IndianRetail: https://www.in.kpmg.com/SecureData/aci/Files/Indian_Retail_Mar09.pdf Timetochangelanes KPMG IN INDIA C O N S U M E R M A R K E T STheadventofNewYear2009heraldedinterestingyetchallengingtimes fortheGlobalRetailindustry.TheIndianretailindustryoneofthe fastestgrowingindustriesinthecountryoverthepastcoupleofyears isnoexception.While2008showedgrowthfortheindustryonthe whole,thelastquarterof2008wasimpactedbytheeconomic slowdownandliquiditycrunch,andthisisexpectedtocontinueinthe currentyear.

Theyeargonebywaspackedwithseveralsignificantdevelopmentsfor theIndianretailindustry,includingtheentryofmanyglobalplayers, growingacceptanceofthemodernformats,thesuccessofmany specialityretailformats,andtherisingcompetitionintheregional marketsbeyondthemetrosandTier1cities. Ontheotherhand,theaftereffectsoftheglobaleconomicturmoilare beingfeltinIndiaaswell,andtheeconomyisexpectedtogrowata significantlylowerrateoverthenext2years(between5to7percent accordingtovariousestimates* ).Consequently,overallconsumption levels,particularlydiscretionaryspendandimpulsepurchaseshavebeen affected,which,inturn,hasresultedinalowergrowthrateforthe industryforthecurrentyear.Moreover,thistrendisexpectedtocontinue in2009. Giventheindustryschanginglandscapeandemergingchallenges,the focusofindustryplayerstooischanging;withastrongemphasison

profitablegrowthinthecurrentscenario.Hence,retailcompaniesare increasinglyconcentratingonstrengtheningexistingoperationsand assessingoptionsforgrowththroughconsolidation,whilecontinuingto innovate. Lookingatthechangingcontoursoftheindustry,therearecertaindrivers whicharelikelytohaveanimpactacrossretailcategories,andwehave examinedthesedriversindetailinthisreport.Factorslikerenegotiating rentals,storerationalization,workingcapitalmanagement, regionalization,costoptimizationandmanpowerresizingaresomeofthe keyTopofMind(TOM)issuesforretailersinthecurrentcontextofthe downturn.Wehavefocusedonhowthesedriversareaffectingvarious playersacrosstheretailvaluechainandtheirstrategiestohelpcopewith theslowdown. Theanalysesandpointofviewpresentedinthereporthavebeen validatedthroughextensivediscussionswithindustryplayers.Wetake thisopportunitytothanktheindustryplayersformakingthisendeavor possible. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Foreword *IMF,CushmanandWakefieldReport,20092009KPMG,anIndianPartnershipandamemberfirmoftheKPM Gnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Table of Contents ExecutiveSummary 01 IndiasRetailJourney-Fromgearfivetogear 04 Livinginuncertaintimes 06

DisappointingFootfalls 07 Margincontraction-Interestburdenadverselyimpactsprofits 08 Rolloutdelaystocompoundproblems 09 Besidestheweakeconomyandthefeebleconsumersentiments, thedisappointingretailgrowthisalsoattributedto 10 Mistakesbyretailershavealsoaddedtoexternaltroubles 11 Strategiestohelpretailerscopewiththeslowdown 12 Tougheninternalefficiencies 13 Decodeconsumerbehavior 21 Enteringintoalliancesandleveragingexpertise 23 Buildacompetentsupplychainmanagementsystem 27 Ventureintounderpenetratedmarkets:RuralRetailing 28 Innovate:categories,services,businessmodels 31 FutureOutlook 332009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. TheIndianRetailsectorhascaughttheworld simaginationinthelastfewyears. Toppingthelistofmostattractiveretaildestinationlistforthreeyearsinarow,it hadretailgiantslikeWal-Mart,CarrefourandTescosizinguppotentialpartnersand waitingtoenterthefray.1 India sretailgrowthwaslargelydrivenbyincreasingdisposableincomes, favorabledemographics,changinglifestyles,growthofthemiddleclasssegment andahighpotentialforpenetrationintourbanandruralmarkets.However,with theonsetoftheglobalfinancialcrisis,Indianretailershavebeensufferingfrom theeffectsofrapidcreditsqueeze,highoperatingcostsandlowcustomer confidence.

TheimpactofcurrentslowdowninIndianretailsectorissummarizedalongkey operatingparametersasfollows: EXECUTIVE SUMMARY TopLine/Sales Tu r n ove r BottomLine/Profitability CostCompetitiveness CostofFinance StockTurns/Rotations WorkingCapital Availability RealEstateAvailability RealEstateCost StoreExpansion Footfalls TierII/IIIExpansion AdvertisingSpends Attrition Headcount/Recruitment InvestmentsinIT IntensityofConsumer Promotions Impact of slowdown on key parameters 1 ATKearney'sGlobalRetailDevelopmentIndex(GRDI),2008 Source: KPMG Retail Survey, March 2009 PositiveImpact NoImpact/StatusQuo AdverseImpact 12009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Strategies to help cope with the recession Inthisreport,wehavesuggestedstrategiesfortheretailsectortohelpcope withimpactofslowdownandvalidatedthemthroughextensivediscussionswith keyplayersintheindustry. ManageCosts

Optimizecosts(Cutcostsinawaythatdoesn tharmthe business)andoptimizeresources.Keyamongstthemare: -improvelaborproductivity -manageinventoryefficiently, -renegotiatetherentals Adoptarevenuesharemodelagainstfixedsharemodel Optimizetechnologyusage Implementtechnology speciallyinareasofmanpower training,realestatemanagement,supplychainandlogistics managementandday-to-daystoreoperations Efficientstoremanagement Streamlinestoreprocesses,increasestorevisibility,manage staffeffectivelyandlookintostorelayoutandproductrange Re-evaluatestoreviabilityandexpansionplans Classifystoresclearlyintocategories:profitable,highcost-high sale,lowcost-highpriceandunviableandtakeaction accordinglyforeachcategory Decodeconsumerbehavior Investinconsumerresearch,payingcloseattentiontothe diversitypresentinIndia sgeography,tobemoresharperin delivery Enterintoalliancesandleverageexpertise Forgealliancesandpartnershipstoleverageoneachother s financialmuscleandexpertise Developprivatelabels

Offercompetitivein-storelabelstoearnhighermargins a win-winsituationforbothcustomerandretailer(thekeyisto improvequalityofin-storebrand) Buildcompetentsupplychainmanagement Focusonlogisticsintermsofminimizingthecostsand knowledgeaggregation Leverageontechnologyandexpertiseofforeignplayers Tapunderpenetratedmarkets Thinkbeyondthemetropolitancities,targettheopportunity offeredbytherapidlydevelopingandlargelyunder-penetrated TierII,TierIIIandruralmarkets Innovate Standoutofthecrowdandkeepofferingnewideas,services, experiencestothecustomers 22009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Some of our thoughts on future outlook and how it may impact behavior in retail sector are as follows: Itiswidelybelievedthatthecurrentslowdownmightlastfor12 18monthsdependingongovernmentincentivesinincreasingspendsoninfrastructure, developmentinitiativesandotheractivitiestostimulatetheeconomy Weexpectanincreasedfocusonvalueretailinthecomingmonthsandashift awayfromlifestylegoods,thankstotheimpactofthecurrentslowdown ThereisexpectedtobeincreasingactioninfoodretailingandFMCGproducts

