The Indian Retail Sector Boom

Anoop Kumar Gupta

What is Retailing?
Retailing involves selling products and
services to consumers for their personal
or family use. Service providers, like
dentists, hotels and hair salons, and online stores, like Amazon.com, are
retailers.

Retail Facts at a Glance

Retail

is Indias largest industry

(second only to agriculture in terms
of employment).
Accounts for over 10% of GDP.

Factors driving Retail BoomAn Economic imperative for India

Extremely

high intermediation
Low \ negligible government revenue
Strong inhibitor \disenabler for the food
industry
Employment
Market access
Impact on Economy (Benefits)

Extremely high intermediation

Inefficient Supply chain: The road all products in India take, from the original
producer to the end customer, is indeed long and tortuous. Various estimates put the
supply chain costs in India, across product categories, at between 12 per cent and 50
per cent. This is largely cost and not value added. In the case of basic products, a
significant portion of these costs is sheer wastage.

Intermediaries pockets over Rs 50,000 crores: Study done by McKinsey for its
FAIDA report on food and grocery retailing estimated wastage loss in the Indian food
chain at over Rs 50,000 crore annually, almost all of it attributable to the archaic
intermediary chain food has to go through to reach the end customer. Its a double
whammy, so that while the customer ends up paying more, the original producer, in
many cases the Indian farmer, gets paid much less than what he would have got in a
modern retail environment. Retail consolidation will aggregate demand at the retail end,
bypass the intermediary system, invest in the supply chain to ensure zero wastage,
ensure lower prices to the end customer and higher prices to the farmer/original
producer. Over time, savings in the Indian economy on this count alone could be a
whopping Rs 50,000 crore plus.

Low \ negligible government revenue

Reduced Administrative costs & collection of much needed taxes,
would enable implementation of modern tax structure (VAT)Among the developed and developing nations in the world, India is one
of the few countries where the last level of value added is not taxed.
Its not that the Government does not want to; it simply cannot. Given
the hugely fragmented structure and the current retail environment, it is
clearly administratively a hopeless and indeed an uneconomic task, to
introduce and administer a modern VAT (value added tax) system in
this country. Admittedly even the current system of flat annual rates and
so on are at best initiatives more aligned towards administrative
convenience rather than maximizing much needed Government
revenue. A modern retail environment will not only significantly
enhance the implementability of VAT, it will also, in the long term,
enable the basic rates to drop to more reasonable levels apart from
significantly reducing administration costs.

Strong inhibitor \ disenabler for the food

industry
Food is vital to Indias prosperity. There is probably no country in
the World that has more to lose than India if we do not succeed
in food. India can and should become a world leader in food
production. The opportunity in value added food alone is
estimated at upwards of Rs 3,00,000 crore. This growth will
bring immense benefits to the economy, raising the general
economic wellbeing of a significantly large cross-section of
people in the country. Apart from progressive and proactive
Government policy, what will be key is the extent of
modernization the retail channel in India undergoes in the first
decade of the new millennium. Empirical data suggests that
for a rupee invested in retail, Rs 3 is invested in the foodprocessing sector.

Employment

Employment Generation: A direct fallout of retail consolidation in India would

be employment generation, both direct and indirect. Retail is hugely laborintensive and various studies have indicated that given the level of investment
envisaged, retail consolidation has the potential to generate an additional eight
million jobs, both direct and indirect. More important, the bulk of jobs will be of
a profile most suited to India, i.e., for young men and women who currently do
not have the wherewithal to go to college. A good indicator of that is the
employment profile of our own Food-World operations, where 70 per cent of the
employees are high school graduates and largely the children of daily wage
earners. Today, they are on the threshold of a viable career opportunity.
Increase in base of Income-tax payees: Many of the earlier recruits will be
income-tax payers in a couple of years. The effects on the economy if hundreds
and even thousands of the virtually unemployed today are made productive
corporate citizens of tomorrow, can only be imagined. Retail consolidation
will do just that.

