Features

The Evolving Retail Market in India

Tremendous Opportunities Ahead Dale Anne Reiss* and Ranjan Biswas**
Abstract: India is on the brink of becoming an economic powerhouse ready to unleash its largely untapped potential for those who are willing to take the right step forward. In the retail sector, in spite of a 1.1 billion-strong population, the target consumer base for most retailers in India stands at about 405 million. Of this, about 30 million have a combined purchasing capacity of US$230 billion.

A Nation on the Move The Indian economy is expected to reach a massive US$902 billion in 2006-07. Trends indicate that the economy is growing at a staggering US$100 billion per annum, given that the GDP was estimated at US$798 billion in 2005-06. (See Table 7-1 and Map 7-1.)
Table 7-1
Snapshot on Republic of India Area 3.3 million sq km Population 1.1 billion Capital New Delhi Government Administrative structure Gross domestic product (GDP) GDP growth rate GDP (PPP terms) Currency Languages Time zone Taxation Parliamentary Democratic Republic Union of 28 states and 7 union territories US$798 billion (2005-06) 8.50% US$3.8 trillion (2005-06) Indian Rupee (INR; Rs.) Hindi, English, 17 other local languages GMT + 5:30 - Corporate Tax : 33.66% - VAT: 12.5% (for most commodities) - Tax exemption for first 10 years in Special Economic Zones (SEZs) Country risk - S&P: BB+ (long term); B (short term) - Fitch: BBB- (long term); F3 (short term)

Map 7-1

Source: The World Factbook (CIA).

It has been said that the only thing more difficult than being indifferent about India is attempting to describe or understand India completely. Most retail and consumer-products companies are no longer indifferent to India. It is the fourth-largest economy in the world, in purchasing power parity (PPP) terms, and it is expected
* Global and Americas Director of Real Estate, Ernst & Young ** Partner and Head, Markets, Ernst & Young
RESEARCH REVIEW, VOL. 14, NO. 1, 2007

to rank third by 2010, just behind the United States and China. Moreover, recent liberalization of foreign direct investment (FDI) policies for retail trading has reduced barriers to entry for single-brand retailers and, for the first time, allowed them to control their operations in India. However, successful expansion into Indiawith more than one billion people representing a dizzying number of cultures, religions, races and tongues coupled with a predominately unorganized retail sector, will take careful planning and a thorough understanding of the nuances of this complex market. India is on the brink of becoming an economic powerhouse ready to unleash its largely untapped potential for those who are willing to take the right step forward. In the retail sector, in spite of a 1.1 billion-

26

Features
strong population, the target consumer base for most retailers in India stands at about 405 million. Of this, about 30 million have a combined purchasing capacity of US$230 billion. The countrys six million rich consumers spend US$28.36 billion every year on shopping. In the words of international fashion icon Tommy Hilfiger, The Indian economy is soaring. I think Indian people love brands. There isnt another American designer on this soil, maybe because they dont know it, maybe because they dont understand it, maybe because they dont care. I understand it, I care about it, I am excited about it and I feel very positive that we are going to build a wonderful lifestyle business here. Indian Retail On A Roll Highly fragmented retail sector The retail sector in India is highly fragmented, and organized retail in the country is at a very nascent stage. There are about 12 million retail outlets spread across India, earning it the epithet of a nation of shopkeepers. More than 80% of these 12 million outlets are run by small family businesses that use only household labor. Traditionally, small-store (kirana) retailing has been one of the easiest ways to generate self-employment, as it requires limited investment in land, capital and labor. Consequently, India has one of the highest retail densities in the world at 6% (12 million retail shops for about 209 million households). Indias peers, such as China and Brazil, took 10-15 years to raise the share of
Chart 7-2
97% 120 85%

their organized retail sectors from 5% when they began, to 20% and 38%, respectively. India too is moving toward growth and maturity in the retail sector at a fast pace. (See Chart 7-2.) Retail is among the fastest growing sectors in the country. India ranks first, ahead of Russia, in terms of emerging markets potential in retail and is deemed a Priority 1 market for international retail. The rapidly emerging Indian retail sector is experiencing unprecedented growth and is being widely recognized as one of the biggest potential growth markets in the world. Since 2005, Indias GDP has been growing at a healthy rate of 7%, and retail is emerging as one of the largest and most rapidly growing sectors, with retail sales accounting for 35.4% of GDP and employment accounting for up to 5% of Indias total workforce. (See Chart 7-3.)
Chart 7-3
Journey of Organized Retail: The India Story

