Opportunity India

By Aparna Dutt Sharma, CEO, India Brand Equity Foundation (IBEF), www.ibef.org Intro: From the local kirana shop to modern supermarkets, the Indian retail market has travelled many miles over the past two decades. The recently announced Foreign Direct Investment (FDI) guidelines in multi-brand and single-brand retail can potentially revolutionise the landscape of the Indian retail industry. The policy measures announced during September 2012 will have far reaching implications for the retail industry. Body: As compared to the days in the early 1990s, when a majority of the Indians were relying on the neighbourhood kirana shop for the monthly grocery requirement, the retail industry today offers a plethora of choices to the Indian consumer. However, it is no secret that the expectations of the Indian consumer are very different as compared to the consumers in western markets, thanks to the diverse structure of the country. As a result, businesses across sectors have been coming up with unique solutions to meet the demands of the Indian market. Retail sector has been no different. Retailers across the country have realised that the consumer is looking for quality goods at efficient pricing. The emergence of no-frills retail segment over the past one decade is a testimony to the fact that the Indian retailers have made progress in the right direction in understanding a large segment of Indian consumers. At the same time, many luxury retailers have also expanded their presence in the country to cash in on the rising aspirations of the Indian consumer. India has emerged as the fifth most favourable destination for international retailers, outpacing UAE, Russia, Indonesia and Saudi Arabia, according to A T Kearney's Global Retail

Development Index (GRDI) 2012. However, there is a lot more to be done on both fronts before they reach closer to the finish line.

The window of opportunity The sheer urge to succeed in the domestic circuit is more than justified by glancing at the growth potential of the Indian retail industry. Factors like a large market size, low organised retail penetration and increasing personal incomes make India an exciting and dynamic retail destination. With a market size of US$ 450 billion in 2012, the retail market in India is expected to be US$ 574 billion by 2015. The retail market in India has grown at a compounded annual growth rate (CAGR) of 5.9 per cent since 1998. While close to 60 per cent of the total market belongs to the food and grocery retail chains, the other broad segments includes categories like clothing and fashion stand at 9.9 per cent, Beauty and wellness account for 4 per cent, electronics for 6.4 per cent and furniture and furnishings for 3.4 per cent. With a growth rate of 18.4 per cent, the Indian market topped the charts in grocery sales across countries in 2010 with China growing at 12.4 per cent, Russia at 11.1 per cent, Brazil at 10 per cent, UK at 3 per cent and the US at 2 per cent. Chart 1: Growth of the Indian retail market (in US$ billion)
500 450 400 350 300 250 200 150 100 50 0 1998 2000 2002 2004 2006 2008 2010 2012E 238 201 204 278 321 368 425

450

(Source: Economist Intelligence Unit, Euro monitor, Aranca Research)

But even at such a robust growth rate, the organised retail is just a small fraction of the total retail industry in India. At the end of 2011-12, the share of organised retail stood at 5 per cent share of the total retail market in terms of penetration and the rest 95 per cent is penetrated by the unorganised retailers with over 12 million mom-and-pop stores. In comparison, the retail penetration is 85 per cent in the US, 81 per cent in Taiwan, 55 per cent in Malaysia. Clearly, there is a huge opportunity for organised retailers to prosper in the Indian market. It is believed that the share of organised retail will go up to 9 per cent by the end of 2015-16 and 20 per cent by the end of 2020-21. While the retail Industry in India has been growing for the past many decades now but the industry really started taking shape in the early 1990s soon after the economic liberalisation took place in the Indian economy. During the period 1990-2005, the market was in the conceptualisation phase where the pure play retailer realised the potential of the market. However, even during this period most of the players operated in the apparel segment. It was only 2005 onwards that substantial investments were committed by Indian corporates towards the food and general merchandise category. Post 2010, it has been seen that there has been a large scale consolidation and at the same time, retailers have started moving towards the smaller cities and rural areas. It was during this phase that the industry witnessed large scale entry of international brand. More importantly, the recently announced Foreign Direct Investment (FDI) measures in singlebrand and multi-brand retail are expected to boost the growth of the retail sector in India.

Chart2: Retail penetration across countries (2011)

120% 100% 80% 55% 60% 40% 20% 0% 15% US 19% Taiwan Malaysia Thailand Indonesia China India 45% 60% 85% 81% 70% 80% 95% 40% 30% 20% 5%

Unorganised retail penetration

Organised retail penetration

(Source: Ernst &Young, Aranca Research)

