Retailing

Facts

• The Indian retail industry, at about USD 300 billion, accounts for nearly 37% of India's GDP. It is the eighth largest retail market in the world.

• The retail market is poised for explosive growth and is estimated to more than double by 2015. The GDP is projected to have an annual growth rate of 8%. That does mean higher growth for Indian retail industry due to increase in disposable income levels.

Employer

• It is the second largest employer after agriculture.• At least 2.5 million additional direct jobs are likely

to be created in the next five years. Hyper- competition is expected to set in by 2008-9 as the footprint of the top six players starts significant overlapping in top 20 30 towns. This indicates a significant impact on other retailers and branded players – creating new opportunities and threats.

Some facts

• Globally, India has the highest absolute number and the highest per capita number of retail outlets. With an estimated 11.2 million outlets.

• India has the largest retail outlet density in the world. Besides, the country is also dotted with low-cost kiosks and pushcarts.

The retail sector

• Indian retail is at present witnessing oversupply from unorganized formats and is one of the most fragmented industries in the world. It has an average of 280-persons per outlet as against the global average of 1,800-persons per outlet.

• Ninety six percent of the 11 million plus outlets are smaller than 500 ft² in area. Per capita retailing space in India is about 2 ft² (compared to 16 ft² in the US), the lowest in the world.

The retail sector

• According to a survey by AT Kearney, only a $5 billion segment of the $180 billion retail market is organized, the rest being unorganized.

Modern retail format

• In India too, there are visible signs of growing affordability with mindsets showing the willingness to spend as also a remarkable shift in the shopping habits.

The Indian distribution

Traditional

The numerous intermediaries like traders, wholesalers, retailers and commission agents, in the supply chain lead to huge cost addition with almost no value addition. Consumer Price is 3.5 times of farm gate price due to high margin buildup at every intermediary and wastage.

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Opportunities

• There would be multiple benefits for the middle-class consumers (and lower income consumers). These can be summed up as reduction of prices in typical monthly “basic needs” shopping bill by at least 10% within next 24-30 months

HIGH PRIVATE CONSUMPTION

• The high private consumption is one of the major factors for the growing retail industry. Over 62% of the private consumption share is towards the retail sector, of which 55% is the contribution from the rural areas, indicating the increasing significance of retail presence in rural areas.

Compressed cycle

• Inventors or early adopters like USA and UK have to invent the wheel, i.e. create a market and go through the grind of success and failure in building models – this results in a long evolution cycle for industries in these geographies. While USA’s retail industry took four decades (1950s onwards) to experiment with models like big box, lifestyle centers, multiplexes, etc, China took two decades. India, will take an even lesser period (one decade) to accomplish the same.

Developing nations – just customize the wheel

• The evolution cycles are quite different for developing nations as they are wary of accepting a new concept and are generally late entrants. Players can therefore choose a particular concept by drawing upon global experiences and need not go through the rigmarole of concept experimentation. This results in simultaneous emergence of multiple formats, which in turn leads to a shorter evolution cycle.

Shrinks the evolution cycle

• Another factor that shrink the evolution cycle is the vast rural urban divide, like in China. The per capita income in urban centers of India is twice that in rural areas. While in India the metros are already into development phase. in select metros, it is in early infancy in smaller towns. This gives rise to a complex situation, wherein pan-India players have to tackle multiple stages of the evolution cycle simultaneously.

Compressed evolution cycle

• Even at abysmally low penetration of 3%, India has witnessed overlapping of multiple models. Being a late entrant, the evolution cycle of Indian retail is compressed, as seen in China earlier. In the development phase, players are finding it imperative to simultaneously go for speed, enhancement of business models and operating efficiency to capitalize on the opportunity.

Indian Organized Retail enters Development phase

Multiplicity of formats

• Given that Indian retailers have begun experimenting with different categories, growth will happen across categories with all models witnessing a rapid scale up.

Indian organized retailers need to perk up their abilities

• Mandated by a compressed evolution cycle, entry of large players like Reliance Industries and an imminent entry of global retailers, incumbent Indian retailers are finding it pertinent to equip themselves with the ability to ramp up fast, experiment with models and achieve operational efficiency – all at the same time. These capabilities would enable them to simultaneously tackle all the stages of evolution.

Indian organized retailers need to perk up their abilities

Drivers of growth

• Increasing consuming class• Urbanization• Real Estate Growth• Regulatory framework• Growth in economy

Consumerism

• India has one of the youngest populations in the world with median age of 24 years and more than half the population having grown up in the post liberalization era.

• The Indian youth has no guilt of consumption, and is more ambitious and confident. Not only this, rising affordability (as the economy is growing at 8%), ever-increasing numbers are being added to the consuming class. The consuming class is expected to increase from 280m in 2002 to 686m in 2010

Increase in consuming class

• The consuming class in India, i.e. with annual income of over Rs 90,000 and more, is estimated to burgeon from 28% in 2002 to 48% in 2010.

• When the newly rich population becomes upwardly mobile, standard of living goes up and aspirations shoot. Therefore, besides horizontal expansion, the consumer base is also growing vertically (i.e. increasing wealth in all segments), which is – in turn – driving growth

Urbanisation

• India has been witnessing significant migration of rural population to urban India (population residing in cities up from 26% in 1991 to 32% now), which is growing at 4% annually. By 2015, urban population will have expanded to 435m from 330m currently.

• With better job opportunities and higher pay levels, per capita income in urban India is 2 that in rural India. In the last decade, India has turned into a services sector hub with IT, banking, financial services and media being at the forefront of the trend, and creating surplus wealth in the hands of a huge consuming class

Real Estate Growth

• In retail, real estate needs are quite different from those for residential and commercial property segments. Real estate market in India has for long been dominated by unorganized players, who do not have experience in property development specifically for retail. This is also reflected in the exterior focused design and improper tenant mix, resulting in higher rental burdens and eventually failure of the mall.

• However, there is a discernible shift underway in the space. While the government is easing land regulations and releasing more land for retail purpose, investment in real estate by organized players is on an increase.

Real Estate Growth

• Also, retailers – who understand the business well – have now forayed into property development for retail purposes. For instance, Rahejas, DLF, Pantaloon, Provogue, etc are now active in retail development and mall management services.

• Other factors that will ensure enhanced availability of retail property is entry of foreign players and a provision for 100% FDI under the automatic route for real estate development for townships over 25 acres of land or commercial and retail development / commercial purpose on floor space of over 500,000 sq. ft.

• It is estimates based on stated plans of Indian retailers, the industry will 75m sq. ft of retail space operational by end 2007.

Regulatory framework

• Besides funding and quality infrastructure the government has finally realized the importance of the same and is making necessary regulatory amendments, though the pace leaves much to desire.

• Issues already addressed by the government are implementation of VAT (thus leaving no room for tax evasion by traditional players), releasing more land for retail development (textile mills in Mumbai allowed development for commercial and retail purposes), allowing 100% FDI in real estate and permitting 51% foreign investment by a single-brand retailer.

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