Market access
The hugely fragmented retail structure has given rise to
a distribution network that is quite unique to India.
Indeed, the cost and complexity of such a structure
makes it a huge competitive barrier for new entrants
or products. It also severely restricts the ability of
Indias
small-scale
manufacturers
to
reach
customers. Given the huge small-scale industry in
India, retail consolidation will act as a fillip to its
ability to access the market. Also, the choice and
range available to the end customer will go up
significantly.

Impact on Economy (Benefits)

In many other not-so-related areas, the benefits of retail consolidation will be immense:

Real estate: The requirement of real-estate will be in millions of square feet and the
demand from retail players will release for productive use large tracts of land lying with
various Government agencies such as the Ports, Railways, Defense and so on. It has
happened all over the world, there is no reason why it will not happen here.

Tourism / Outbound shopping: If one were to think of any city which attracts a large
number of tourists every year London, Singapore, Dubai, New York and so on one of
their attractions is the well-developed shopping environment. Retail consolidation will act
as a significant enabler to developing many of our cities as tourist destinations, and if
well-marketed and managed, can significantly enhance Government revenues, apart
from carrying ethnic Indian brands across the world. The impact on benefits would be
difficult to quantify, but clearly they would be huge. And finally, one only has to look at
the countries where retail consolidation and modernization has occurred to conclude
that it has almost always radically and favorably affected the value-capturing capacity
and modernization of the farming industry, restructured the supply chain for all FMCG
products, driven end customer prices down on a sustained basis, created significant
employment opportunities, been a source of considerable revenue for Governments,
both local and national and in general been a catalyst in creating considerable national
wealth. There is no reason why it will not do the same for the Indian economy and her
people.

Evolution of Retail Industry

Traditionally retailing in India can be traced to

The emergence of the neighborhood Kirana stores catering to the convenience of

the consumers

Era of government support for rural retail: Indigenous franchise model of store
chains run by Khadi & Village Industries Commission
1980s experienced slow change as India began to open up economy.
Textiles sector with companies like Bombay Dyeing, Raymond's, S Kumar's and Grasim
first saw the emergence of retail chains
Later Titan successfully created an organized retailing concept and established a series
of showrooms for its premium watches
The latter half of the 1990s saw a fresh wave of entrants with a shift from
Manufactures to Pure Retailers.
For e.g. Food World, Subhiksha and Nilgiris in food and FMCG; Planet M and Music
World in music; Crossword and Fountainhead in books.
Post 1995 onwards saw an emergence of shopping centers,

mainly in urban areas, with facilities like car parking

targeted to provide a complete destination experience for all segments of society

Emergence of hyper and super markets trying to provide customer with 3 Vs - Value,
Variety and Volume
Expanding target consumer segment: The Sachet revolution - example of reaching to
the bottom of the pyramid.
Economic reforms in India resulted in wave of consumerism.
Changing consumer behavior, consumption shift and evolving consumer preferences.

Evolution of Indian retail

Historic/Rural
Reach

Traditional/Perva
sive Reach

Government
Supported

Modern Formats/
International

Exclusive Brand
Outlets
Hyper/Super Markets
Department Stores
Shopping Malls
PDS Outlets
Khadi Stores
Cooperatives

Weekly
Markets
Village Fairs
Melas
Source of
Entertainmen
t

Convenience
Stores
Mom and
Pop/Kiranas

Neighborhood
Stores/Convenie
nce

Availability/
Low Costs /
Distribution

Shopping
Experience/Efficie
ncy

Consumerism in India : The New Wave

Growing consumerism would be a key driver for organized

retail in India. Several demographic trends are favorable for the
growth of organized trade.
Rapid income growth : Consumers have greater ability to
spend.
Increasing Urbanization : Larger urban population which values
convenience coupled with higher propensity of the urban
consumer to spend
Growing young population : Growth of post liberalization
maturing population with the willingness to spend (attitude)
Tendency to spend now vs. save earlier. Consumers willing to
borrow for current consumption

Other drivers of the Retail

Boom:
The changing Indian
consumer
Greater per capita income
Increase in disposable income of middle
class households
20.9%* growth in real disposable income
in 1999-2003.