81%

55% 45%

60%

a80
60 40 20 0 US

70%

80%

100

40%

85 81 55 40 30 20 3
15%

Organized vs. Traditional Retailing 15 19 45 60 70 80 97

30% 19% 20%

Source: Ernst & Young

Organized Traditional

Source: Ernst & Young

The attraction to Indian retail is obviousthe current total retail market is US$300 billion and is expected to grow to US$450 billion by 2010. However, it is critical to note that most of the countrys retail is in the unorganized sector. The sector to watch at this time is the organized sector. Organized retail currently accounts for only 3.5% of the total retail market. Since 2004, this sector has been growing at a meteoric rate of 25%-30% annually. This growth in organized retail is expected to continue and is projected to contribute 9% of the total retail sector by 2010 (Chart 7-4 on next page). Additionally, as the

M a la ysia

Th a ila n d

In d o n e sia

Ta iw a n

C h in a

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

In d ia

3%

27

Features
Chart 7-4
Retail Sales Growth (US$ Billion)

400 350 300 250 200 150 100 50 0 1998 2000 2002 2004 2006* 2008* 2010*
* Estimate/Forecast

Economic factors Indias fast emerging middle-income class currently constitutes 22% of the total population (over 220 million) and is expected to increase to 32% by 2010 (over 320 million, or the population of the U.S). The estimated total purchasing power of this class is magnified by an estimated corresponding growth of 8.5% in disposable incomes until 2015. (Table 7-2 on next page.) Social factors Indias urban population is expected to increase from 28% of the population in 2001 to 40% by 2011. This growth is not limited to Tier I cities; Tier II and Tier III cities are growing too, augmenting and expanding the countrys purchasing power far beyond the main metro areas. (Table 7-3 on next page.) Illustrating this (India has 61 other cities with populations greater than a half-million), these cities represent 80% of Indias population and contribute about 14% to the countrys GDP. The increasing global exposure of the urban Indian through work, education and travel is also playing a significant role in the growing demand for organized retailing shopping experiences and branded goods. Improved credit availability and the increased appetite for risk among the younger Indian population are indicated by the doubling of retail loans in the past three years (more than US$38.7 billion in 2006). These two factors combined have resulted in an unprecedented boom in purchases of high ticket items.

Source: Ernst & Young

sector continues on its organized growth path, existing domestic retailers are ramping up, large domestic business houses are entering the retail industry, and international retailers and brands are entering the Indian market in hordes. So, what is triggering the explosive growth in retail? Essentially, the key driver is booming consumer demand driven by numerous demographic, economic and social factors. Demographic factors Currently, more than 50% of Indias 1.1 billion population is less than 25 years old and is representative of the future consumer market India boasts. Multiple income families in India allow for higher purchasing power levels than those reflected by traditional per capita income indicators (Chart 7-5).

Chart 7-5
Indias Shifting Age Pyramid

200 (million)

200 (million)

Sources: Census of India, Ernst & Young RESEARCH REVIEW, VOL. 14, NO. 1, 2007

28

Features
Table 7-2
Indias Changing Income-Group Composition
Compound Annual Growth Rate (1999-2006)

while enhancing their entire shopping experience. Not much emphasis has been laid on the vital aspects of supply-chain management. However, with the growth of organized retail distribution and increasing competition, it is imperative for retailers to reform their supply chains to improve productivity and efficiency in order to remain profitable.

