Opportunity in Indian Retail

GRAPH
Organized retailing is spreading and making its present felt in different parts of the
country. Several growth drivers are responsible for this boom of retail industry.
There has been an increase in the presence of MNCs. The industrial boom has led to the
emergence of new residential areas with aggregation of professionals as well as rapid
increase in the number of ‘double-income’ households and growth of the rich/upper
middle class with increased purchasing power. This has been combined with the
increasing need for touch and feel shopping, especially for the large migrant population.
All these factors have together acted favorably in nurturing the industry.
One of the main influences in the growth of retail industry is the consumer pull. In fact
this seems to be the most important driving factor behind the sustenance of the industry.
With the increase in double-income households, working women, there is an increasing
pressure on time with very little time available for leisure. So under these circumstances
people are preferring the convenience of one stop shopping. They are also seeking speed
and efficiency in processing, as a result.
Being more aware, consumers are on the lookout for more information, better quality,
hygiene and as well as increased customer service. These changes in consumer behavior
also augur well for the retail industry.

Though lucrative opportunities exist across product categories, food and grocery,
nevertheless, presents the most significant potential in the Indian context as consumer
spending is highest on food. Further, ‘wet groceries’ i.e. fresh fruits and vegetables is the
most promising segment within food and grocery though initially all retailers foraying in
to this segment had to face had wide spread protest from traders, small shop keepers.
The next level of opportunities in terms of product retail expansion lies in categories such
as apparel, jewellery and accessories, consumer durables, catering services and home
improvement. These sectors have already witnessed the emergence of organized formats
though more players are expected to join the bandwagon. Some of the niche categories
like Leisure and entertainment (Books, Music and Gifts in particular) offer interesting
opportunities for the retail players.
Currently the fashion sector in India commands a lion’s share in the organised retail pie.
This is in line with the retail evolution in other parts of the world, where fashion led the
retail development in the early stages of evolution and was followed by other categories
like Food & Grocery, Durables etc. Fashion across lifestyle categories makes up for over
50 per cent of organised retail and with the kind of retail space growth that India is
witnessing we can certainly foresee a very healthy prospect for the fashion industry.

Low cost of operations

•Existing players are increasingly turning to tier-II and tier-III cities for opening retail
establishments and manpower sourcing.
•These cities offer significant cost advantages in the form of low-cost skilled resources
and attractive lease rentals/real estate prices.
•Well-educated small town graduates turning to urban cities for employment are ideal
candidates for sales and marketing executive roles in modern organised retail formats.

Rural Retail: Retail sector offers opportunities for exploration and investment in rural
areas, with Corporates and Entrepreneurs having made a foray in the past. India's largely
rural population has caught the eye of retailers looking for new areas of growth. ITC
launched the country's first rural mall ' Chaupal Sagar', offering a diverse product range
from FMCG to electronics appliance to automobiles, attempting to provide farmers a
one-stop destination for all of their needs. There has been yet another initiative by the
DCM Sriram Group called the ' Hariyali Bazaar', that has initially started off by providing
farm related inputs and services but plans to introduce the complete shopping basket in
due course. Other corporate bodies include Escorts and Tata Chemicals (with Tata Kisan
Sansar) setting up agri-stores to provide products/services targeted at the farmer in order
to tap the vast rural market.

The first challenge facing the organised retail industry in India is: competition from
the unorganised sector. Traditional retailing has established in India for some
centuries. It is a low cost structure, mostly owner-operated, has negligible real
estate and labour costs and little or no taxes to pay. Consumer familiarity that runs
from generation to generation is one big advantage for the traditional retailing
sector.

In contrast, players in the organised sector have big expenses to meet, and yet
have to keep prices low enough to be able to compete with the traditional sector.
High costs for the organised sector arises from: higher labour costs, social security
to employees, high quality real estate, much bigger premises, comfort facilities
such as air-conditioning, back-up power supply, taxes etc. Organised retailing also
has to cope with the middle class psychology that the bigger and brighter a sales
outlet is, the more expensive it will be.

The following are the key challenges of retailing:

• Large transactions: Retailers need to handle smaller transactions in large numbers and
still be able to make money.
• Low price strategy: The Indian consumer being value-conscious, a Key to success for
many retailers is the ability to attract customers by offering low price guarantee.
• Aggressive sales, discount and collection schemes (say, credit facilities.) and thus keep
the enthusiasm going.
• Indian consumer behaviors - Retailers need to conduct MRs and behavioral studies into
the Indian psyche simply because he is so different from those in the west and in fact,
different from other Indian
consumers. His shopping patterns need to be analyzed in detail.
• Location: A prime location in the city/town so a big plus. Things such as waiting and
parking areas need to be taken care of.
• Use of information technology (IT) in developing a supply chain and integrating all the
retailing processes from procurement to after sales.

Challenges of Retailing in India

In India the Retailing industry has a long way to go,and to become a truly flourishing
industry, retailing needs to cross the following hurdles:

* The first challenge facing the organized retail sector is the competition from
unorganized sector.