Growing high
population

and

middle

income

Growing at a pace of over 10%* per

annum over last decade

Affordability growth
Falling interest rates
Easier consumer credit
Greater variety and quality at all price
points

Consumption shift

Lifestyle

Frequent eating out

Growing health and dietary

supplements
Growing organic produce
Greater focus on looking and
feeling good

Consumption is moving out of home.

It is moving into lifestyle products, eating out,
events, entertainment. And that is going to
continue
Source: AT Kearney

Evolving consumer preferences

From traditional to

From

globalize to

From functional to

modernized traditional

Indianise

lifestyle

Evolving consumer preferences

From value for money to

value for time and convenience

From cautious to

experimentation

From over-the-counter to
touch-and-feel

Happening Times
Indian GDP growth
at 9.4
% for 2006-07 is the
highest in 18 years
Analysts across the
globe
find Indian growth
sustainable
Economic outlook
for India
is positive
Indian working
population
is confident

INDIA: #1 EMERGING RETAIL

GROWTH MARKET
Most
Unsaturated:
Modern Retail
Penetration:
< 3%
Large Market:
Retail Market Size:
Current US$ 330
Billion
Future Projections
~US $650 Billion by
Year 2011
Growth rate of 30%
year-on-year
A.T. Kearney Global Retail Development Index (GRDI)

Organized retail is still in its infancy

With just 2 % organized retail

.India is a big opportunity

Most attractive retail market

Indias retail market has grown by 10% on average for past 5 years
steadily rising to top position in GRDI

Organized Retailing is big

opportunity
With robust economy,
sustained GDP growth
and
booming stock exchange,
there are several
emerging
sectors in India waiting to
be tapped

Organized Retail is at the forefront of these opportunities

Growth in Organized Retail

India is in 2nd phase of retail growth

Increasing Range, Portfolio and Format options
Food retailing leads the growth in Indian organized retail

Retailing formats in India

Malls:

A specialty store is a store, usually retail, that offers specific and

specialized types of items. These stores focus on selling a particular
brand, or a particular type of item. For example, a store that
exclusively sells cell phones or video games would be considered
specialized.

The largest form of organized retailing today. Located mainly in metro

cities, in proximity to urban outskirts. Ranges from 60,000 sq ft to
7,00,000 sq ft and above. They lend an ideal shopping experience with
an amalgamation of product, service and entertainment, all under a
common roof.Examples include Shoppers Stop, Piramyd, Pantaloon.

Discount Stores:

Department Stores:
A department store is a retail establishment which specializes in
selling a wide range of products without a single predominant
merchandise line. Department stores usually sell products including
apparel, furniture, appliances, electronics, and additionally select
other lines of products such as paint, hardware, toiletries, cosmetics,
photographic equipment, jewellery, toys, and sporting goods.

Convenience Stores:
These are relatively small stores 400-2,000 sq. feet located near
residential areas. They stock a limited range of high-turnover
convenience products and are usually open for extended periods
during the day, seven days a week. Prices are slightly higher due to
the convenience premium.

As the name suggests, discount stores or factory outlets, offer

discounts on the MRP through selling in bulk reaching economies of
scale or excess stock left over at the season. The product category
can range from a variety of perishable/ non perishable goods

Hypermarts / Supermarkets:
A hypermarket or multi-department store is a superstore which
combines a supermarket and Department store. The result is a very
large retail facility which carries an enormous range of products
under one roof, including full lines of groceries and general
merchandise. When they are planned, constructed, and executed
correctly, a consumer can ideally satisfy all of his or her routine
weekly shopping needs in one trip.

Company owned-company operated (COCO):As is

evident from the name itself, the retail facility is owned and managed
by the manufacturing or marketing company. Popular and familiar
Examples are Bata showrooms & petrol pumps owned by petrocompanies.

Specialized Chains:

Multi Brand outlets (MBO)s :

Multi Brand outlets, also known as Category Killers, offer several
brands across a single product
category. These usually do well in busy market places and Metros.

Recent Trends
Retail Sales in India

Retailing in India is witnessing a huge

revamping exercise as can be seen in
the graph
India is rated the fifth most attractive
emerging retail market: a potential
goldmine.
Estimated to be US$ 330 billion, of
which organized retailing (i.e. modern
trade) makes up 2 percent or US$ 6.6
billion
As per a report by KPMG the annual
growth of department stores is
estimated at 24%
Ranked first in a Global Retail
Development Index (GRDI) of 30
developing countries drawn up by AT
Kearney.