asthissegmentislargelyinsulatedfromtheslowdown,whilesectorssuchas homefurnishingarelessfavored Retailersarelikelytostartclosingunprofitablestoresandrationalizecapital expenditure,asapartofcostoptimization Churninmallsislikelytoincreaseintheshorttermwhensomeretailersopt forlow-rentpremisesasameansofsustenanceinthecurrenteconomic situation AsTierIcitiesbecomesaturated,retailersmaymovetoTierII,TierIIIcities whereprofitsarehigherduetolowerrentalsandoperatingcosts Therearegoingtobeincreasedinvestmentsinshorteningofsupplychain. Thisismainlyduetotheincentivesofferedbythegovernmentandthe potentialforhigherprofitmargins Thefrequencywithwhichretailersliquidateslow-movinggoodsbyoffering discountstoreduceinventoryislikelytoincrease. Thelongtermprospectsforretailchainexpansionarestillveryattractiveandthis periodofuncertaintyisseenbyretailersasanimportantconsolidationimperative foranindustrythathasbeengrowingat30-40percentp.a.2 overthepast decade. 2 JonesLangLasalleMeghrajReportonIndiaRetail2008 32009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Inthepastfewyears,India sretailjourneyseemedpictureperfectwith themostattractive stops stillunexploitedandunder-penetrated.

Favorabledemographics,steadyeconomicgrowth,easyavailabilityof credit,andlargescalerealestatedevelopmentswerefuellingthegrowth ofIndia sapproximatelyUSD25billion3 organizedretailmarket.The opportunitywasthereforalltoseeandIndiawasthedestinationof choicefortopglobalretailers.Inthisenvironment,India sownbluechip companieslikeReliance,BhartiandRPGdiversifiedtoaddretailtotheir sectorportfolio4 Allthingsconsidered,itwasagoodtimeforIndian. retail. Thiswasthescenariotillafewmonthsago.Entertheglobalmeltdown andIndiadidnotfinditselfcompletelyinsulatedfromitsharsheffects. AspertheCartesiansurvey,almostallkeyindustriesinIndiahavebeen negativelyimpactedbytheslowdownandretailisnoexception. Source: Cartesian Economic Meltdown Survey, Dec 2008 An impact score of 0-15 indicates low impact An impact score of 16-50 indicates moderate impact An impact score of > 50 indicates high impact 3 IBEF 4 Reliance, Bharti and RPG group websites Industry-wise Impact INDIA S RETAIL JOURNEY FROM GEAR FIVE TO GEAR... 42009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

WiththeQ3growthnumbersofFY2008-09at10-12percentasagainst 35percentofthepreviousyear,the happygrins arefastturninginto nervoussmiles .Whilethesectorisstillregisteringdecentgrowth,the heavyinvestmentsmadeduringtheboomperiodmayweightheretailers down. Organized retail penetration, which was expected to touch 16 percent by 2012 from the current 5 percent, is likely to trace 10.4 percent only Source:KPMGAnalysisandRetailersAssociationofIndia Organized retail penetration - Gap created by slowdown 52009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. As per KPMG s survey, even though almost all retailers believe that the current uncertainty is only near term and is likely to persist for 12-18 months, there exists certain degree of skepticism in achieving targets. This is clearly indicated by the Cartesian study where 53 percent of retailer s confidence levels have been shaken. Source: Cartesian Economic Meltdown Survey, Dec 2008 LIVING IN UNCERTAIN TIMES 6 Retailer s Confidence level in achieving targetsDisappointing Footfalls Alargenumberofretailershaveexperiencedadropinfootfallswhichis mirroredbyslowingSameStoreSales(SSS)growthfigures.Thisalso adverselyimpactsthetimetakentobreak-evenfornewstores.SSSat someofIndia sbiggestretailgroupshavebecomenegativeforthefirst timeinsixyears.

Althoughretailersaretryingtheirbesttocombatthisslowdownthrough constantpromotionaloffersanddeepdiscounts,consumersare expectedtocutdownontheirdiscretionaryspending.Withtheglobal recessionhavingnoclearendinsight,consumersseesenseinsaving forarainyday. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. According to KPMG s survey, 70 percent of the respondents stated that the slowdown has adversely affected their footfalls. Source: KPMG Analysis, Prowess 7 Year-on-Year Net Sales GrowthLiquidity under pressure Theslowingsalesareresultinginlowerinventoryturnoverandincreasingworkingcapital requirementsforretailers.Thisinturnhasresultedinliquiditypressuresformanyretailers.To freethecashthathasbeenlocked,alargenumberofcompanieshavebeentryingtoreduce theinventoryontheirbooksandshortenworkingcapitalcycles. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Margin contraction- Interest burden adversely impacts profits Ontheirpart,retailershavebeentryingtocompensateforfallingsalesbycurtailing expenses.Thishascounteredtheeffectofthetoplineonoperatingmarginsleavingitlargely unaffected.However,withworkingcapitalrequirementsandexpansioncapitalbeingfinanced throughsizeabledebt,interestcostshavesignificantlydentedthebottomline. Working Capital on the rise Operating Profit Margin

Net Profit Margin Decline in Inventory Turnover Source: KPMG Analysis, Capitaline Note: Retailer Average Source: KPMG Analysis, Prowess 8Funding constraints Alargenumberofretailersarehighlyleveragedandrelyonfreshequity fundingforgrowth,whichisdifficulttocomebyinthecurrentmarket. Banksareincreasinglyhesitanttofinanceretailersinthecontextof fallingdemandandlowprofitability.Workingcapitalrequirementshave alsobeendifficulttomeetas60percentofKPMG ssurveyrespondents confirmedthedryingupofcredit. Roll out delays to compound problems Theorganizedretailspacewasexpectedtoreceiveinvestmentstothe tuneofUSD25billionoverthenext4-5years5 Howeversignificant. delaysinretailrealestatedevelopmentandoppositiontoorganizedretail hasresultedindelaysininvestment.Alargenumberofretailershavenot beenabletomeettheirstatedexpansionplans.Currently,withhigher costoffundsandaslowdownindemand,developersarelikelytodelay moreprojectsinthenearfuture. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. The slowdown and delay in development of quality malls have hindered our expansion plans to a large extent. -- Amit Kumar, Head, Retail, Fashion@bigbazaar

Pantaloon Retail: Delay in plans Source:Edelweiss Research 5 www.ibef.org 9Besides the weak economy and the feeble consumer sentiments, the disappointing retail growth is also attributed to Poor supply chain management and weak support infrastructure Poorinfrastructure Underdevelopedsupplychains,lackofstrongcold chains,poorwarehousingfacilities,badroads,etc.havebeen contributingtoincreasedlogisticcostsfortheretailers.Globally,the logisticscostcomponenttothetotalretailpriceisaround5percent, whileinIndiaitisashighas10percent.6 AbsenceofamatureThirdPartyLogistics(3PL)industry Poor infrastructure(roads,communicationandpower)makeslogisticsand transportationinIndiaextremelydifficult.Further,internaloperationsof retailers,suchaswarehouseprocessesanddistribution,areusually fairlyadhocandinefficient.Retailersarekeentooutsourcetheir logisticsto3PL.Butthereisanabsenceofamature3PLplayer providinghighservicelevelsatcompetitiveprices. Fragmentedsupplybase Thesupplybaseishighlyfragmentedwitha largenumberofintermediariessqueezingthemarginsofallinvolved, whichalsoincludestheretailer.Thisnotonlyhasanadverseaffecton themarginsbutalsoresultsincasesofmishandling,theftand increasedinstancesofshrinkage. Rentals skyrocketing to all time high