Sources: NCAER, NSSO, Ernst & Young

Table 7-3
Rate of Urbanization in India (1971-2011) Year Urban Share of Population (%)

1971 1981 1991 2001 2011

Source: Ernst & Young

20% 23 26 28 41 est.

Supply dynamics On the supply side, the private sector wants a piece of the action. Investors are entering the market with huge investments and are leveraging on the optimistic support of the capital markets. There is a steady flow of initial public offerings and private equity deals in the retail sector, and this is enabling existing retailers as well as new entrants to scale up their operations quickly. In the Indian retail revolution, the focus was (and still largely is) on capturing the attention of consumers

Government Regulation and Foreign Direct Investment Foreign Direct Investment (FDI) for retail is a widely debated issue in India. Both the Ministry of Finance and Ministry of Commerce & Industry are in support of opening up the widely fragmented Indian retail sector, but it still faces much opposition from small fragmented local retailers and leftist parties in the government. The last couple of months have been high with speculation as the Minister of Commerce & Industry has recently revealed plans to shortly further open up FDI that would include single brands and specialized niches like sporting goods, stationery and electronics. According to government sources, this will not only bring muchneeded investment into the sector, but also lead to increased sourcing for specialized global retail chains. However, no official statement has yet been pronounced in this regard. FDI restrictions in retailing have not deterred prominent international players from setting up shop in India. The correct market entry strategy can be devised for each individual retailer based on their business models. Entry of foreign players is possible through the five channels shown in Table 7-4 on the next page. In addition to the regulatory environment, import tariffs historically have been a further barrier for trading in India for many potential investors. With tariffs of 36.8% for many retail products, they remain a major issue for many overseas players. This has also fueled a significant gray market for many goods such as televisions and electrical products. These illegally imported products, which Customs has either failed to spot or to which it has turned a blind eye, can be significantly cheaper because of lack of duty. Importantly, though, many shoppers are now becoming

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

29

Features
Table 7-4
Regulatory Framework for Entry of Foreign Players Channel Entry Route - Foreign company gives name and technology to local partner and earns royalty on sales made. - Master franchise appointed for region or country, has right to appoint local franchisees. - Fast food retailers like Dominos have entered India through the master franchise route, while Pizza Hut has entered India through a regional franchisee. - Since January 2006, FDI up to 51% with prior government approval for retail trade in Single Brand products. Companies Who Have Entered India

Franchise Agreements

Dominos, Adidas, Marks & Spencer, Pizza Hut, The Medicine Shoppe, McDonalds, Nike, Tommy Hilfiger

Single-Brand Retailing

- Foreign companies can now sell Nike, Reebok, Nokia, LVMH globally sold goods under a single brand, such as Reebok and Adidas. - Retailing of goods of multiple brands, even if the goods are produced by the same manufacturer, is not allowed. - 100% FDI is now allowed in wholesale cash and carry trading on automatic basis. - This gives greater flexibility to foreign retailers, and the business model is built in a way in which wholesaler deals only with smaller retailers and not consumers. - Foreign retailers can procure goods locally / import. This route involves the foreign company entering into a licensing agreement with a domestic partner/ retailer. This route involves the foreign company setting up a local distributor office, supplying products to Indian retailers and also setting up franchised outlets for the brand.

Cash and Carry Wholesale Trading

Metro, Shop Rite

Manufacturing

Coca-Cola, Toyota, Bata

Distribution

Swarovski, Hugo Boss

more wary of big-ticket gray-market purchases due to the lack of consumer protection, i.e., no warranty, receipt or instruction manual. The good news is that the long-term prognosis for import tariffs is favorable. The government is committed to lowering them, in effect telling Indian manufacturers they must be competitive. We believe that in the long term, they will fall to under 10%, to be broadly in line with those of ASEAN (the Association of South East Asian Nations) territories. Clearly, however, the real gain for overseas retailers is to source locally rather than import, leveraging Indian sourcing across group operations all over the world.
RESEARCH REVIEW, VOL. 14, NO. 1, 2007

