Research Indian retail

The Indian retail bazaar

Riding on the Indian festival bandwagon. the Big Bazaar hypermart recently offered a 'buy one, get one free' discount opportunity In its 29 stores around tbe counti'y Theresult:recoi-d-breakingsales with customers thronging outside the stores to grab the lucrative offers. This glimpse of frenetic commerce stands testimony to tbe fact that organised retail - a multi-outlet chain of stores run by professional management - is gaining wider acceptance in a country that is still dominated by small and unstructured retailers symbolised by the ubiquitous corner shop.

Case study: Mango - a foreign brand in India

Foreign clothing brands made their Initial forays into the Indian market through their Indian franchises. Spanish business, Mango, was one of the first labels to enter the Indian maricet. Facilitated by Major Brands (I) Pvt. Ltd, it has stucit to an exclusive retail format through franchises in each of the b)g Indian metropolises. As a part of a government regulation that will soon come into play, it will take control of its own stores in india - marking a significant step forward for global players looking to entrench themselves in the indian market. Mango has made strong inroads into the highly active clothing space in India by cashing in on the growing consumer disposable income and the accompanying splurge on clothing and apparel, it has close to 300 stores planned over the next few years. it will be a challenge for the brand to take its proposition to the mass market. However the Spanish giant is undaunted. Autumn-winter this year will see the launch of Mango's first line of watches in India, the design of which is based on the '0* of the Mango logo.

Fragmented market
Organised retail has miles to go in India. It captures only three per cent of the $330bn (176bn) retaii market wbicb is highly fragmented and unorganised, comprising mostly family-owned businesses that leverage their unique selling point of being close to people's homes. Modern retail chains which sprang up fewer than five years ago foresee immense growth potential. A vast swathe of Indian retail is yet to be tapped into. Compare this with organised retail activity in Taiwan and Malaysia: organised retail accounts for 81 % of total retail in Taiwan, whereas in Malaysia, Thailand and China, it makes up 55%, 40% and 20%, respectively With improving infrastructure facilities, especially in cities, and witb government moving in the direction of relaxing rules for foreign brands, the Indian organised retail sector is set to become the new star on the commercial Share in spending- rural versus urban households
Rural Entertainment Consumer services Durables Miscellaneous consumer goods Ctothlng and footwear Food Source; KPMG/Rocsearch
33%

horizon. The entry of the largest domestic business conglomerates such as the Reliance Group, Aditya Birla Group and Bharti Enterprises, bas upped both the capital inflows as well as business confidence in tbe sector. The largely untapped organised retail arena is now viewed as a multibillion dollar proposition by Indian and foreign players. It is backed by a strong economy wbere GDP has more than doubled in tbe last 10 years, a mushrooming middle class, and a young earning population with an appetite for spending

and $22,000 (E1L736). An additional 287 million could be termed as 'aspirers' or those tbat hope to join the middle class in tbe near term. Rising incomes, particularly in tlie lower and middle-income households, are impacting retail growth in India as these groups tend to spend more on upgrading and diversifying their lifestyles, eating out and moving on to processed and convenience foods. The middle class is the hope for lai'ge Indian retail players such as Pantaloon, the Tatas and RPG Enterprises that bave moved beyond the urban sprawl to

that is further spurred by a rapid rise

in the proportion of working women in India.

smaller cities in their bid to gain the firstmover advantage. Also joining them in the fray is Reliance Group, which is expected to change tbe dynamics of competition when it becomes the country's largest modern retailer with an investment of $2.5bn (l.33bn) in 1500 super and hypermarkets by March 2007. Similarly, India's Aditya Birla Group is also investing $2bn (1.1 bn) to roll out a mix of super and hypermarkets across the country by 2007. Bbarti Enterprises is yet another player foraying into this sector with an initial investment of $100m (53.35m) in a tie-up with UK-based global retailer, Tesco.

Indian middle class - the catalyst

A growing Indian middlt' class thut has so far been used to buying apparel and groceries from small and cluttei-ed neigbborhood market shops is fast realising the joys of visiting swanky malls that have redefined the freedom to sbop and entertain. Such malls are the new temples of leisure and weekend entertainment. India's National Council for Applied Economic Research estimates that the nation's middle class population currently comprises about 17 million households - 90 miUion people - with annual earnings ranging between $4,500 (2,400)

Urban
67%

44%
50%

56%
50%

5A

43% 39% 36%

Targeting young workers

The huge and growing young working population is a preferred customer segbrand strategy november 2006