* In retail sector, Automatic approval is not allowed for foreign investment.

* Taxation, which favors small retail businesses.

* Developed supply chain and integrated IT management is absent in retail sector.

* Lack of trained work force.

* Low skill level for retailing management.

* Intrinsic complexity of retailing- rapid price changes, threat of product obsolescence

and low margins.

* Organized retail sector has to pay huge taxes, which is negligible for small retail
business.

*Cost of business operations is very high in India.

Growth drivers in India for retail sector

• Rising incomes and improvements in infrastructure are enlarging consumer markets and
accelerating the convergence of consumer tastes.

• Liberalization of the Indian economy

• Increase in spending Percapita Income.

• Advent of dual income families also helps in the growth of retail sector.

• Shift in consumer demand to foreign brands like McDonalds, Sony, Panasonic, etc.

• Consumer preference for shopping in new environs

• The Internet revolution is making the Indian consumer more accessible to the growing
influences of domestic and foreign retail chains. Reach of satellite T.V. channels is
helping in creating awareness about global products for local markets.

• About 47% of India’s population is under the age of 20; and this will increase to 55%
by 2015. This young population, which is technology-savvy, watch more than 50 TV
satellite channels, and display the highest propensity to spend, will immensely contribute
to the growth of the retail sector in the country.

• Availability of quality real estate and mall management practices

• Foreign companies’ attraction to India is the billion-plus population.

GROWING ECONOMY
Potential for all Formats to Thrive :
Most of the global powerhouses in the retailing sector such as Wal- Mart, Carrefour,
Tesco etc have adopted multi-format and multi-product strategies in order to customize
their product offering for distinct target segments. Similar trends

Identifying the future

The important thing is to identify the 'future that has already happened' - Peter Drucker
The important and distinctive are always the result of changes in values, perceptions and
goals of people. Identify the changes that have already happened, exploit the changes that
have already occurred and use them as opportunities. Dr William T Wilson, Chief
Economist for Keystone India ñ a Chicago-based firm providing cross-border trade
facilitation and asset management services in US are likely to be exhibited in India as all
formats present prospects for growth, the Report says. Further, with the emergence of
larger store formats like superstores and hypermarkets in countries like UK, France,
Germany, Spain since the 1980s and Eastern Europe more recently, traditional food
retailers have been able to stock more extensive non-food ranges. In fact, Tesco, UK's
leading grocer, has become the number one apparel retailer in the Czech Republic and
also a major player in Hungary apart from being one of the fastest growing clothing
retailers in the UK. Together with its rival, Wal-Mart-owned ASDA, Tesco is one of the
food sector's most successful exponents of clothing in Europe

DISPOSABLE INCOME
There is no point complaining, accusing or justifying that retailing business is only for
larger players and multinational retailing companies. That's total rubbish and rather an
assumed limitation. Recent research finding is that by the year 2010, India will have at
least three million people with an annual income of over Rs 4,000,000. Mind you, this is
the official, declared and straight income meaning there will be a considerable number of
consumers with other sources of income! (I suppose). One could comfortably presume
that one fourth of the three millions would reside in Bangalore. Considering the third
successive year with great economic growth in India, it is obvious that we shall have
more people with higher disposable income. With higher disposable income, the
discerning Indian consumers are not going to be conscious about price alone. This
emerging consumers would want something special, unique, different, better, customized
and more. Find the synonyms and transliterate these into value offerings in your field of
business and you have a gold mine, especially when you manage to connect with the
customers' value and perception and India, said that after significant accelerations in
economic growth recently, India's economy is expected to equal or surpass Japan as the
world's third largest sometime in the year 2006. Dr Wilson also added that India's
economy measured in PPP (purchasing power parity) terms will eclipse the US$ four
trillion mark in 2006, making it equal to or greater than Japan's. Indian consumers are
getting richer noticeably leading to higher disposable money.

RISING INCOMES
Over the past deacde , India’s middle and High Income group has grown at a rapid pace
of over 10% per annum. Though this growth is most evident in urban areas, it has also
taken place in rural markets. Further, the number of house holds earning above
Rs.150,000 per annum is about 30 million today and is expected to grow to 80 million by
2007. This growing high-income population is triggering the demand for consumer
goods, leading to the proliferation of Higher quality/higher priced products.

EXPLOSION OF MEDIA
There has been an explosion in media as well during the past decade . Kick-started by
the cable-explosion during the gulf war, television has accelerated to a pint where there
are more cable connections than telephones in Indian homes and more than 100 channels
are being aired at all times .This media bombardment has exposed the Indian consumer to
the lifestyles of more affluent countries and raised their aspirations from the shopping
experience – they want more choice , value , experience and convenience.