Other taxation levels worth noting are corporation tax of 33.5% and peak customs duty of 12.5%. A transition to a nationwide state-level value-added tax and a national goods-and-services tax is underway. This should reduce some of the complexity of the current system. What Do Indians Buy? The four major retail sectors are food and grocery, clothing, consumer durables and jewelry and accessories. Food and grocery contributes about 41% of private consumption expenditure and about 77% of total retail sales. However, this segment is largely controlled by the
30

Features
unorganized small outlet sector. The sector is defined by low gross margins, but there is a tremendous growth potential in the organized sector in the form of hypermarkets, supermarkets and discount chains. In such a scenario, pricing and network will be the key to success. Clothing is the second-largest segment in terms of retail sales. Indias organized retail sector is divided fundamentally into the following eight segments as shown in Charts 7-7 and 7-8: Footweardominates organized retail penetration (ORP) at 22%. This is mainly attributed to the dominance of home-grown players like Liberty, as well as the 15% market share that retailer Bata commands. Foreign presence, especially through the franchisee route, e.g., Adidas, Reebok, Nike, etc., adds to this slice of the pie. Franchisee activity in this category, especially in Tier II cities, is pegged to rise.

Chart 7-7
Total Retail Sales Share
(2005)
Health and Beauty 2%

Medical services 2%

Food and Grocery 77%

Footwear 1% Clothing 17%

Books and Music 1%

Home furnishings 2%

Jewelry and accessories 4% Durables 4%

Source: Ernst & Young

Chart 7-8
Organized Retail Penetration (ORP) Rate By Segment
Food & Grocery Health & Beauty Medical Services
% of Segment

1 1 2 22 12 9 8 5 3 5 10 15 20 25

Footwear Clothing Books & Music Jewelry & Accessories Durables Home Furnishings, 0
Source: Ernst & Young

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

31

Features
Clothinghas a 12% ORP and is likely to have the highest increase in ORP over the next three years (200710) due to the high level of branding activities by apparel retailers and to merchandising spread across formats such as department stores, hypermarkets, owned retail outlets and franchises. The womens clothing sector offers its own challenges. Not only do body shapes differ significantly between American and Indian women, Western clothes tend to be worn for socializing, while traditional Indian wear is still popular in the workplace and at ceremonial occasions. Both of these factors have a major impact on potential product ranges and on a means of targeting the mass market. Books and musicis a relatively unorganized market in India with an ORP of 9%. It is still concentrated in the eight largest cities and is slated for increase. Jewelry and accessorieswith ORP at 8%, this segment has a relatively lower organized retail presence, with fragmented traditional family-run units dominating retail sales. This segment will face increased competition, especially on price, as smaller retailers challenge the might of the larger retailers. Durableswith an ORP of only 5%, consumer durables is still a traditionally unorganized market in India. Growth in this segment has traditionally been driven by the post-liberalization era. Retail revenues in this segment will grow further in proportion with increases in urban incomes. Home furnishingshas been relatively unorganized so far, and growth will be driven by new formats introduced by innovative retailers. An interesting point here is that, unlike consumers in the West, Indians are not great do-it-yourselfers (DIYers). Local tradesmen tend to fill the role, generally sourcing unbranded parts from small hardware stores. The typical Western big box DIY concept would therefore not necessarily translate particularly well in its current form. Health and beautyboth have minor ORPs in organized retail at about 1%. To grow, this segment requires an innovative, aggressive approach on the part of Indian and international retailers. Food and grocerywhile it dominates total retail sales, due to its highly fragmented nature this segment has a relatively low ORP of 1%. This is a key factor behind Indias overall low ORP. However, with much of organized retail and new formats aiming at food and grocery, this segment is likely to see tremendous growth.

