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The Changing Face of Organized Retail

&

It's Potential Impact on Packaging Industry

Harminder SahniTechnopak Advisors

September 1st, 2006

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Size of the retail opportunity in India…

The Retail opportunity in India is estimated as US $ 300 Bn.; ranked amongst the top 10 globally

GDP US 804 Bn

Private ConsumptionUS $482 Bn

(60%)

Public Spending and Gross Capital Formation US $322 Bn

(40%)

RetailUS $300 Bn

(62%)

Non-RetailUS $182 Bn

(38%)

Estimate Figures

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…Never the less, contribution of organized sector is miniscule…

Only 3% of the total market

Hence size of the untapped opportunity is huge

Organized Retail

3%

Unorganised Retail

Organised Retail (US $ 9 Bn.)

2006

Technopak Analysis

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However, growth in this sector likely to happen at a rapid pace…

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

510

20

30

40

50

Tota

l Ret

ailin

g M

arke

t (U

SD b

illio

n)

Org

anis

ed R

etai

ling

(USD

bill

ion)

Total Retailing Market Organized Retail

Organised retailing in India at the point of inflection

Technopak Analysis

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Increased demand for better shopping experienceGrowing incomesYounger ProfileIncreasing exposure and awareness levelsChanging role of women and children in decision making process

All drivers in place to propel growth in the retail segment …

Demand-side factors

Goldman Sachs BRIC Report dated Oct. 2003

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Supply-side factors

Improved Sourcing OptionsQuality product from Indian producers who are already supplying to world-class retailersGlobal sourcing increasingly viable due to liberalisation of tariffsProduct proliferation driven by manufacturers

Increased interest among corporatesLarge Indian business houses bullish on activity in the retail sectorInternational players keen on India entry

Increased supply of Retail Real Estate Over 600 malls being planned across the country by 2010

All drivers in place to propel growth in the retail segment …

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As a result, various categories are likely to shape up in the future as follows…

Food & Grocery likely to emerge as huge opportunity

100%427 9.0%100%300

5%23 18%4%12Others

1%3 17%0.6%2Recreation

3%12 12%3%8Medical Care and Health Services

6%24 12%5%15Jewellery & Watches

4%16 15%3%9Furniture

6%24 15%5%14Consumer Durables & IT

2%7 15%1%4Furnishings

2%7 11%2%5Footwear

8%33 11%7%21Apparel

5%23 11%5%15Personal Care

60%256 7.0%65%195Food, Beverages and Tobacco

% Share -

2010

Market Size

$billion -2010*

Growth Rate b/w 2010-05

% Share 2006

Market Size $billion -2006*

Food & Grocery led format

* Estimate Figures

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Hypermarkets now and ahead …

Store in Bangalore by end 2006, 50 stores over next 5 years

1HypermarketMumbaiHome Care Retail India –Magnet

Set up distribution centers in Delhi, Mumbai, Hyderabad, Kolkata, Chennai

2Cash ‘n CarryBangaloreMetro Cash ‘n Carry

3 stores by 2008; enter cash ‘n carry format

1HypermarketMumbaiShoprite

1,000 hypermarketsNoneHyper/ Supermarket/ All

Reliance Retail

220 stores by 201035HypermarketVishal Megamart

to establish a network of 55 hypermarkets across India, by 2015

1HypermarketMumbaiShoppers Stop-Hypercity

80 stores by 2008; 225 stores by 2010 30+Hypermarket21Big Bazaar

Two more stores planned- in Mumbai and Bangalore

2HypermarketAhmedabadStar India Bazaar

Hypermarkets

Format

54

Number of Stores*

Expansion Plans*CitiesRetailer

20 hypermarkets by end-2006All IndiaSpencer’s

* Estimate Figures of key players

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Supermarkets likely to increase…

128 stores across India; concentration on western region

11Supermarket5Tru Mart

70 stores in north India, 30 in NCR25SupermarketDelhiSabka Bazaar

-44SupermarketSouth IndiaFood World

2300 supermarkets in 3 yearsN/AHyper/ Supermarket/ All

Reliance Retail

Across Delhi, Bangalore, Andhra Pradesh & Mumbai. 600 stores by year end

164SupermarketTamil NaduSubhiksha

Expansion in North & West India by end-2006

30Supermarket15Nilgiri’s

Entering B-markets. 250 stores by 2009

35Supermarket14Food Bazaar

65 new outlets in the next three years

40SupermarketsGujaratAdani Group

Supermarket

Format

80

Number of Stores*

Expansion Plans*CitiesRetailer

100 new stores over next 2 years8Trinethra

* Estimate Figures of key players

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Such changes in the retail environment in India are likely to drive growth of several ancillary & support industries in the coming

years; one such Industry would be the packaging Industry

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Contribution of packaging in the F&G Sector…

Depiction of a typical cost split

Produc

tion C

ost

Marketi

ng & A

dvert

ising

Cost

Transp

ortati

on

Cost

Packa

ging C

ost

Rent

Other C

osts

30

TaxesOpe

rating

Overhe

ads

10 6 12 20 6 4 12

Indexed Numbers (Estimates)

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Impact on the packaging industry as a result of growth of organized retailing…

