuilding.Freshproduceandpackagedgroceriesareonthegroundfloor,processedfoodandpersonalcareareonthefirstfloor,andclothingandelectronicsareontheupperthreefloors.

Aislesareslightlynarrow,andwenoticedseveralshoppingcartsloadedwithproducts,presumablywaitingtobestocked.Intermsofdécor,thestorewasquitebare,andmanyareaslookedrun-down.

BigBazaarinBangaloreSource:FungGlobalRetail&Technology

Storetraffic:Wevisitedalittleafter5p.m.Storetrafficwashighandthefreshproduceareaswerethebusiest.

Assortment:BigBazaarsellsconventionalfoodandselectedorganics.WenoticedareasonableassortmentofBigBazaar’sprivatelabel,TastyTreat,alongsideotherbrands.Personalcareproductsweremainlyfromthelarge,internationalbrands.

BigBazaar,operatedbyFutureGroup,isoneofIndia’soldestmoderngroceryretailchains,havingbeenestablishedin2001.Itisalsooneofthecountry’slargestchains,with218storesacrossIndiaspanningatotalof10millionsquarefeet.

May26,2017

BigBazaarinBangaloreSource:FungGlobalRetail&Technology

Price:Mostproductsfromthird-partybrandsatBigBazaarwereofferedatadiscounttotheMRP,butwedidnotnoticemanymultibuyoffers,suchasthree-for-twoorbuyone,getonefree.

Otherfacilities:Therewerecheckoutregistersonnearlyeveryfloorinthestore.Therewassignageindicatingproductcategoriesandfacilities,butsomesignswerepartiallyhiddenbyproductsthatwerestackedupinfrontofthem.Restroomsandseatingwereavailableforcustomers.WealsonoticedthatthestorehadaBangaloreOneCentre—whichisanofficesetupbythelocalgovernmentwherepeoplecanpayutilitybills,renewpublictransportationpassesandmakeotherpaymentstocivicbodies.

ABangaloreOneCentreofficeinBigBazaarinBangaloreSource:FungGlobalRetail&Technology

Mostproductsfromthird-partybrandsatBigBazaarwereofferedatadiscounttotheMRP,butwedidnotnoticemanymultibuyoffers.

May26,2017

HyperCityHyperCityisownedbyK.RahejaCorp.andoperates14moderngroceryretailstoresacrossIndia.IthasanexclusivesupplyagreementwithpremiumBritishgroceryretailerWaitrose.WevisitedoneofthesmallerHyperCitystores,locatedatOrionMall,inBangalore.TherearefourHyperCitystoresinthecity.

Layout:Despiteitssmallsize,theHyperCitystorewevisitedwastidy,withdifferentareasdistinctlylabeledandaisleswideenoughtopushtwocartsthroughatthesametime.

HyperCityinBangaloreSource:FungGlobalRetail&Technology

Storetraffic:Therewerefewpeopleatthestorewhenwevisited,probablybecauseitwasearlyintheafternoonandmanypeoplewereatwork.

Assortment:HyperCity’sownbrands,suchasFreshBasket,hadaclearpresenceontheshelves,butnotmoresothanotherbrands.ThoughHyperCityhasanexclusivesupplyagreementwithWaitrose,wefoundfewproductsfromtheBritishbrandatthestore,perhapsbecauseitwasasmall-formatone.MembersofourteamhadpreviouslyobservedawholeaisleofWaitroseproductsinadifferent,large-format,HyperCitystore.Wedidseeseveralotherinternationalbrands,suchasJamieOliver,Hellman’sandAmericanGarden,atthestorewevisited.

HyperCity,ownedbyK.RahejaCorp,,hasanexclusivesupplyagreementwithpremiumBritishgroceryretailerWaitrose.

May26,2017

Price:Theatmosphereinthestorewashighlypromotional.Wenoticedspecialdiscountslabeled“HyperSavers”andbuy-one,get-one-freeoffers.

Otherfacilities:Therewasacustomerservicedesk,butwedidnotobserveanyotherspecialfacilitiesinthestore.

Overall,wefoundtheinternationalgrocerystoresweremorespacious,andhadclearersignageandwideraislesthanthedomesticgrocerystores.Theinternationalretailersalsoappearedtohavefewershopfloorstaff.

TheatmosphereintheHyperCitystorewashighlypromotional.Wenoticedspecialdiscountslabeled“HyperSavers”andbuy-one,get-one-freeoffers.