Asrealestatepricesskyrocketed,retailrentalsalsotouched unsustainablelevelseatingdirectlyintotheprofitmarginsofretailers. Untilafewmonthsback,storerentalswere300to400basispoints higherthaneveninternationallevels.RetailrentalsinLinkingRoadin Mumbai,SouthExtensioninDelhiandBrigadeRoadinBangalorehave risenabout50percentinthepast3years7 . 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Rentals eating into profit margin of retailers 6www.cmai.in 7JonesLangLasalleMeghrajReportonIndiaRetail2008 Source: Jones Lang Lasalle Meghraj Report on India Retail 2008, KPMG Analysis 10Mistakes by retailers have also added to external troubles Crowding in unattractive locations Anotherreasonforslowgrowthinorganizedretailispoorchoiceof locations.ClusteringisacommonthemeinretailinIndiaandretailmalls appearwhereverrealestateisavailableratherthanwheretheyare actuallyneeded.Thishasresultedinattractivecitycentersbeingdevoid ofmallsandnewlydevelopedareashavingtoomany. Inability to compete with traditional retail Organizedretailershavenotbeensuccessfultoprovideservicesthat matchthoseofkiranastores.Thetruereasonoftheirtroublesisthatthe businesscapacityofthekiranashopownersandbuyersishighinIndia.

MomandPopstoresalreadyhaveamodelthatispreferredby consumersandisalsocostefficient.Thebigstoresarestilltryingtoget theirmodelrightinprovidinganalternativetoneighborhoodretailerswho offerconvenience,creditandpersonalizedservice. Over reliance on debt funding Therapidexpansioninretailspaceinrecentyearswaslargelydebt funded.Thishasresultedinsubstantialleverage,whichhasaddedto retailersfinancingrisksintherecentscenario.Thedeclininginterest coverageclearlyindicatedthatalargenumberofretailersarehighly leveragedandarebattlinghighinterestpayments. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Funding is the biggest issue for us. We are borrowing at 14-15 percent and this high cost of borrowing has forced us to keep our major expansion plans on hold, - Ambeek Khemka, President, Vishal Retail. Whateverbethereason,webelievethatplayerswhotakeimmediate strategicmeasuresarelikelytobethedarkhorses.Beitstore rationalization,changeofsupplychain,consolidationofoperations, improvementinITinfrastructure,retailersneedtothinkquicktoprotect

theirmarginsandtoughenupformorechallengingtimes. Interest coverage declining across players Source: KPMG Analysis, Capital IQ 112009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Consumers are currently sitting on the fence and the challenge for retailers will be to offer the right baits to get them back to stores. Retailers have to focus on growing profits through sales growth and not mere cost-cutting strategies. There will be a sharp cut in overall sales growth this year, but a marked improvement in bottomlines with players focusing on efficiencies"- Kishore Biyani, Chief Executive Officer, Future Group Source: The Economic Times, 30 January 2009 STRATEGIES TO HELP RETAILERS COPE WITH THE SLOWDOWN 12Toughen internal efficiencies Managing Costs: Subduedquarterlyresults,staffingcutsandfrozenbudgetshave increasedthescrutinyoneachrupeespent.WhenKPMGaskedits respondentstonamethemostimportantfocusareainthecurrenttimes, about90percentoftheretailershighlightedcostsastheirfocalpointand theremaining10percentmentionedevaluatingstoreviabilityandrevision ofexpansionplansastheirmainconcern. Cost Cutting: Costcuttingisinevitableinadownturn,butstrategic decisionswithalongtermviewshouldbethekeyfocuswhilemaking costcontainmentchoices.Manyretailershavemadethemistakeof cuttingthosecoststhatareeasiestandfastest.Aneffectivestrategy

shouldbeonethatidentifiesthecostsleastimportanttodelivering whatcustomersvalue.Thisrequiresadeepunderstandingof customers needsandre-evaluatingthebusinessactivitiesthatactually deliverwhatcustomersvalueandtheonesthatdonot.Thisensures thatthecostscutnowdonotharmthefuturepotentialofthe business. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Inmid2008,KishoreBiyaniannouncedanewstrategyforhisgroup: Garv se bolo hum kanjoos hain -Translated Say Yes, I am stingy with pride Withthiscampaign,thecompanyaimedtosaveUSD36.5millionina periodofoneyear.Theideawastoopenlyacceptthatcost-cutting needstobeimplementedandthenaggressivelyeliminate inefficiencies.Themoveensuredthatinternaloverlappingoffunctions wasavoidedwithinvariousdepartments.Attheback-end,human resourcesandinformationtechnologywereintegratedinanorganized manner. Source:MumbaiMirror,Sep2008 13 Resource optimization: Aretailerwantstobettermanageitsbackendcenters,supplychainandstoreswhileimprovingitsprofitability. Eachcustomeramongsthismillionsisdefinedbyadifferentbuying history,adifferentbuyingpropensity,andadistinctservicingcost.This raisesseveralquestions. Giventhecapacityandcostsforeachchannel,whichofthe customers,shouldreceivewhatkindofoffers,throughwhichofthe

channels? Whatwillhappenifsomepartsofthebusinessareoutsourcedas againstbuildingin-housecapabilities? Woulditbeviabletoinitiateanewmodel? Ineachcasetheansweris itdepends .Thebestwaytoallocate resourcesdependsonthenatureoftheresourcesandtheconstraints athand: Forexample,inordertoconserveresources,VishalRetailtoohas decidedtolookatcentralizingsomeofitsoperations.Ithasalready closeditslargedistributioncentersinMumbaiandKolkataandopened acentralizedwarehouseinGurgaon,nearDelhi.* FutureGrouphasmergedtheback-officeoperationsofitsdifferent storestolowercostsamidtheglobaleconomicslowdown. Ourbackendoperationshavebeenconvergedtocat ertomultipleformatsasa partofourcost-cuttingandefficiencyenhancingexercise, Rajan Malhotra,ChiefExecutive,BigBazaar.Thegroupisalsoconsidering reducingthesizeofsomeBigBazaarstores,andclosingtheworst performingones.** Companiesneedtoreviewtheiroptimizationstrategiesinthe changingenvironment,aswitheffectiveoptimizationtheyarelikelyto beabletobringaboutsavingsleadingtoimprovedcompetencieseven inanunfavorableclimate. Improving labor productivity: Retailersareturningtheirattention towardsemployeeproductivitytoboostsales.Manyretailersaregoing slowonhiringinback-endoperationswithtrainingstaffhighontheir agenda.

2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Koutons Retail has increased the performance target for its employees to deliver more. We have motivated our employees to give that extra 25 percent in the quality and quantity of work they do, --D PS Kohli, Chairman, Koutons Retail India. Source: Business Standard, November 2008 *www.indiaretailbiz.com,March2009 **LiveMint,Jan2009 142009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Manpower retention and training: Inspiteofadownturn,the requirementforskilledmanpowerstillpersists.Companiesneedto understandhowtoretaintheirmostdesirablestaffwhileensuring theirfuturedevelopment.Thisbecomesabiggerconcernparticularly whenmanagementdevelopmentcostsareunderpressure,asthisisa leadershipchallenge. Oneofthecommonproblemswithretailfirmsisthattheyhirefresh graduateswithoutanyexperienceintheretailsector.Thishasledto over-ambitiousexpansionplanswhichhasleftthefirmsstruggling.The currentdownturnhashighlightedthisissueandmadefirmsrealize thattosucceedtheyneedexperiencedtalentwithanunderstandingof thegroundrealitiesfacedbytheIndianretailsector. Withscarcityofanexperiencedtalentpool,talentdevelopmenthasto bebroughtin-house.Theneedistofocusonselectedsenior managers,todeveloptheircapabilitiestocoachandmentorothers.