Private Labels
Brands, store labels, private label brands, store brands. These terms may seem to be
synonyms of each other. However, when it comes to retailing, each of these terms has a
different meaning. While we all know what a brand is, a private label and a store label are
different from any other brand because they are product lines that are owned, controlled,
merchandised and sold by a specific retailer in its own stores. Among Indian retailers,
Stop, Life and Kashish by Shoppers' Stop, and ETC by Ebony are private label brands.
According to Synovate, is the market research arm of global communications specialist
Aegis Group, the growth of private labels is about 2-3 times more than that of advertised
brands .Among the product lines launched by retailers, the ones whose nomenclature is
the name of the store itself are called store labels. Foodworld and Nilgiris have launched
their own brand of supermarket products under the "Food world" and "Nilgiris" brand
names. There is a distinct advantage in naming the brand launched by the retailer after the
same name as that of the store. But at the same time, the store label also carries the
burden of not only the success of the brand, but also the failure, which may have a
negative rub-off effect on the retailer's image. A store brand on the other hand is a brand
name the retailer carries. Each retailer, because of its unique offering, is a brand in itself,
which is what the store brand signifies. Nallis, Modern Bazaar and The Home Store are
store brands since each of them stands for a certain retail offering.
 Retailers are now aggressively moving into developing their own private labels as it not
only makes economic sense in the form of retailers achieving higher margins, it also
helps them to plug gaps in their product portfolio. For instance, in menswear, retailers say
that gross margins on branded products vary from 25-38 per cent. Compared to that, the
retailers can earn whopping margins of around 55-60 per cent on private labels. Private
label products contribute to a retail brands differentiation. A retailer can achieve
differentiation through a large (but not necessarily exclusive) portfolio of private label
products. Service adds to the differentiation, and together with a unique product range,
results in a strong retail brand. They are not perceived as being interchangeable with
similar private label products launched by other retailers (unlike manufacturers of
branded products, which are the same regardless of the retailer). Introduction of an in
house brand of products helps the retailer to have means with which they can compete
head on with the other branded products. An established private label brand provides the
retailers a platform to negotiate with suppliers, and the retailers are thus self-sufficient in
a certain category. They have more control over the merchandise and are able to make the
required changes and modifications to suit the changing customer profile much quicker.
This brings about a more consistent and acceptable product portfolio, which also helps
reduce mark-downs. A retailer can create a stronger emotional connect with the consumer
as the experience is not just the store experience but also the product experience. An
outside brand could be purchased from any outlet. This is not so in the case of private
labels, so the product experience keeps bringing the consumer back

Factors estimated to propel the growth of the organized retailing

Increased Purchasing Power

The National Council of Applied Economic Research classifies households into five
categories—lower, lower middle, middle, upper middle and high. The movement of
households within these income categories reflects the changing dynamics of the Indian
market. 33% of Indian households are in the middle- to high-income category in 2004.
This is projected to increase to 49% by 2010. The impact of increasing income levels is
reflected in the sales trend for high involvement products like cars and multi-utility
vehicles (MUVs) in the Indian market. The Society of Indian Automobile Manufacturers
registered growth in commercial vehicle segment a rate of 10%. While the M&HCV
segment has grown by 4.5%, the LCVs grew by more than 19% during 2005-06 as
compared to 2004-05.

Changing Consumption Patterns

The rapid pace of organized retailing is fueled by changing consumer habits in both cities
and large town by (DINKS) Double income no kids group and increased aspirations
caused by exposure to the satellite television, cable and other channels. The growth for
the changing habit patterns would be affected by the mobile telephones (new product
categories like ring tones estimated at INR 400 crore) and increasing credit-card usage
(estimated to reach 21mn the end of 2006).

Young Indian Consumers

The Indian consumer segment is the youngest in the world with a median age of 24 as
compared to other developed nations. With fertility rates at an estimated three children
per woman and a population growth rate at 1.6% pa, the population is expected to
continue to grow to 2050. There should also be a big surge in the 20-34 age group—up
from 210m (25%of the total population) in 1991 to an estimated 312m (27% of the total
population) by 2010. This increase in population would lead to acceleration of demand of
personal care products and personalized financial services.

More Available Retail Space

The boom in the retail sector is also associated with the rise of mall all across the country.
There are 220 mall project in the pipeline till 2007, 139 in the big 8 cities including the
metros and 81 in other Tier II cities. Developers are keeping in mind the astonishing pace
with which the new supply is expected to enter the market and are developing ‘specialty
malls’ and other propositions to offer a different experience to the changing consumer.

Easier Financing
Interest rates have dropped down over a couple of years making it much easier for
investors to develop a mall and economically viable for retailers to set up shops. The fall
in real-estate prices as well as lower borrowing rates still ensure that current rental yields
are attractive for developers.

Improved Logistics and Better Infrastructure

Infrastructure spending has improved the state of India’s roads and transport system.
Connectivity has enabled the faster movement of goods, especially perishable goods,
from one part of the country to another. Logistics has improved, enabling more efficient
retail operations. Retailers have benefited from the improved infrastructure, and further
improvements should only increase the benefits to retailers. As the retailers continue to
grow their presence, there is going to be an imminent need for a single, enterprise-wide
IT platform to manage operations.