May26,2017

OpportunitiesinIndianGroceryRetailandBarrierstoEntryInIndia’sorganizedgroceryretailmarket,therearenumeroushomegrownmodernretailers,butonlyahandfulofinternationalretailers.Giventhecountry’sdiversityandcomplexity,thereappeartobemoresocial,commercialandpoliticalbarrierstoentryintothegrocerymarketthanthereareinotherretailsegments—buttherearemanyopportunitiesforgrowthinIndiangrocery,too.

WespokewithSuryaShastry,ManagingDirectorofPhaladaAgroResearchFoundations,tounderstandmoreabouttheunderlyingopportunitiesandhurdlesinIndiangroceryretail.Phaladaisanexporterofprivate-labelorganicspicesandpackagedfoodtoUSretailersandisalsothethird-largestorganicfoodbrandinIndia.WecombinedShastry’sobservationswithourownanalysistocreatethefollowinglistofopportunitiesintheIndiangrocerymarket:

1. Growingorganicgrocerysegmentandpreferenceforhealthierfood:ShastrytoldusthatsalesintheorganicgrocerysegmentinIndiahavebeengrowingataround30%annuallyoverthelastthreetofouryears,andthatthegovernmenthasimplementedpoliciestoincreasethefarmlanddevotedtoorganicagriculture.OrganicfoodcurrentlyconstitutesasmallbutrapidlygrowingcategoryacrossmostmoderngroceryretailersinIndia,whichcaterlargelytoyoung,urbanfamilies.

2. Asubstantialportionofthepopulationisemployedinfarmingandagriculture:TheagriculturalsectoremploysthegreatestproportionofpeopleinIndia.Fully51%oftotalemploymentinIndiain2010wasinagriculture,accordingtothelatestavailablefiguresfromtheWorldBank.Weestimatethattheproportionwasabout48%in2015.FarmershavestrongunionsinIndiaandareprovidedmanysubsidiesbythegovernment.Hence,theyhavestrongbargainingpower.Theentryoflargeinternationalplayerswillallowfordirectnegotiationswiththefarmersandcutoutintermediaries,whichwillresultinawin-winsituationforbothparties,aswellasmoretransparencyinthesupplychain.

3. ProximitytosourceandIndia’slandscapeforcultivation:FDInormsstipulatethatamajorportionofmerchandisesoldissourcedfromIndia,aslargepartsofthecountryareagriculturalareasandamajorityoftheworkingpopulationisemployedinagriculture.Locatingsourcingfactoriesandofficesclosetotheseagriculturalareaswillenableretailerstotransportfoodfromfarmtomarketefficiently.

4. Youthful,modernworkingpopulation:Indiahasoneoftheyoungestpopulationsintheworld.Some66%ofthecountry’s1.3billionpeoplearebetweentheagesof15and64.Manymembersoftheurbanworkingclassincreasinglyprefertoshopatorganizedfoodretailshopsduetothevarietyavailableatthosestores.

5. Government’splansandinitiativestoboostforeigninvestment:TheIndiangovernment’smovetoliftthecaponforeigninvestmentinfoodretailindicatesthatitisopentogrowingthesector.Thoughthegovernmenthasindicatedthatitdoesnotintendtoliftthe

Some66%ofthe1.3billionpeopleinIndiaarebetweentheagesof15and64.

May26,2017

restrictionontheretailingofnonfooditemsinthesamestoresinwhichfoodissold,manyinternationalretailershopethatitwillopenupthesectorfurtherinthenearfuture.

6. Wideningpalatesandpreferencesforinternationalcuisines:AsmoreIndianstravelaroundtheworld,theirdesiretotryoutinternationalcuisinesathomeisalsogrowing.Manyoftheingredientsandmuchoftheequipmentrequiredtoprepareinternationaldishesareavailableonlyatmodernretailers’stores,makingthempreferredshoppingdestinationsforthoseinterestedininternationalcuisines.

However,beforeinternationalretailersareabletotakeadvantageofalloftheseopportunitiesinIndia,thefollowingbarriersandthreatsneedtobeaddressed:

1. Lengthybureaucraticproceduresandloosefoodsafetyregulations:SettingupanysortofestablishmentinIndiainvolvesgoingthroughincrediblylengthybureaucraticprocedures,whichneedtobestreamlined.Also,foodsafetyregulationsinIndiaarenotasstringentasintheWest.Shastrytoldusthatfarmersdofollowstrictinternationalregulationsinorganicfoodcultivationandlabelingforproductsthatareexported,butthattheydonotfollowthemascarefullyforproductssoldtothedomesticmarket.Astheimageandreputationofretailersandbrandsdependonthequalityoftheproductssold,strictregulationisaburningissuethatthegovernmentneedstoaddressinordertoattractmoreinternationalretailers.