Experimenting With Models and Formats With their core business models in place, several Indian retailers are experimenting with different retail formats and various offerings as they compete to enhance consumer spending and the number of consumers. Most retailers initially began with department store formats, and many are now moving into value retailing and setting up hypermarkets and specialty stores. The Indian retail space is gradually being populated by hypermarkets, supermarkets, seamless malls, convenience stores, multiplexes, entertainment-cum-shopping centers, sports bars, etc. Table 7-5 on next page shows estimated growth in organized retail sales. Value retailing and convenience stores Value retailing that offers consumers both value for money and a modern shopping experience has been the major growth format for most emerging retail markets of Eastern Europe, Latin America and China. Value retailing has the advantages of reaching a very large section of the population and of covering the food and grocery segment (which as mentioned earlier contributes to about 40% of ORP). Although supermarkets dominate most cities, there has been a clear shift toward hypermarkets, driven by the combination of good prices, overall shopping convenience and experience, product range and quality. In China, most hypermarkets are located within city limits, as consumers do their shopping more than once a week. This is primarily because Chinese consumers prefer fresh produce and have low car penetration and limited refrigeration space at home. The same factors apply to Indian consumers, and we believe that successful hypermarkets in India will have to be centrally located in Tier I and Tier II cities. Pantaloons Big Bazaar hypermarket at Phoenix Mills, Mumbai, has sales of US$20 million per year, the highest by any retail outlet in India. Yet, there are only

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

32

Features
Table 7-5 Estimated Growth in Organized Retail ($million) 2002 2007
1,924 1,315 239 3,478 391 326 65 1,075 293 315 467 359 141 98 120 97 54 43 5,024 2,645 422 8,091 1,624 1,462 162 2,266 590 852 824 822 284 298 240 310 202 108

Format Large Other Non-store Total Organized The 4 Large Segments Food Chain Single (large format) Clothing Manufacturer Chain Single (large format) Consumer durables Manufacturer Chain Single (large format) Books & Music Chain Single (large format)

Compound Annualized Growth Rate (CAGR) 21 15 12 18% 33% 35 20 16% 15 22 12 18% 15 25 15 26% 30 20

Source: Economic Times Retail Knowledge

about 25 hypermarkets in India, operated by four major retailers. Indias 67 retail destinations therefore can absorb over 1,000 hypermarkets by 2010. Three out of Indias top five retailers already have aggressive hypermarket strategies in place. This is going to be one of the most preferred formats for international retailers entering India. Convenience stores are another format likely to experience rapid growth and performance, as they offer consumers value for money, convenience and variety. Rural retailing The challenges and opportunities posed by Indian rural retailing are immeasurable. A few large retailers have identified potential demand in the rural segment and have zeroed in on providing to consumers, under one roof, a modern retail experience at discounted prices, fair prices to farmers, a variety of products ranging from food and groceries to farm inputs, and even investment and insurance needs. First-mover advantage here is likely to bring high credibility and loyalty from local consumers. ITC Group and Godrej Group are early entrants into this arena and have already made marked progress and established strong brands in rural India.

Indian Supply-Chain Management Supply-chain management has been identified as one of Indian retails most significant pressure points. Several leading Indian retailers are talking about owning their own fleet of supply trucks and cargo aircraft to transport goods and fresh produce. By owning the entire supply chain, companies can bring about desired efficiencies in transport costs, inventory and cycle time; be highly profitable and still keep low prices; and increase sourcing and even export from India. Therefore, the big question is: Are big retailers going to change the face of supply chain and logistics in India? Are large investments sufficient to ensure that a supply chain perfected elsewhere in the world can be adapted to India? Numerous global corporations are eyeing the exploding Indian marketplace. Dell, Nokia, Motorola, LG, Honda and Hyundai are setting up or expanding production facilities to cater to the surging demand in the domestic market. So, is there a flip side at all? The short answer is yes. For global and large Indian companies planning to build supply chains from scratch, the hurdles are likely to be threefold: on the technology, infrastructure and human capital fronts.