Indian retail Research

ment for major retailers. These young people are early adopters of most modern product lines. The ongoing hoom in sectors such as information technology and husiness process outsourcing has created a clientele with high disposable income and a increased demand for lifestyle merchandise such as watches, cosmetics and perfumes. This is a much-travelled and hrand-savvy urban population. Interestingiy, an estimated 40-50% of the Indian working woman's salary is spent on apparel and footwear. Eating out, mobile phones and accessories make up the other leading spending options. Jewellery stores such as Kiah, Sia and Tanishq specifically target young, working women who have income of their own and are primary decision-makers. Boom beyond the *big six* The Indian organised retail sector has been highly concentrated in six key destinations: Delhi, Mumbai. Bangalore. Chennai, Kolkata and Hyderabad. Currently, 80% of retail sales come from these six leading cities. Tier II cities are 67 towns in India with a population of more than 500.000. housing almost seven per cent of India's population and contributing 13% to the GDP Real estate activity and retail trade have only lately begun moving towards such Tier II cities and there is huge untapped potential here. The availability of cheaper real estate options in these cities is enabling retailers to break-even much faster compared to larger areas. These cities

are also home to a growing number of high income, upwardly mobile lifestyle aspirants. Major retail players such as Pantaloon plan to enter a large number of small cities such as Meerut, Jalandhar, Ludhiana and Kochi. Similarly, Westside's future strategy Includes establishing the hrand in Indian townships with a population of more than 100.000. Then there are malls coming up in the rural hinterland such as ITC's 'Chaupal Sagar' that offers a diverse range of products, from food and cars, to electronic appliances. In order to compete better, retailers are also exploring a variety of retail formats such as business-to-business wholesale superstores, supermarkets. hypermarkets, convenience stores, health and beauty specialty stores and discount stores. Although hypermarkets are a common element in the expansion plans of most retailers, the specialty and supermarket formats offer the strongest potential in India. Apparel rules supreme Clothing and accessories rule the roost in Indian organised retail. They account for the maximum share of 38% in organised retail in India, followed by food or groceries and consumer durahles at 11% and nine per cent, respectively Park Avenue, Chiragh Din, Liberty, Double Bull. Proline and Snowhite are among the leading players catering to the hranded apparel market. It took a long time for global brands such as Allen SoUy and Van Heusen to create a respectable market share in the ready-to-wear segment, especially in the face of fierce com-

Cities by classification and characteristics Tien

Charatteri5tirs High skill availability. infrastructure capabilities and high quality of life Tier 1-1 Characteristics Similar capabilities as Tien cities but with lower visibility Tier 2 Charsrteristifi Emerging cities. attracting new and high-tech industries Cities Kolkata, Man galore. Ludhiana, Chandigarh/Mohali, Bhopal Cities Hyderabad, Chennai, Pune, NOtDA. Guidon Cities Bangalore, Mumbai, New Delhi

Tier 3 Characteristics Cities focusing on IT as a key growth industry but do not have the requisites of infrastructure. facilities and quality of life geared as yet

Cities Mysore, Nasik, Kochi, Nagpur, laipur. Indore. Shimla, Lucknow, Kanpur. Panaii, Srinagar

Source: KPMG/Rocsearch

petition from local brands. Today, there is also a discernible trend towards reverse globalisation in the case of Indian apparel. Indian brands such as Zodiac Clothing have created a niche for themselves in competitive markets such as Holland and the UK. Similarly. Indian leather brand, Hidesign. is being retailed at premium international outlets in South Africa, China. Dubai and Russia. Players in the retail industry are adopting different strategies to compete effectively. In keeping with their scaie and competitive advantage, certain brands have been focusing on regional markets and trying different retail formats. For instance, in food retail. FoodWorld. Nilgiris. Margin Free Market, Giant, Varkey's and Subhiksha are focusing on the regionai markets in South India whereas Sabka Bazaar is present only in and around the capital city of Delhi. With the Indian government still dithering over the issue of allowing direct access to foreign companies in the retail sector through the 100% foreign direct investment (FDD route, domestic
37

Case study: Hidesign - an Indian brand abroad

After tasting success in the Indian market with its leather bags and accessories collection, Hidesign, the Pondicherry-based Indian brand, has begun charting its course internationally. It appears to be doing well. The president of Hidesign, Dilip Kapur, has invested $<|ni (2ni) in joint ventures in Dubai. Malaysia, South Africa, Russia, US, and more recently in China, Denmark and Sweden. The diversification is not just into geographies but also into related product groups such as clothing. In the president's own words, the objective for Hidesign is to feature among the top luxury brands in the world through around loo targeted stores over the next two years. The company has also roped in Alberto Sciaccinj, the one time chief designer of leather products at Emporio Armani, to work on its range. Mooring forward, Hidesign wiUoffer customised solutions enabling Its customers to choose from an array of leather, designs and styles for making their own unique bag.