Present Retail Stores and Future

Plans of Big Players
Player

Format / Name

A. Birla Group

Super Market

14

1000

Bharti-Walmart

Wholesale Store

Express Retail Service

Big Apple

65

200

Godrej Group

Aadhar

31

1000

Big Bazzar

68

100

Food Bazzar

98

200

Reliance Fresh

240

471

Hyper Mart

500

Reliance Town Centre

784

Pantaloon

Reliance Retail

Present Number of
Stores

Future Plan

RPG

Spencer

200

000

Subhiksha

Discount Store

870

150

Wadhwan Food Retail

Super Local

94

1500

Source-FICCI-KPMG Report

Future direction: Positives

AT Kearney has estimated Indias total retail market at US$ 330 billion which is expected to grow at a
compounded 30 per cent over the next five years.
With the organised retail segment growing at the rate of 25-30 per cent per annum, revenues from the sector
are expected to triple from the current US$ 7.7 billion to US$ 24 billion by 2010.
The share of modern retail is likely to grow from its current 2 per cent to 15-20 percent over the next decade
Over next two years India will see several Indian retail businesses attaining a critical mass as growth in the
industry picks up momentum driven by two key factors:

Availability of quality real estate and mall management practices

Consumer preference for shopping in new environments

Players in Retail Business:

9.

Reliance Retail
Subhiksha (500 outlets across India, making it the largest in the discount format)
Big Apple
Aditya Birla Group.
Pantaloon Retail
Bharti-Wal-Mart
Tata-Woolworths (electronics home appaliances store- Croma)
Raheja Group-Hypercity in Mumbai
Carrefour (French Retailing Major)-waiting in wings

10.

Tesco (British)-waiting in wings

1.
2.
3.
4.
5.
6.
7.
8.

Future direction: Concerns

90 million square feet of mall space is expected to be available by end of 2007, which might lead
to over-capacity of malls
Lack of differentiation among the malls that are coming up. One option may be to look at
specialization.
Poor inventory turns and stock availability measures - retailers clearly need to augment their
operations.
Operations of retailers and suppliers are not integrated. Efficient replenishment practices practiced
in the Indian auto and auto-component industry can be leveraged to implement efficient supply
chain management techniques.
Supplier maturity, in terms of adherence to delivery schedules and delivering the quantity ordered,
is an issue
Sales tax laws - lead to retailers having state-level procurement and storage leads to Indian
retailers having higher inventories. VAT has helped alleviate this a bit.
Increased adoption of IT and shrinkage management will be a critical area.
Supply chain and customer relations followed by merchandising, facilities management and
vendor development are areas which have significant gaps and proactive training is a key
imperative for overcoming these.
Politicians opposing the retailing of fruits and vegetables through retail chains due to opposition
from the intermediaries, e.g. U.P. Govt ordered closure of Reliance fresh stores and Spencers
Stores, citing law and order problems.

Retail reform
The Government allows 100 per cent foreign
direct investment (FDI) in cash and carry
through the automatic route and 51 per cent
in single brand. Besides, the franchise route
is available for big operators. Now, the
Government
also
proposes
further
liberalization in the retail sector allowing 51
per cent FDI in consumer electronics, sports
goods, stationery and building equipment.

100% FDI in Retail

For all the fears of the demise of the so-called mom
and pop retail stores, the point to remember is that
Nowhere in the world has small retailing
disappeared. But, nowhere in the world has
modern retailing not come in. So, I dont see why
we should be any different.
Montek Singh Ahluwalia,
Deputy chairman of the Planning Commission.

Sources

The Bird of Gold: The Rise of Indias Consumer Market by

McKinsey & Company
IRMC Analysis on India Retail Opportunity
The Great Indian Retail Story by Ernst & Young India
Organised Retail in India by Tata Strategic Management Group
AT Kearny
Forrester Research 2006
KPMG-FICCI Report
http://www.indiainbusiness.nic.in/
Euromonitor Retail Survey

Thank You