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

33

Features
Although India is one of the global centers for IT development, most Indian companies have low levels of technology adoption, especially in the area of supplychain management. Most have built basic applications as a reaction to increasing costs and pressure on margins brought about by a competitive marketplace. Additionally, most applications are stand-alone, and key supply-chain issues such as sales peaks, inaccuracy in forecasting and constraint-based planning continue to hamper companies even after deployment of applications. Over 75% of goods in India are transported on highways, which account for less than 2% of Indias two million miles of roads. Most roads are dirt tracks or blacktop, at best, forcing delivery companies to use smaller vehicles with capacities below one ton. This results in increased costs, shortage of carrying capacity and other inefficiencies for companies looking to move large volumes of products and produce over long distances. Ports will also witness a 38% increase in tonnage in the next two to three years, and hence, port infrastructure cannot be ignored. Indias supply-chain environment is also very laborintensive as most functions, such as logistics, are usually staffed by a workforce low on skills as well as education. Several academic programs on supply-chain management are being established, and professionally qualified supply-chain professionals are entering Indian middle and upper management levels. However, companies will take some time to develop a depth of experience and an understanding of advanced supplychain principles. Despite these challenges, explosive growth in retail consumption and a complete transformation in consumer behavior are creating tremendous wealth in the market and making India an attractive destination for global and large Indian retailers. Going forward, there is going to be a relentless demand for improvement in supply-chain capabilities. Some of the wealth created in the marketplace will be driven as investment into critical pressure areas such as logistics, which is beginning to show signs of change. Over the last two years, supply-chain infrastructure and management know-how has started to gradually develop as the retail sector grows. It is expected that the huge investments planned in the retail sector will drive growth in warehousing and cargo transportation, create the need for integrated logistics solutions and bring global best practices to supply-chain management to India. Retail Real Estate India is the most exciting real estate market in Asia, opined Michael Smith, head of Asian Real Estate Investment Banking for Goldman Sachs. Growing at the rate of over 14% per annum in 2006, the Indian real-estate industry is estimated to be around US$15 billion and is the second largest employer in the country (accounting for four million jobs). The realestate sector as a whole contributed about 2%-3% of the national GDP during 2006. It is estimated that Indian real estate has the potential to grow to US$40 billion (some estimates even say US$90billion) by 2015. The availability of quality retail space is one of the major constraints limiting the development of organized retail formats in India. An increase in the availability of quality retail space likely will lead to a reduction in overall retail occupancy costs. Malls are likely to attract consumer traffic from existing high streets, increasing average footfalls and leading to more walk-ins for inline stores in these malls. The average real-estate investor yield for retail and entertainment is shown in Table 7-6.
Table 7-6

Average Real Estate Investor Yield

Average Return on Investment in Retail Real Estate 9 10%

Type

Cities New Delhi, Mumbai, Bangalore, Chennai Kolkata, Hyderabad, Pune Cochin Ludhiana, Jaipur, Mysore, Amritsar etc.

Tier I

Tier II

8 9%

Tier III

10 11%

Source: Ernst & Young

The organized retail boom is promoting the trend toward larger retail formats such as stand-alone big box retail and department stores in malls, and it is expected to keep growing rapidly.

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

34

Features
Map 7-2
Commercial Retail Space (Tier I & II Cities)

Entering India The last few years have seen strong international interest in Indias retail sector. With FDI legislation still relatively protective, companies have only selective modes of establishing their interests and operations in India. Entry modes Entry of foreign retailers is possible mainly through four channels, and the correct market entry strategy should be devised for each individual retailer based on their business models. Franchising through a master or regional franchisee: employed by the likes of Dominos, Pizza Hut, TGIF and Marks & Spencer. Cash-and-carry wholesale trading on an automatic basis wherein the company may procure goods locally or import and must operate in a way in which the wholesaler deals only with smaller retailers and not consumers: employed by Metro AG. Manufacturing through license agreements: employed by Coca-Cola, Bata and Toyota. In January 2006 the government allowed FDI up to 51% in retail trade of single brand products subject to the following conditions: i. Products to be sold should be of a single brand only.
Map 7-3
Commercial Retail Space
(Intensity Mapping of Activity in Tier III Cities)