Indianplayershavealreadystartedtotakestepstocurbthisproblem andareopeningacademiestomeettheirmanpowerneeds. In2008,twocompanies BhartiRetailandVishalRetail announcedthelaunchofretailtrainingacademiesinLudhianaand Delhirespectively.The2facilitiesareexpectedtochurnaround5,000 trainedpersonseveryyear.Thenewschoolsareinadditiontothe existingacademiesincludingSpencer'sPragati,SubhikshaRetail InstitutesinMumbai,Delhi,BangaloreandHyderabad,andFuture LearningandDevelopmentAcademiesinAhmedabad,Bangaloreand Kolkata.8 Inventory Management: Inanyretailoperation,restraininginventory costisofutmostimportance.Improperinventorymayresultinstockoutsforsomeofthecategorieswhereasexce ssstockforothers. LowerinventoryturnsarelikelytohavenegativeimpactonROIand moresoforcategorieswheregrossmarginisquitelowlikefruitsand vegetables,milk,staples,mobiles,etc.Inaddition,higherinventory mayresultinobsoletestock,marginleakages,damagesandhigh carryingcost(interest,space,handlingcosts,etc.). Vishal Retail is planning to start a performance-based remuneration process in its back-end operations, whereby employees will get higher perks and salaries based on their performance. Though we can t do much about labor cost at front-end operations, we are considering performance-based remuneration at the back-end. We are encouraging our people to work harder so that they bring in more efficiency into the system, Source: Business Standard, November 2008 15

8BusinessStandard,April2008Retailers should aim to: 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Reducestock-outs Whenaniteminnotavailableitreducesdirectsalesandcan leadtocustomersshoppingelsewhere Avoid bargainhunting Buyinghugequantitiesofgoodsatlowpricesbutthenbeing unabletosellthestockmayleadtoincreasedcostofinventory. Increase Inventoryturnover Increaseinventoryturnoverand,inturn,reduceexcessinventory stock-Thisisbothimportantanddifficultasitmayrequirea changeinretailermindsetandtoughdecisionsintermsofwritedowns. Controlshrinkage InIndiashrinkageisequivalentto2.9percentofretailsalesandis thehighestintheworld.Reducingshrinkagethroughwell-defined processesforphysicalcountingofinventory,digitalsurveillance, Electrictags,etcmighteffectivelysavecostsandimprove Source: KPMG Analysis, Technopak's Retail Summit 2008 Bringing down Real estate costs: Realestaterentalsconstitutethe biggestcostitemforretailersatabout10-15percentofsales.Quite frequently,ithasbeenobservedthatoneofthemajorcostsforretail storesi.e.rentalcostisignoredbyretailers. Renegotiating Real estate costs: Thecurrentenvironmentis conduciveforretailerstore-negotiatetherentalsandbringdownthis

cost.LargeretailersliketheFuturegroup,RelianceRetailandAditya BirlaRetailareinthemidstoffuriouslyrenegotiatingrentalstobring downcosts.Someplayershavemanageda40to50percentreduction instorerentals9 . Entering into revenue sharing model as against fixed rental model: Althoughpreviouslydevelopersandlandlordswereunwillingto enterintorevenuesharingmodel,theyarenowreadytoleaseout theiremptyspaces.Themodel,underwhichretailerssharea percentageoftheirsaleswithrealestatecompanies,isseenasafair wayofsharingrisksbetweenthetwostakeholders.Revenue-sharing modelincreasestheresponsibilityofthedevelopertobringinfootfalls inthemallbyprovidinggoodupkeepoftheinfrastructure.Themodel issustainableduringthedownturnastheretailersdonothavetotake thehitalone.Playerscanleveragethisopportunitybycollaborating withdeveloperstoworkoutawin-winmodelandarevenuesharing deal. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Rent constitutes major chunk of retailer s cost Source: KPMG Analysis The rentals have fallen dramatically in the past few months, bringing retailers and the developers on equal

footing. Now, the developers are ready for flexible revenues instead of fixed rentals, - Samar Shekhawat, Vice-President, Spencer s Retail. Source: Business Standard, November 2008 We believe this is the way forward for all the retailers as it is beneficial for both the developer and the retailer, - Kishore Biyani, Chief Executive Officer, Future Group. Source: Business Standard, November 2008 9HinduBusinessLine,February2009,Companywebsites,KPMGAnalysis 17Leveraging Information Technology OrganizedretailinIndiafacesmanyhurdlesintheabsenceofproper supply-chaininfrastructureanddevelopmentofeffectiveelectronic paymentanddeliverychannels. Thetechnologiesthatretailershavedeployedovertheyears,toserve theirdistributednetworks,arewithoutstandards.Goingforward, technologyislikelytobeakeydifferentiatortobringaboutefficiencies, saveoncostsandofferbetterservicestocustomers.Theproblemwith oldtechnologyisthattherearenostandardsandinmanyinstances,one doesnotintegratewithanother. Alltheelementswithintheretailindustryrightfromdatawarehouses, logistics,supplychain,storemanagement,pointofsale,etc.arelikelyto

getimpactedpositivelywiththeusageoftechnologybeitRFID,GPS, intelligentvideoanalytics,point-of-salesterminalsorsensor-basedshop carts,etc. AlthoughIndianretailchainshavestarteddeployingthesetechnologies, therestillexistsachallengetoimplementthemsimultaneouslyandmake theprocessmoreefficient. Theadvantagesofimplementationoftechnologycouldbescaled manifoldbycarefullychoosingsolutionsincontextofthesaidbusiness andbyuseoftechnologyinfollowingdomains: Manpower training: Retailersneedtogearupwithgoodpeople managementprograms.Onewaythiscanbedoneisthrough certificationprogrammes.Suchprogrammesarelikelytoenable employeestoupgradetheirbasicskillsinretailoperationsandresult betterutilizationoftheavailableresources. Real Estate Management: Informationtechnologycanbeleveraged toprovideprojectmanagementcapabilitiestomonitortheprogressof storelaunches.Timelylaunchofretailoutletscanprovideagoodheadstartforretailersandsavesignificantfunds aswell. Supply chain visibility: ITcanhelpretailerssetupbasicforecasting, replenishmentandsuppliermanagementsolutionstoimprovesupply chainmanagement.Startingfromsensorbasedinventory managementtoRFIDbasedcontrolovertheinventorycoupledwith GPSbasedtracking;ITcanhelpinmaintainingtheoptimallyminimal inventoryenablingreducedinputcosts. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