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Research Indian retail

players have been experimenting with innovative retail formats and value propositions. Foreign players on the fringe Large foreign retailers such as Wal-Mart and Tesco are currently watching from

the sidelines but they are hopeful that they can find a direct entry into the Indian retail market. Many foreign companies have also been exploring possible alternative entry routes such as brand licensing, franchising, cash & carry and wholesaling,

How malls will alter the retail landscape and shopping experience

$64.3

Co-existence of muttiple formats, but modern formats with international shopping experience are gaining popularity Historic/ rural reach Traditional reach Governmentsupported Modern formats/ international
Exclusive brand outlets/ Supermarkets Departmental stores Shopping malls

FY 2005

FY 2oio(e)

FY2OJ5(e)

Source: Morgan Stan ley/RocSearch

Weekly markets
Mela's

Mom and Pop/ Local Kirana store

PDS outlets Khadi stores Co-operatives

Source of entertainment

Neighbourhood stores

Availability/ low costs

Shopping experience/efficiency

Value proposition for customers at each stage

Source: ICICI/Rocsearch

Organised retaii is moving from being a 'novel' experiment to expected backend innovation and scale build-up

Retailers strengthen backend systems and supply chain Consumers demand variety in New retail entrants driving top line growth 2002 Flrat phase 2004 Second phase 2006 Third phase

Gmsolidatloti actMty

2007+ Fourth phase

Source: HSBC/Rocsearch

Growth in income (million households)

Key: Low income Mass affluents High Income Bo 70 60 50 40 JO 30
iO O

14.3V'-''

where 100% FDI is allowed, apart from online retailing. Some of the foreign brands that have successfully ventured into the Indian marketplace include Metro, Shoprite, Louis Vuitton Moet Hennessy, Marks & Spencer, Mango and Versace. The recent permission granted to the foreign players for operating exclusive branded stores with 51% FDI is a really positive step, both for international brands and the local Indian retail sector as whole. Foreign brands that currently operate through various routes generally position themselves to cater to the requirements of a niche category of buyers. For instance, Spanish womenswear retailers such as Mango prefer standalone stores and are positioned at highstreet locations with upmarket environments such as shopping malls. Similarly, the Canadian lingerie brand. La Senza, and the French womenswear line, Promod, are targeting women who have travelled internationally and want to look like their counterparts in foreign countries. The level of competition between the domestic players as well as between local and foreign brands has started getting intense. But the foreign players do not as yet enjoy as much leeway as their Indian counterparts. The future of Indian retail From its current $10bn (5.3bn), the Indian organised retail sector is expected to grow into a $64bn {34.2bn) enterprise by 2015. Witb tbe retail pie continuing to expand on the back of rising disposable incomes and spending power, both domestic retailers as well as foreign
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1996
Source: NISSO, AC Nielsen, NCAER and Rocsearch

2005

indian retail Research

Shopper type by gender Male Female

Changing demographics in India

% population 0-14 years 15-64 years over 65 years 199S 344 61.0 4.6 3003 32.3 63.1 4.8 1008 30.0 64.9 s>i

79

India is increasingly being acknowledged as a Voung" nation, with about 35% of its population Less than 14 years of age Strong demographic growth is predicted in the main consumer age (15-64) The proportion of the Indian population in the consuming age class (15-64) will increase the most over the next few years The median age of India's population is 24 years

Source: NISSO, AC Nielsen. NCAER and Rocsearch

Youth are early adopters of most modem products and are emerging as the target market for consumer goods Source: ElU, August 2004 and Rocsearch

Organised retail: segment share 2005 Apparet and accessories

Food & grocery Consumer durables Footwear Furniture ^ Catering Mobile phones Books, music and gifts Jewellery Entertainment Health & beauty care services
Source: HSBC, India Retail Report 2005 - KSA Technopak, E&Y and Rocsearch

38%
11%

9%
ng

9% 8% 7% 3% 3% 3%
2 ': 2%

1%

Comparative penetration of organised retail Traditional Organised

100
3%

players Eire expected to capitalise on the latent potential in the Indian marketplace. While new entrants are driving topline growth, the Indian retail industry is still in its preliminary phase. As of now. minor instances of strategic alliances have heen reported in a bid to expand product range. For instance, Future Group (owners of Pantaloon and Big Bazaar) has formed alliances with hrands such as Liberty Shoes. Unitech Enterprises and Planet Sports to expand its ranges of footwear and home products. Industry watchers expect consolidation to happen only after 2012 when the players should have bolstered their logistics and supply chains. Still in its nascent stage, the Indian retail sector offers strong growth potential. Jeffrey H. Cohen, global head of retail investment banking at UBS, noted that: "Lack of consolidation and strong economic fundamentals promise huge potential for the Indian retail sector". Perhaps he'll be queuing up for Big Bazaar's next discount offer with everyone else. Matloob Hasan Li senior research analyst, Aneesh Issar is associate manager. Gayatri Ojha. senior associate and Bhanu Pratap Singh is research editor at Rocsearch India, a knowledge services outsourcing firm hased in the UK and India. For information about the full report 'Indian Retail Industry - An Analysis' contact: gayatrLojhaiairocsearch.com

60

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>' ^^'
Source: HSBC, India Retail Report 2005 - KSA Technopak, E&Y and Rocsearch

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