Source: Ernst & Young

Strong demand fundamentals along with strong anticipated yields in the retail sector are fueling interest in retail development. Interest in this sector is anticipated to increase many-fold when FDI rules are relaxed to allow real-estate funds and investment trusts to invest in retail. From the map (Map 7-2), it can be seen that, thus far, organized retail supply is primarily in the large metro areas (New Delhi, Mumbai, Bangalore and Chennai). Due to their size, these cities are some of the most attractive consumer markets in Asia. Last year alone, about 8.6 million square feet of retail mall space was supplied to New Delhi and Mumbai. By the end of 2007, about 30 million square feet is expected to be supplied to these two Tier I cities. Retail mall development is increasing in other Indian metropolitan cities, too, as disposable incomes increase and the populations move, primarily due to the expansion of the IT industry. (See Map 7-3.) Interestingly, the retail mall trend is penetrating all the way to Tier III cities, with several large developers planning malls in smaller cities. Currently, 600 malls are planned by 2010, a 24-fold increase from 25 operational malls in 2003, and a fourfold increase from 158 at the end of 2005. (See Table 7-7 on next page.) Dividing this by geographical distribution, by 2007, the North zone will account for 39% of total mall space, followed by the West zone (33%), the South zone (18%) and the East zone (10%).
RESEARCH REVIEW, VOL. 14, NO. 1, 2007

Source: Ernst & Young

35

Features
Table 7-7
Number and Mall Space In Large Indian Cities By 2006 GLA (Gross Cities No. of malls Leasable Area) in million SFT New Delhi 96 23.5 Mumbai 55 16.2 Bangalore 14 8 ChennaI 6 2.5 Kolkata 10 3.2 Hyderabad 12 4.2 Pune 19 5.6 Ahmedabad 7 2.7 TOTAL 219 65.9
Source: Retailing in India, Coming to Market, The Economist, 2006.

ii. Products should be sold under the same brand internationally. iii. Single brand product retailing would cover only products that are branded during manufacturing. This has been successfully used by Nokia, Louis Vuitton-Moet Hennessey (LVMH), Lladro and several other luxury brands in their India operations during 2006. Franchising option For global players entering India, there are some key reasons for adopting a franchise model as the preferred business structure: Franchising is probably the best route by which to establish scale of operations without the added risk of large investments in a new or unfamiliar country. Up until January 2006, the only foreign-entry option for global players was franchising. However, subsequently, retailers had a new entry option through single brand FDI. Although this change is a positive move, it faces considerable political challenges from the 12 million mom-and-pop stores, which employ about 21 million people. As such, franchising continues to be popular with global companies wishing to enter the Indian market as they await lower restrictions on FDI in the future. Real-estate rentals in most Tier I cities in India are usually higher than global benchmarks, which is another hurdle for direct investment and a reason for franchising. Localization of preferences and consumer behavior and the enormous spread of the consuming class make the franchisee route an easier, less risky way to learn market realities and implement improvements.

Franchising in India needs to mature further to become a more attractive option, especially for apprehensive international retailers. Unlike in North America or Europe, there is no legislation for franchising in India and hence local operations are more open-ended. However, there are several Indian laws on taxation, labor and competition that clearly affect franchisee models. Therefore, a good understanding of laws affecting franchising is essential. The franchisee is expected to follow guidelines on the use of systems, trademarks, assistance, training and marketing while operating within a tightly monitored approval process. However, there are cases of incomplete processes and training, poor visibility for the global brand and inadequate returns on investment. Therefore, a well-framed franchisee agreement is critical, as are clauses such as buyout options (subject to regulations) and franchisee assurance through a third party. Finally, the key success factor in the model is performing a thorough search to select the right business partner, one who shares the strategic vision, has sufficient management expertise to comply with systems, has the financial muscle to support aggressive expansion plans and has real depth of knowledge to add strategic value on issues ranging from retail expertise to real estate. Challenges The retail sector is projected to boom in India over the next few years but faces certain challenges on its growth path. Those obstacles include: At this time, the regulation on FDI in the sector is one of the foremost limiters to growth in the sector by restricting entry of global players and capital through investment funds. The fact that the retail sector is still largely unorganized may hinder its growth and scaling-up potential as well as affecting the availability of finance. Indias prevalent poor infrastructure restricts accessibility and efficiency in logistics, and the absence of distribution networks connecting Tier II and smaller towns further restricts retails potential for expansion. The lack of efficient and organized supply-chain management leads to higher costs and complexity of sourcing and planning for retailers and, hence, for final consumers. The high cost of quality real estate due to constrained supply in prime locations is another potential stumbling block for retailers expanding into India.
36