2. Inadequatelydevelopedinfrastructure:BecausethemajorityoffoodretailinIndiaisunorganized,therehasbeenlittlereasonandopportunitytodevelopinfrastructurerelatedtofoodretail.Warehouses,cold-storagefacilitiesandothernecessarylinksinthesupplychainareinadequate.Infact,agovernmentsurveyin2016foundthatIndiawastesapproximately67milliontonnesoffoodeachyear,worthaboutINR920billion($14billion),duetostoragefacilitiesthatinadequatelyaddresspests,weatherconditionsandglutsinsupply.

3. Riseofe-grocers:WelookedattheriseofhomegrowndisruptorBigbasketindetailinoursecondreportintheIndiaRisingseries.Bigbasketandanotherdomesticplayer,Grofers,havebeenslowlygainingmarketshareindryfoodretail,ashasinternationalgiantAmazon.

Shastrymentionedseveraladvantagesthatpackaged-foodsuppliershaveinworkingdirectlywithe-groceryplayers.Hesaidthatonlinemarketplacesallowretailerstodisplayawiderassortmentandrangethancouldbestockedataphysicalstore,andthatthebige-grocersalsohavelogisticsandotheroperationalfunctionsinplacethateasethedeliveryofproductsfromproducertoconsumer.AnynewentrantstotheIndiangrocerymarketwillcertainlyneedtoassessthethreatfromtherapidlygrowinge-groceryretailsector,Shastrysaid.

Indiawastesapproximately67milliontonnesoffoodeachyear,worthaboutINR920billion($14billion),duetostoragefacilitiesthatinadequatelyaddresspests,weatherconditionsandglutsinsupply.

May26,2017

4. Numerousintermediariesinthesupplychain:Foodproducerstend

toworkdirectlywithretailersinurbanareas,buttheyneedtoengagedistributorsorsuper-stockiststosupplyretailersinsmallercitiesandless-connectedneighborhoods,whichcouldreducetheproducers’margins.

5. Unplannedurbanization:UrbanareashavebeengrowingrapidlyinIndia,butinfrastructurehasnotevolvedatthesamepace.Insomeareas,roadsarenarrowandpoorlymaintained,makingthemunsuitableforlargevehiclesthatcarryproductstomarket.Furthermore,alackofmobileconnectivityinremoteareasmakesithardforcompaniestocommunicateeffectively.

Outlook:WhatWeThinkIndiaisahigh-growtheconomythatisrapidlymodernizing,andthereisscopeforinternationalretailerstogrowinthecountry,eitherbysettingupdirectoperationsinpartnershipwithlocalplayersorbyprovidingtheirexpertiseinrunninggrocerychainsthroughfranchisesorotherroutes.Whilethegovernmenthastakenstepstoopenthemarket,therecentallowanceof100%FDIinIndian-producedfood-onlyretail(excludingothergrocerycategories)remainsrestrictive,andislikelytomakelong-termgrowthamonglarge-scaleretailersunfeasible.

InternationalretailersalsoneedtoconsiderthegrowingroleofonlinegroceryinIndia,withBigbasketandAmazonbeingthefirstsignificantmoversinthesegment.ApartfromFDIrestrictionsandthethreatfrome-commerceplayers,internationalretailersmustalsothinkaboutthelackofquality,moderninfrastructureinIndiaandthefactthatbasketsizestendtobesmallerinthecountrycomparedwiththeglobalaverage.

Ifthegovernmentconsidersopeningthemarkettoforeigninvestmentinfoodandnonfoodgrocery,moreretailersmayfinditpracticaltoadvancetheiroperationsinlow-spendingyethigh-growthIndia.

UrbanareashavebeengrowingrapidlyinIndia,butinfrastructurehasnotevolvedatthesamepace.Insomeareas,roadsarenarrowandpoorlymaintained,makingthemunsuitableforlargevehiclesthatcarryproductstomarket.

May26,2017

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comSwaroopraniMuralidharResearchAssistant

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

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