18 Store operations: InnovativeuseofIntelligentVideoAnalytics,pointof-salesterminalsandsensorbasedshopcartscanhelpretailers enhancecustomerexperienceandsimultaneouslyreducecostsby controllingshrinkage. Logistics management: RetailerscanleverageITforback-end supportand3PLcompaniesforphysicalinfrastructuresuchas warehousespaceandatransportationfleet.GPStechnologyis extremelyusefulinrealtimetrackingofthegoodsmoment. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Shopper s Stop: FifteenpercentofShopper sStop snetworthis investedinIT.Thecompanyhasreapeditsbenefitsthroughreduction inshrinkagelevelsandenhancingcustomer sexperience.Shopper s Stophasoneofthelowestshrinkagelevelsintheindustry(0.4 percent) We have found that 50 to 55 percent of a customer s experience revolves around two components: The availability of merchandise, and the ease and speed of a billing process. Out of the two, the availability of merchandise is more important. Here, I see IT playing a much more important role. --B.S.Nagesh,ManagingDirector,Shopper'sStop FuturePlans:SincethebaseofShopper sStopITstructureismoreor lessinplace,progressivelyalargepartoftheirinvestmentsis expectedtobeinclinedtowardsusereducation.Thecompanyplansto investinunderstandingitscustomersusingCRMtechnologiesby buildingdatawarehousing,data-mining,andCRMcapabilities.Thereis alsolikelytobefurtherinvestmentsinenhancingcorporate

governance,informationinsight,scalingandmanagingSKUs,network andinfrastructuremanagement,anddisasterrecovery. Source: CIO India Case Example 19Reevaluating store viability and expansion plans Withcatchmentsturningunviable,rampantstoreclosuresandformat rationalizationisonthecards.Rationalizationislikelytointensifyin comingquarters.Retailersmayneedtoshutdownunviablestoresto conservecashandinventory. Givenhighdebtlevelsanddormantequitymarket,capitalforgrowthhas becomescarce.Expansionplansneedtobere-lookedbecauseofcapital scarcityandcatchmentreassessment. Efficient store management Evenaftersettingupstores,retailersmayfaceissuesinrunningstores efficiently.Therearecurrentlynostreamlinedanddefinedprocessesfor allocationofproducts/categories,inventorymanagement(bothonshelfand inbackroom),workforcemanagementandstoreinfrastructuremanagement. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. New Customers Marketinginadequate:-Insufficienthypeduringstorelaunch,lackofregularinstoreevents Storevisibility:-Storenotdistinctlyvisiblewithinmalloronstreetoutside Loyaltyand Spend

Staffknowledgeandmotivation:-Highattritionrates,lowproductknowledge,poorcustomerinteraction skills,inadequatecompetitionandincentives Productrange:-Wearrangeofcertaincategories PricePerception:-PricecommunicationnotstronglybroughtoutthroughVMandproductadjacencies LayoutandVM:-ReducedshoppabilityduetolayoutandVMnotbeingoptimal GCmanagementnotaggressive:-InadequatemonitoringandincentivesonGCrecruitmenttargets Costs Rent:-Veryhighrentals,poorretailtocarpetandcarpettochargeableratios.Lowpackingdensityof options Power:-Absenceofmonitoringmechanismsandmetricsforpowercontrol Personnel:-Largenumberofidlepersonnelleadingtohighcosts Issues facing retailers 20 Source: KPMG AnalysisDecode consumer behavior Indiaisadiversenationwithmulti-lingual,crossculturalpopulation spreadacrossdifferentgeographicalregions.Retailershavetorecognize thefactthatastrategythatholdstrueforaparticularregionandsetof peoplemaynotholdtrueforothers. WhileIndiahasagreatmarketpotential,mostretailerstendtoignorethe basicfactaboutthediversityofitscustomerbase.Anyretailerwhodoes notdohisgroundworkintermsofunderstandinghiscustomerneeds standsagreatriskoffailingevenwithoneofthebestmodelsathand. AcaseinpointisdiscountshoppinginIndia.Indiandiscountshoppingis stillfragmentedbecauseofdiverseculturewhilewesternretailersare abletotreattheentirecustomerbaseasone.Thishelpsthemgain

benefitsoflargescalepromotionsandoffers.Theopportunitylieswith theIndianretailerstocustomizediscountseasonsbasedonfestivalsof differentregions.However,annualplanningofsalesbasedongeography andfestivalsisstillatanascentstageinIndia. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Players need to take multiple initiatives to fix retail basics and ensure growth to meet the targets. 21Retailersshouldrecognizethatconsumeristhekingandcannotbe ignored.Thetruemetricofsuccessmaynotbeintermsofnumberof newstoresaddedbyacompany,rather,increaseinsamestoresales throughathoroughunderstandingofconsumerrequirements. AccordingtoKPMG ssurvey,whileattractingthecustomerswasoneof thetopconcernsoftheretailers,investmentinconsumerresearchwas notamongsttheirtoppriorities.Retailershavestartedespousing differentapproachestoseizeashareinconsumers wallet.Someofthe strategiesadoptedbyretailers: 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. OfferingDiscounts Mostretailershaveadvancedoff-seasonsalesplansandsome haveextendeddiscountsalesperiodsfrom15daystoamonth. Thediscountsonofferhavegoneupfrom25-30percentto40 percent,evenhigherforcertainlifestyleproducts LoweringPrices

Certainretailersaremovingtowardsadopting FirstPriceRight approach.Underthistheretailerdoesnotofferdiscounts,rather directlycompetesonthesellingpricebyofferingbestprice withoutanymarkdowns. OfferingValueAdded Services Companiesareofferinginnovativevalueaddedserviceslikehappy hoursonshoppingdeals,offersforseniorcitizens,contestsfor students,lotterygains,etc. Leveraging partnerships Withanaimtokeepcustomerslongerontheshopfloorand increaseconversions,retailersarenowpitchingtopartnerwith manufacturers,serviceproviders,financialcompanies,etc.to createabuzzaroundcertainproductcategories 10www.ibef.org KPMGbelievesthatcompaniesthatinvestinCRMandconsumer researchanalyticsmaystandtogainagainstthosewhotakecustomers forgranted.BigBazaarhassetupCustomerAdvisoryBoards(CABs)asa measureforreceivingvaluablecustomerfeedback10 ThroughCABsthe. managementaimstogetclosertocustomersandgivethemaplatform tovoicetheiropinionsaboutthestores.CABsconsistof8-10influential peopleofthecommunitylikelocaldoctorsandlawyerswhohold meetingandcollectfeedbackfromconsumers.Thefeedbackisthen

assessedandimplementedbymanagementtodevelopbettercustomer relationships. 22Entering into alliances and leveraging expertise Inthecurrentscenarioretailersshouldbeonlookoutforopportunitiesto partnerwithforeignretailersasitcouldpossiblybringinthemuchneededcapitalandexpertise.Therelationship couldinvolvejoint contributionbypartieswithsharedcontrol/ownershipandhassome degreeofexclusivityattachedtoit. Retailerscanalsoconsiderenteringintoanalliancewith: Aretailerfromthesamechannel Aretailerfromadifferentchannel Vendors Back-endserviceproviderslikethirdpartylogisticsplayersandIT serviceproviders Alliancesenableretailersinenteringnewmarkets,categories,expanding valuepropositionandcapturingnewconsumersegments.Whileglobally, it sacommontrend,Indianretailersareslowlyrecognizingthe importanceofsuchpartnershipsandthereforeactivelyseekingfor opportunitiestounlockvalue. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Tapnewconsumer segments Extendintonew categories Enterintonew