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

Features
Unavailability of sufficiently skilled and trained manpower due to the nascent stage of the sector leads to higher trial and error in managing retail operations, thus leading to strained personnel and other costs. by 2010), price sensitivity is a serious consideration for the larger retail market. This is promoting the development of value retailing and discount stores and, thus, brand management and the growth of private labels in India. The emerging trend of entertainment retailing is becoming another important element of consumption patterns. Everybody seemingly knows that Indian retail offers a huge opportunity. However, if foreign retailers are planning to enter the market, they need to be aware that the consumer culture, business practices and industry dynamics in India can differ substantially from what they are accustomed to in their home markets, often leading to pitfalls for the unprepared. In this competitive scenario, what is it that will distinguish one retailer from another? It will be their ability to understand the uniqueness of the Indian retail sector and environment, through their understanding of the vagaries of the Indian consumer; the uniquely Indian business practices; the right type of Indian partner; the appropriate India entry strategy; the business and regulatory framework; strong fundamentals; and the ability to comprehend and keep pace with the phenomenal potential growth opportunities.

Outlook on Retail in India Over the next four to five years, the top 20 retailers will experiment across multiple retail formats and categories. By 2010, investments in retail and supply chains are anticipated to be in the range of US$20 billion-plus. Intense competition in the retail sector is expected to begin by 2008-09 as the footprints of the strongest few retailers begin to significantly overlap in Indias top 20 to 30 cities/towns. Newer entrants like Bharti Enterprises, Wal-Mart and AV Birla Groups ventures will find themselves competing directly with existing retailers like Pantaloon, Trent, Shoppers Stop and Lifestyle stores. Over the next five years, the sector is expected to directly generate up to 2.5 million new jobs. There is significant potential for retail expansion from the increasingly saturated metro areas to the smaller, regional urban centers. While on one hand, Indias highend luxury market is rapidly growing (clothing and accessories alone are expected to reach US$800 million

Dale Anne Reiss is the Global and Americas Director of Real Estate for Ernst & Young. She has specialized in providing a full spectrum of services to real estate and hospitality companies and real estate advisory assistance to corporations and financial institutions, including publicly traded and privately held client companies in all aspects of real estate development, investment and finance. Ms. Reiss has a B.S. in economics and accounting from the Illinois Institute of Technology and an M.B.A. in finance and statistics from the University of Chicago and is a certified public accountant. She is a Trustee of the Urban Land Institute, Illinois Institute of Technology/Stuart School, University of Chicago Graduate School of Business, and Pension Real Estate Association Board of Directors and is a member of the American Institute of Certified Public Accountants, Financial Executives Institute, Institute of Management Consultants, National Association of Real Estate Investment Trusts, The Chicago Network and the New York Forum. She is frequent speaker at real estate organizations and has written numerous articles. Ranjan Biswas is Partner and Head of Markets at Ernst & Young India. He also leads the BPO Advisory Center at Ernst & Young India. Over the past 14 years, Ranjan has participated in and led M&A transactions for corporate and financial investors. Ranjans responsibilities include deal sourcing, syndicating private equity for early stage and late stage companies, assisting companies in strategic business planning, restructuring and mergers and acquisitions. He has assisted a number of MNCs in developing and implementing their market entry and business strategies for India.. Prior to working for Ernst & Young, Ranjan was the Country head for Liberty Mutual Insurance Company in India.

RESEARCH REVIEW, VOL. 14, NO. 1, 2007

37