Banking on the FDI movement Till now, FDI up to 100 per cent was allowed for cash and carry wholesale trading and export trading under the automatic route, and FDI up to 51 per cent was allowed in single-brand retail, with prior government approvals. However, the Cabinet Committee on Economic Affairs (CCEA) recently permitted FDI up to 51 per cent in multi-brand retailing with prior Government approval and 100 per cent in single brand retailing thus further liberalising the sector. This policy initiative is expected to provide further fillip to the growth of the sector. For the record, the FDI reforms in multi-brand retail are expected to pave way for the international multi-brand retailers interested to set up shop in India. Simultaneously, the revised FDI guidelines single-brand retail will boost the presence of many international retailers in the country. Many global single-brand retail chains have entered into the country forging joint ventures with the local retailers over the past few years, the new guidelines will help them expand at a fast pace and would speed up the plans of many other retailers, who are yet to make their presence felt in the Indian retail market. Foreign multi-brand retailers present in India through cash-and-carry route are expected to roll out consumer facing formats in the short to medium term, according to a research paper by consultancy firm KPMG. The paper added that most of the foreign retailers will undertake
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changes in their cash-and-carry arrangement with their Indian partners. However, single brand retailers would significantly invest in India in the next 12-18 months due to 100 per cent ownership which is allowed. The FDI inflows in single-brand retail trading during April 2000 to June 2012 stood at US$ 42.70 million, according to the latest data released by Department of Industrial Policy and Promotion (DIPP).While are the steps in the right direction that will help the growth of organised retail in the Indian market, these policies will have a cascading effect in the longrun on the retail landscape in the Indian market. FDI guidelines in the Indian retail sector are likely to create 10 million jobs over the next 10 years, according to a report from Indian Staffing Federation (ISF). The report also mentioned that the new job opportunities in the sector will make it the largest sector in organised employment. Prima facie, FDI in multi-brand retail would benefit capital constrained retailers, accelerating the pace of investment in the supply chain to meet demands of increasing scale and enhancing efficiencies (offering competitive prices), besides expertise of foreign retailers, JP Morgan said in a note. As per the new guidelines, the minimum amount to be brought in by the foreign investor would be US$ 100 million and outlets may be set up only in cities with a population of more than 10 lakh for FDI in multi-brand retail. In fact, at least 50 per cent of FDI should be invested in 'back-end infrastructure' within three years of the first tranche. Unlike the assumptions from many sections of the society that the incoming of big retail giants will hurt the kirana shops, the new FDI guidelines can only be expected to boost the growth of the retail sector giving equal space to both these segments organised and unorganised retail - to grow. For instance, when Haldirams started offering Gol Gappas at its restaurants, it did not hurt the neighbourhood Gol Gappa stall owner. Rather, it only expanded the category and resulted in creating two different sets of consumers for this product. Holding a strong position Going by the A T Kearney 2011 Global Retail Development Report, India ranks fourth on the 2011 Global Retail Development Index and ranks sixth on the Global Apparel Index. In fact,
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as per the A T Kearney 2012 FDI Confidence Index, India ranks on the second position after Brazil (up from the third position in 2010) and if the retail sales are to be considered, the country is ranked third among emerging and developed nations, i.e. after China and Brazil.

Chart 3: India ranks fourth in the 2011 Global Retail Development Index
71.5%

65.5% 64.7%

63.0% 61.3% 61.2% 59.5% 58.2% 58.0% 57.8%

(Source: A.T.Kearney 2011 Global Retail Development Report, Aranca Analysis)

Strong standings on the global charts like the ones just mentioned hold a lot of importance, especially at a time when the consumer is looking for more choices. In fact, the incoming of modern retail giants will result in giving those choices to the consumer. At the same time, it does not mean that the local mom-and-pop stores will go out of business. The rise of modern retail will help in creating an ecosystem where both organised and unorganised retailers would continue to coexist. In order to protect the interest of the small and medium enterprises, the Government has set up a system where international retailers will push the local businesses by sourcing locally, both for single-brand and multi-brand retail. For instance, in the case of multi-brand retail, at least 30 per cent of the value of procurement of the manufactured or processed products shall be sourced from Indian small industries (which have a total investment in plant and machinery not exceeding US$ 1 million). Similarly, for single-brand retail, the FDI proposals that are looking at investing beyond 51
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per cent in the country, should source 31 per cent of the value of goods from India and preferably from small and medium enterprises, villages and cottage industries, artisans and craftsmen in all sectors. It is important to mention here that the effect of both these FDI guidelines will only be seen in the long-run. The policy push will surely speed up the India plans of many multinational retailers but we are still far from witnessing the presence of all the multinational retailers in the domestic industry. Not a sMall story As far as mall space requirement of the country is concerned, India will need an additional 45 million sq ft of space by 2013-14 in cities like Delhi, Mumbai, Kolkata and Chennai, according to research from Technopak advisors and Cushman & Wakefield. In addition, cities like Bengaluru, Pune, Hyderabad and Ahmedabad will require 21 million sq ft by 201314. While 21 per cent of this space will be taken up by hypermarkets, apparel stores will account for 19 per cent of the total requirement. Other segments like Multiplexes, gaming and food court will take 14 per cent, departmental stores will take 10 per cent, restaurants will take 8 per cent and super markets will take 9 per cent. The large share of hypermarkets is hardly surprising for anyone especially considering the fact that the grocery market in India being the fastest growing and hence, the most attractive segment across the globe.

Chart 4: Break-up of mall-space by Format in 2013-14

Hypermarkets 1% 6% 3% 8% 9% 8% 10% 14% Super markets Jewellary& time wear outlets 19% 21% Apparel stores Multiplexes, gaming & food court Department stores Footwear stores Restaurants& fastfood outlets Mobile stores

(Source: Technopak Advisors, Cushman & Wakefield Research)

The way forward The low share of organised retail and the huge potential of Indias retail market coupled with the rising disposable income make India a destination which is tough to miss for any global retailer. However, even at this stage, the industry needs an equal support from all the stakeholders including the government, vendors and the employees. The entry of international retailers would not only bring in new job opportunities and huge investments into the country but would also install the best practices which would help the local retailers to make their operations more efficient and effective. Consumer markets in emerging economies like India are growing rapidly owing to robust economic growth. The retail industry is highly competitive because of ever changing consumer preferences and the need for marketing differentiation. The retail enterprises need to focus on costs throughout the consumer value chain because of proliferation of new products and categories and ever increasing demands to optimise value chains.