geographies Enhancevalue proposition Relianceretailhastied upwithPearleEurope tolaunchachainof opticalstoresinIndia FutureGroupis leveragingBlueFoods expertiseinfoodand beverages(F&B) Fabindiahasacquireda 25percentstakein UK'sbohemian women'swearretailer EAST,tohelpFabIndia sellitsgarmentsinUK Shoppers Stophas enteredintoanalliance withMothercareUKto expanditsvalue propositioninmother careandkidswear section Fortappingthekids

segmentinIndia, Spencerretailhastied upwithWoolworthsfor marketingitsChad Valleyrangeoftoys Spencer'senteredinto partnershipwith specialistslikeSankalp, Rajdhani,YoChinaand SingaporebasedBread Talktoopenchainof foodoutletsinits stores ABRetailacquired90 percentstakein TrinethrafromIndia ValueFundstogaina strongretailfootprintin SouthIndia Trent,hasenteredinto ajointventurewith InditexGroupto developandpromote ZarastoresinIndiaand thusleverageonZara s

internationalexperience Source:Companywebsite,EconomicTimes,October2008;BusinessStandard,September2008;HinduBusines sLine,March2008; KPMGAnalysis 23It s the time of Private Labeling Privatelabelsenableretailerstoofferqualityproductsandearnhigher margins.Theretaileralsoderivesmanyadvantagesofusingprivate labels.In-storelabelsareatleast5-20percentcheaperacrossvarious categories11 Thisisbecausetheycutoutmiddlemencostsandpasson. thebenefittotheconsumer.Privatelabelsenhancethebargainingpower oftheretailerwhilenegotiatingwithmanufacturer(national/international) brands.Inthelongrun,theretailercanusethePrivateLabelstoattract customerstohisoutlet.Thus,manyretailersareconsideringincreasing theirprivatelabelofferingssignificantly. AdityaBirlaRetailisaggressivelypursuingthestrategyofpromoting salesofprivatelabels.Currently,thesegmentaccountsforaround3 percentofitstotalsales.ABRetail,whichoperatessupermarketand hypermarketformats,under MoreforYou foodandgrocerychain,is targetingtoincreaseprivatelabelsalesto10-15percentinthenext2-3 years.12 WhenweaskedMr.AmitKumar,Retailhead,Fashion@bigbazaaron privatelabeling,hesaidthatheplanstoincreasehisprivatelabelsfrom 60percentto90percentinthenextthreeyears.Accordingtohim privatelabelsprovidefourkeymerits: Givestheopportunitiestostandoutfromthecrowd

Helpsmaintainconsistencyinstocks.Outsidebrandsmayormaynot beavailableinthefutureleadingtoapotentiallossofcustomers. Enablesretailerstocontrolmarginsbyimprovingtheirbargaining power Facilitatesmovementintoaplannedenvironment.Sinceprivate labelingrequireslongtermplanning,itenablestheretailersto understandallthenuancesofitsproductsasagainstanopportunity stockwhichcouldturnintoanopportunitycostinthelongrun Globally,ownlabelbrandscontributeto17percentofRetailSaleswitha growthof5percentperannum.InternationalRetailerslikeWal-Martof USAandTescoofUKhave40percentand55percentownlabelbrands representationintheirstores,respectively.InIndiathereisanincreasing trendtowardsacceptanceofPrivateLabelbrandsandthustheir 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. 11ImagesRetailReport,2009 12IndiaRetailing,February2009 24penetrationisontheriseespeciallyintheApparel,ConsumerDurables, HomeCareandFMCGsegments.Overall,inIndia,PrivateLabels constitute10-12percentoftheorganizedretailproductmix.13 PlayerslikeShoppersStop,TataTrent,Pantaloon,Reliance,Spencers, Subhiksha,andVishalhavemovedtowardsadoptingprivatelabelsto addressconsumerneedsandtoincreaseprofitabilityoftheirretail businesses.14 InIndia,veryfewplayersareintoownmanufacturingofprivatelabels

andaredependentonthirdparties Forexample,VishalRetailis increasinglyshiftingfrommanufacturingtothirdpartysourcingprimarily becauseofincreaseincategoriesforprivatelabelingandvolumes. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Private label penetration (%) Source: Images Retail Report 2009 13ImagesRetailReport,2009 14ImagesRetailReport,2009 252009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Snapshot of retailer s depth of private labeling Source: Images Retail Report 2009 Private label sales growth (%) Source: Images Retail Report 2009 Recession spears private label appeal Privatelabelsarelikelytocontinuetogrowinthecurrentfinancial environmentascash-strappedconsumers'perceptionoftheproductsas a'cheaperoption'changes.Partofprivatelabelgrowthinarecessionis permanentlysustainable.Asconsumerslearnabouttheimprovedquality ofprivatelabelsinrecessions,asignificantproportionofthemarelikely toremainloyaltoprivatelabels,evenafterthenecessitytoeconomize onpurchasesisnolongerrequired. Higherprofile,quality-focusedprivatelabelbrandsarelikelytoprosperas consumersbegintoreassesstheirviewsofown-brandgoods.Also,with

increaseincompetitionandrisingpressureonmargins,privatelabelare increasinglygettingattentionduetotheaggressivemarketingofretailers atparwithbrandedgoods. Today with the margins that the FMCG companies offer, no one can survive. Even global retailers such as Wal-Mart, Carrefour and others are successful because of their strong focus on private labels. No retailer can survive on high rentals and low margins, adding that margins on private labels are higher, as much as 3540percent - Thomas Varghese, Chief Executive Officer, Aditya Birla Retail 26Build a competent supply chain management system Strengthen support infrastructure WiththelargeplayerslikeReliance,Bharti-Wal-Mart,Tata senteringinto inretailmarket,thereislikelytobeenhancedfocusonimprovementsin logisticsandsupplychaininfrastructure.Retailersaswellasthirdparty logisticsprovidersmayincreasetheirinvestmentinlogistics

infrastructure.Togaincostleadershipinthemarket,bigplayersmayhave tominimizecostsbydevelopingsupplychaininfrastructure.Warehouses, distributioncentersandtransportationarelikelytoseemodernization. Warehouses Alargenumberofplayersinthisindustryaresmall/medium entrepreneursrunningthewarehouseforoneormorecompanies.The scaleofthesewarehousesisnotlargeenoughtotaplargescale economiesorjustifyinvestmentsinhigherstandards.However,going forward,theimplementationofVATregimeisexpectedtodrive consolidationandhencelargerscalewarehouses.Alsotherapidgrowth oforganizedretailisexpectedtodrivesophisticationandefficiencyin warehousingpractices. Cold Chain ThereisanuntappedpotentialofUSD2.6billionforprovidingefficient coldstoragefacilities.15 Drivenbyagrowingdemandforconvenience foods,weexpectretailerstopartnerwithlogisticsspecialiststomeet theircoldchaininfrastructureneeds. Third Party Logistics (3PL) 3PLmarketinIndiaisstillinarelativelynascentstage.However,realizing thecostbenefitsthatthesecompaniesbring,retailersaregearingupto use3PLservicesfortheirlogisticsfunction.Asthesizesofretailers growwithapotentialforscaleeconomies,weforeseethemtomoveto 3PLserviceproviders. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