Example of Milk – evolution across retail formats

Modern Format with aseptic

packsTraditional

Convenience Store with plastic packaging

Loose milk at Milk Booth

Loose milk at traditional Milk Dairy

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Factors driving growth in the packaging Industry in India…

High consumer acceptance & usage of packaged milk

Technopak Analysis

Milk Type Used for Home Preparation (Metros)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CurdPan

eer

Ghee

Butter

Lass

iIce

crea

m

Kheer

Tea

Coffee

Chees

eMilk

shak

esKho

ya/ m

ava

OthersCondensed milkUHT milkMilk powderBottled MilkPacket MilkCow Milk

Buffalo MilkToned milk

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Factors driving growth in the packaging Industry in India…

With changing lifestyles, RTE category has been evolving

16% penetration in Nuclear families

Growing acceptance of processed & convenient food

Technopak Analysis

0

10

20

30

40

50

60

Everyday Once a week

2-3 times month

Once aFortnight

Once a Month

< once a Month

Less frequently

Never

% o

f the

pop

ulat

ion

North EastWest South

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Factors driving growth in the packaging Industry in India…

Consumer expectations have increased

Lifestyle changes, i.e. presentation and aesthetics is important

“Package graphics and presentation quality figure as the most powerful influences in

purchasing decision”

[Source : Point of Purchase Advertising Industry in the US (POPAI )]

Hence packaging can play a greater role in facilitating impulse purchase of such items

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Factors driving growth in the packaging Industry in India…

Carrying and Storage Ease

easy-pour in the juices

oil refill pack segments

shampoo sachets with zip locks

Health consciousness, hence consumer wants to see the nutritional benefits on the packaging; ISO certifications etc.

packaging reflects upon the quality of the product

Environment Factors

Type of packaging will also undergo a change, driven by eco-friendly initiatives

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Factors driving growth in the packaging Industry in India…

With larger retailers getting into supermarket and hypermarket formats, private labels are likely to emerge in a big way. Hence, packaging can help -

In providing an identity to the private label brand; act as a communication tool with the consumer

Prove to be an important aspect of the marketing strategy

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Projected size of the Industry as organized retail grows

Signifying a huge opportunity

INR Cr1,600 Incremental Opportunity in Packaging arising from private labelsin India

USD Bn0.4Incremental Opportunity in Packaging arising from private labelsin India

USD Bn6.0Share of private label in organized retail in F&G

20%% share of private label in organized retail

USD Bn30.0Share of organized retail in F&G

INR Cr~70,000 Packaging spend on the F&G segment

USD Bn15Packaging spend on the F&G segment

~6%Ratio of Packing cost to MRP

USD Bn256Retail contribution of F&G

Scenario 2011

Estimate Figures

Technopak Analysis

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Importance of packaging in modern retail…

“The number of brands/variants on display in a hypermarket format is

in excess of 1,700 on average”

[Source : Point of Purchase Advertising Industry in the US (POPAI )]

…can help create a distinct visual impression on the consumer that is instantly identifiable to the brand

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Importance of packaging in modern retail…

“50% of the purchases inside hypermarkets are impulse……

shoppers typically spend only a few seconds to actively compare

different products”

Technopak Analysis

…will be an important means for product differentiation

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Importance of packaging in modern retail…

“Shoppers typically spend 10-20 seconds making their purchase decisions” –

Given this reality, the first challenge is clearly to be seen and considered — hence consistently create an opportunity for sale

…with private label sharing the same shelf space as several brands, its packing will have to be competitive so as to

drive customer attention and purchases

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In addition, several inherent advantages can accrue to retailers in the form of…

Shelf life of products can be increased as a result of new and innovative packaging techniques

E.g. : in case of milk, aseptic packaging technology can increase the shelf life of milk by 6 months

Will also help in unitising the commodity

For better and efficient costing

New packaging technology can prove to be an effective tool in hedging the risk associated with uncertainties in demand & supply -

By having a longer holding period for perishable items

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In addition, several inherent advantages can accrue to retailers in the form of…

Especially in the rural sector in India, the distribution channel is typically long; with the transit time being as high as 1-2 months

Company C & F Stockist Retailer

Wholesaler

Sub

Stockist

Super

Stockist

Proper packaging can help avoid contamination, not only at the front end, but at every stage of the value chain –

especially in case of perishables such as Milk, Oil, F&G –hence reducing wastage across the supply chain

Technopak Analysis

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While there is likely to be big opportunity in packaging as a result of organized retail growth, none-the-less there are several

challenges which need to be managed…

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Current state of the Industry…

Largely dominated by the Small Scale Sector in India

limited scale

limited capabilities

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Need-gap…

However over the next five years,

Packing requirements are likely to increase

Top few players in the F&G category likely to contribute to large part of the market

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Implications…

With the large size of retailers, these players will require large size vendors to be able to cater to the collective packaging needs

Hence the packing players will have to invest in

upgrading technology

increasing scale

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Implications…

Given this scenario, two options may emerge:

this industry is likely to witness consolidation. i.e. small number of large players to be able to handle large capacities

in order to protect the smaller players, institutional support in favour of supporting and forming clusters may also be useful, i.e. hosiery cluster in Tirupur

technopak

Harminder Sahni

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