15InhousemagazineofgroupTCI2008,KPMGAnalysis 27Backward integration Thereisaneedtoreducethenumberofintermediariessoastoincrease theefficiencyandprofitabilityofretailers.Oneofthewaystodothatis tointegratethefunctionsinthesupplychain.Therehavebeeninitiatives inthisregardinruralIndiafollowingthegovernment sapprovalof contractfarmingandlandleasing.Thisislikelytoallowaccelerated technologicaltransfer,capitalinflowsandassuredmarketforcrop production.Thisislikelytoeliminatetheintermediariessuckingawaya largechunkofthemargins.Pepsico scontractfarminginPunjab,ITC sechaupalandMahindraShubhlabhservice sareexamplesofthisvertical co-ordinationleadingtoanincreasinglyefficientsupplychain.16 Optimize Processes ITcanhelpretailersoptimizetheirprocessesinalotofwaysincluding improvingforecastingaccuracy,reducingstock-outs,increasingsourcing efficiency,increasingproductmovementvisibility,reducingleadtimeand optimizingtransportation.Startingfromsensorbasedinventory managementtoRFIDbasedcontroloverinventory,ITcanhelpin maintainingoptimalinventoryresultinginreducedinputcosts. Venture into under penetrated markets: Rural Retailing Indiahaswitnessedarapidincreaseinincomeswithpercapitaincomes soaringtoUSD1000in2008fromminisculeUSD418in1998.The growthhasnotbeenrestrictedtourbanIndia,asthepercapitaincome inruralIndiahasgrownby50percentinpast10years.17 Amongkeyreasonsforthelatterarerisingcommodityprices,improving

productivityandhigherproduction.Theincreasingavailabilityofbasic infrastructure,improvingaccesstofunding,employmentguarantee schemes,betterinformationsystemsandgrowingliteracyaretogether 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. 16 New Farm Supply Chain Initiatives in Indian Agriculture, Article by Dr. Rakesh Singh, Professor of Economics, Great Lakes Institute of Management 17 Business Standard 28helpingbringprosperitytoruralhouseholds.Withadditionalfiscal incentivesprovidedbythegovernment,ruralIndiaissettowitness furtherboostinoverallfarmincomes. Overall,thereisahugemarketwhichiswaitingtobeserved,readyto splurge,willingtoexplorenewproductsandservices.Retailerscantap ontheirwalletsgiventheydotheirhomeworkwell. AccordingtoIndiaRetailReport2009byImages,"India'sruralmarkets offeraseaofopportunityfortheretailsector.Theurban-retailsplitin consumerspendingstandsat9:11,withruralIndiaaccountingfor55 percentofprivateretailconsumption." AsperIBEF,ruralIndiaaccountedforalmosthalfoftheIndianretail market,whichwasworthaboutUSD300billion.Withmostoftheretail marketsgettingsaturatedinTierIandTierIIcities,thenextphaseof growthislikelytobeseenintheruralmarkets. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. ITC-CHOUPALSAGAR:ASuccessfulRuralRetailingModel

CONCEPT HubandspokemodelinvolvingengagementwithfarmersinruralIndia. Aruralshoppingmallwherefarmerscanselltheircommoditiesandcan buyalmosteverythingincludingcosmetics,garments,electronics, appliancesandeventractors. Itservesasanagri-sourcingcenters,shoppingcenters,andfacilitation centers ChaupalSagarstoreshavebecomemeetingpointforfarmers totransactcommerceandexchangeusefulinformation. ITCawarded InnovationforIndiaAward2006 fore-Choupal intheSocialInnovationscategoryforbusinessorganizations. e-ChoupalspeciallycitedintheGovernmentofIndia s EconomicSurveyof2006-07foritstransformationalimpacton rurallives. e-ChoupalisoneofthetopfivealternativechannelsforLIC Policysales,andaccountsfor10percentofthenational weatherinsurancemarket IMPACT Source: ITC s Website, KPMG Analysis 292009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. ManyretailplayersarecapitalizingonruralIndia spotentialbypartneringwithfarmers Triveni (Khushali bazaar) Triveniaimsatincreasingthe associationofrural

communities.Currentlythe companyhas2ownedand4 franchisesstores.Eachstore providestofarmersagri inputs,agriequipmentforsale andrental,irrigation equipment,cattlefeeds, FMCG,petrol,diesel,two wheelersandtractors,and othergoodstocompletethe farmer sbasketofgoods ITC (e chaupal) IITCprocuresallmaterials directlyfromtheproducers, therebycuttingdownthe middlemenalltogether Itpaysupfronttothe producers,meaningthereis nocreditsystem Reliance Retail (Fresh & Fresh plus) Focusingonsourcing directlyfromfarmgate forFresh&FreshPlus. Aimedatconnecting

farms&unorganized retailbysettingup1600 farm-supplyhubsacross thecountry. Tata (Tata Kisan Sansar) Provideend-to-end solutions,rightfromwhat cropstogrowtohowto sellthemforthe maximumreturns HUL (Shakti) Accesstotheremoterural areasandmarketpotential Sellitsproductsthrough womenself-helpgroupswho operatelikeadirect-to-home teamofsaleswomenin inaccessibleareaswhere HLL'sconventionalsales systemdoesnotreach. DCM (Hariyali Kissan Bazaar) Catersforabout15-20,000 farminghouseholdsandat least70,000acresof agriculturalland.

M&M (Shublabh) Shublabhinterfaceswith bankforthefinancing w.r.tthefertilizerand seedsfirm,aswellasfor thedeliveryofproduceto theendbuyerand paymenttofarmer Godrej Agrovet (Aadhar) Completesolution providertothefarmers renderingfarmadvisory services,creditfacilityto farmers,providingupto dateinformationon weather,price,soil& watertestingfacility, FMCG/consumer durables,etc.tofarmers. Source: Company websites, www.ibnlive.in.com, KPMG Analysis 30 Majordomesticretailershavestartedsettingupfarmlinkages.Few examplesinclude,DCM sHariyaliKisanBazaars,PantaloonGodrej sjoint ventureAadhars,ITC sChoupalSagars,Tata sKisanSansarsandReliance Fresharesomeoftheestablishedruralretailchains.18

18 Company Websites and IBEFInnovate: categories, services, business models Intoday sworldofinternettechnology,globalizationwheneveryoneis connectedandwellinformed;retailershavetoensurethatthey continuouslyunderstandthepulseoftheircustomersanddesigntheir offeringsaccordingly.Thisrequiresnotonlyin-depthunderstanding customerrequirementsbutalsothinkinglaterallytocomeupwith innovativesolutionswhichwouldmaketheretailersstandoutofthe crowd. Withrapidglobalization,increasedconnectivityandheightened awarenesstheconsumerismuchmoreconsciousabouthisneedsand requirements.Henotonlyseekstopurchaseaproductbutalsothe entireshoppingexperience.KPMGbelievesthatplayers,whocan customizetheirofferingsaccordingtothespecificneedsoftheIndian consumer,arelikelytoemergeasaleaders.Retailershavetostart appreciatingthisfactandtakeouttheirthinkinghatstoplaninnovative solutionsfortheircustomers. Thecurrentenvironmentisagoodtimeforgeneratingtrials;the consumersareactivelylookingforthebestvalueandmaythereforebe morethanwillingtoexperiment.Internationally,withconsumers currentlydebatingoverwhetherornottospendtheirhard-earnedmoney onthatnextcupatStarbucks,McDonald'shasaperfectopportunityto provethattheirPremiumRoastcoffee astepupinpricefor McDonald's,butstillcheaperthanStarbucks isaprettytastybrew.19 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

Innovation and newness should be the name of the retail game in India. As an industry we have to be radically different in our approach towards consumers, product offering, market segmentation and competition. This would create demand within the target segment and in turn help attain viability for the business model. Instant gratification as envisaged by the promoters in the past actually reduced the share of the pie resulting in the repelling impact as witnessed today. - Anurag Rajpal, Vice President (Apparel), Spencer s Retail Source: www.indiafashionforum.co.in 19 www.chiefmarketer.com 312009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. BigBazaar sChaosTheoryevolvedtocatertotheIndianMindset Concept Avalueformoneyhypermarketthatsubscribes

tothenotionthatchaosinstoresincreases sales. Mr.KishoreBiyanirealizedthatinabroad hypermarketshavelong,narrowaisles,suitable forindividualsshoppingaroundcartswhichwon t workinIndia,soinbigbazaarhecreated multipleclusterswithineverystore. Thestoresaredesignedasanagglomerationof bazaarswithdifferentsectionsellingdifferent categories. TheU-shapedsectionandislandshaveprovedto bemoreappropriatefortheIndiancontextthan longaisles. Broughtintheinnovativeconceptof sabse saste3din whichoffers,dealsanddiscounts, helpingensurethatthereissomethingfor everyoneinthefamilytoshopfor,and customersget'value-for-money'. Impact BigBazaarandFoodBazaartobe hivedoffintoindependent companies. BigBazaariseyeingaturnoverof USD1700millionbythenextfinancial year.

In2007-08,Bigbazaarclocked110 millionfootfalls. KishoreBiyaniawardedthe'Retail FaceoftheYear atImagesRetail Awards2007. Mom & Me Stores: A Unique Specialty Retail Model Business Model Target Audience AspecialityconceptstartedbyMahindra& Mahindra'sinJanuary2009 Storesize:Rangebetween5,000and10,000sq.ft StorestobelocatedinMetros,majorcitiesat highstreetormalllocations Theconceptprovidesvariousfunctionally importantproductsthatoffersafetyandquality productsthatarecurrentlylackinginIndia Theprimarytargetforcompanyincludes -9to9 whichmeanswomenwhoareexpecting,to motherswhohavekidsuptotheageof9years, andkidsfrom0-9years. Product Offerings Add on s Productbasketwouldcompriseofmaternitywear, fashionapparelforbabies,toddlers&youngkids, toys&games,wellnessproductsformothersand babies,nurseryandfurnishings,travel&safety products,personalproducts,foods,etc.

Partnershipwithinternationalbrands: Startrit,BrainyBaby,MaryMeyer,CAM,Bugaboo, Evenflo,andAvado Valueaddedserviceslikefeedingarea,playarea forkids,nappychangearea,andotherfacilities likeastrollertouseatthestore,readinglounge, etc. M&Mwillconductmorningcoffeemeetings, consultationswithexpertsandmanysuchmore eventstobeasourceofknowledgeandexpertise forcustomers Thewebsitewillalsoserveasaforumfor customerstoshareinformation MOM & ME Source: Images Retail, 2009 Sources: www.retailigence.wordpress.com , September 2008; Economic Times, January 2008; Book on Kishore Biyani s autobiography It happend in India ; company website; KPMG Analysis

322009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. "We predict an increase in 'value for money' category and a decline in lifestyle category. Also we might see lesser aggression in stores expansion and focus on store productivity, shrinkage and loss reduction"Narayanan Ramaswamy, Executive Director, KPMG. Retail

Everydayusage Highticketretail Impulsepurchase Highendluxury Valueformat Groceries/FMCG/ Beverages HomeFurnishings/ Electronics Peoplearebuying productswhich givesvalueinthe longterm Books/Music/ Stationery/Travel Retailersare givingdiscounts toincreasesales Apparel/Fashion wear Retailersare offeringdiscounts Not effected Not effected Adversely effected Adversely effected Shift from lifestyle to value for money FUTURE OUTLOOK 33 Thepastsixmonthshavebeendifficultfortheretailindustry.Retailhas beenoneofthesevenindustriesinthecountrythathavebeenseverely

impactedbythedownturnineconomicconditions.Thesectorhas enteredintoamodeofcorrectionremovingsomeoftheflabthathad accumulatedoverthepast5yearsofrapidexpansion.Almostallretailers thatwemetwithwereredrawingtheirexpansionplansandseriously evaluatingoptionstocloseoutpoorperformingstores.Theseeffortsare expectedtointensifyoverthenextfewmonths.Therecouldbesome MergerandAcquisition(M&A)activitythathasbeenmissingoflatewith thelongtermplayerslikelytoconsolidateandmoveaheadstrongly.Thereisaconsensushoweverwithinthesectorthatt hisrestructuring exercisemaycontinueforthenext12-18monthsbeforeretailersbegin anotherseriousroundofexpansion. Thelongtermprospectsforretailchainexpansionarestillveryattractive andthisperiodofuncertaintyisseenbyretailersasanimportant consolidationimperativeforanindustrythathasbeengrowingat30-40 percentp.a.overthepastdecade.Therelativelylowratesofpenetration oforganizedretailinmostcategoriescoupledwiththesheer attractivenessofIndia sdemographicandeconomicenvironmentis expectedtocontinuetoaddmomentumtooverallprospectsofthis sectorinthelongterm. 2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependent memberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved. Short term outlook Thecurrentslowdownisexpectedtolast12 18monthsconditional ongovernmentincentivesinincreasingspendsoninfrastructure, developmentinitiativesandotheractivitiestostimulatethe

economy. Inlightoftheeffectsoftheslowdown,weexpectanincreased focusonvalueretailinthecomingmonthsandashiftawayfrom lifestylegoods. ThefocusislikelytoshifttowardsfoodretailingandFMCG productsasthissegmentislargelyinsulatedfromtheslowdown. Retailersmaystartfocusingoncostreductionbyclosingthe unprofitablestoresandrationalizationofcapitalexpenditure. Churninmallsislikelytoincreaseintheshorttermwhensome retailersmayfinditdifficulttosustaininthecurrenteconomic situation,insteadoptingforlowrentpremises. AsTierIcitiesbecomesaturated,retailersarelikelytomovetoTier II,TierIIIcitieswhereprofitsarehigherduetolowerrentalsand operatingcosts. Therearegoingtobeincreasedinvestmentsinshorteningofsupply chain.Thisismainlyduetotheincentivesofferedbythe governmentandthepotentialforhigherprofitmargins. Thefrequencywithwhichretailersliquidateslowmovinggoodsby offeringdiscountstoreduceinventoryareexpectedtoincrease 34in.kpmg.com Mumbai KPMG House, Kamala Mills Compound 448, Senapati Bapat Marg, Lower Parel, Mumbai 400 013

Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Delhi DLF Building No. 10, 8th Floor, Tower B, DLF Cyber City, Phase 2, Gurgaon 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Bangalore Solitaire 139/26, 3rd Floor, Inner Ring Road, Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chennai No.10 Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills

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withoutappropriateprofessionaladviceafterathoroughexaminationoftheparticularsituation. KPMGinIndia Pradip Kanakia Executive Director Head - Markets e-Mail: pkanakia@kpmg.com Tel: +91 80 3980 6100 Ramesh Srinivas Executive Director Head - Consumer Markets e-Mail: rameshs@kpmg.com Tel: +91 80 3065 4300 KPMGContacts