India’s Economic Growth and Consumer Market Development · II. State of India’s Retail Industry...

June 10, 2013

Naoki Nagashima

Senior Research Fellow

Economic Research Center, FRI

India’s Economic Growth and Consumer Market Development

Copyright 2013 FUJITSU RESEARCH INSTITUTE

1 Copyright 2013 FUJITSU RESEARCH INSTITUTE

Report Overview

Background and Presentation of Issues

I. Appearance of New Urban Middle Class

・ Present portrait of consumers based on local consumer survey

・ Similarities and differences with Japan

II. State of India’s Retail Industry and Japanese Companies’

Potential

・ Retail sector is a segmentalized market

・ Supermarkets are problematic, convenience stores have potential

III. Issues with and Hints for Entering Retail in India

・ Permits and licenses systems, rising real estate prices, securing labor, distribution, etc. ・ Cooperation and cohabitation with traditional small-scale shops

Finally…

Background and Presentation of Issues

Background

・ In India, (multiple brand) retailers are still unable to enter the market due to

foreign capital regulations, but last autumn the ban was lifted, albeit conditionally.

・ As a result, large foreign corporations are preparing to expand into the market.

Issues

・ It’s difficult for Japanese retail to take on all of India from the start, but

urban population is growing, the urban middle class profile is gradually

nearing that of developed countries and homogenizing.

・ A clear image of consumers in India is necessary for considering doing

business there.

・ There is a way to enter this new target consumer market, but what are the

challenges? Let’s examine retail in detail.


I. Appearance of

New Urban Middle Class


Chennai: One of 4 major cities

Population: 4.7 million

(7.7 million in greater area)

Face-to-face Survey

Behavioral observation important,

but quantitative survey necessary

to grasp trends

Copyright 2013 FUJITSU RESEARCH INSTITUTE 4

Copyright 2012 FUJITSU RESEACH INSTITUTE 5

Coimbatore:

Outlying city of Chennai

Pop. 920,000

(urban area 1.45 million)


Customers: Similarities and Differences

with Japan

・ Rapidly rising demand for frozen/instant foods

Various needs for point-of-sale retail services

・ Customer experience value is greatest differentiator

In past, price was paramount

Moved towards balance of quality and price (value for money)

Recently, customer experience has gained importance

(convenience, comfort)

Some facets nearing developed countries


Increasing Frozen/Instant Foods Demand

Eating Habits Nearing Developed Countries’

・ Demand for frozen/instant foods is increasing

Vista Processed Foods: Food supplier for McDonald’s and Subway

Started selling frozen french fries

Started making frozen omelets (sales to start in 3-6 mo.)

WalMart: preparing to start private brand of frozen foods

・ Home meal replacements, such as bento lunch boxes, also on the rise

・ Fast food shops also doing well

Recent Trend

Cell phone charging, checking internet also demanded (free answer field)

NB: Survey on 320 middle class residents in Chennai and Coimbatore


Great Need for Point of Sale Services

1st: Paying utilities

2nd: Ticket reservations

3rd: Send/receive packages

4th: Bank ATMs



with Japan

・ Rapidly rising demand for frozen/instant foods

Various needs for point-of-sale retail services

・ Customer experience value is greatest differentiator

In past, price was paramount

Moved towards balance of quality and price (value for money)

Recently, customer experience has gained importance

(convenience, comfort)

Some facets nearing developed countries


満足要因不満要因満足要因不満要因

　（１）品質 72 74 94 8

　（２）価格 42 26 39 41

　（３）顧客経験（利便性・快適性） 160 78 236 128

　　　　立地（近さ・環境） 124 1 7 3

　　　　品揃え・お買い得品 8 10 66 7

　　　　ワンストップショッピング 0 4 124 0

　　　　サービス（配送・ツケ・量・表示など） 20 6 16 8

　　　　店の概観・環境 1 23 4 1

　　　　店内の雰囲気・美観・混雑 1 16 4 21

　　　　店員のアプローチ・反応 4 13 12 22

　　　　時間（レジ・パッケージ・売り場移動） 2 1 3 58

　　　　パッケージの適切さ 0 4 0 0

　　　　駐車スペース 0 0 0 8

食品スーパー・ハイパーマーケットキラナ

Retail Store Satisfaction/Dissatisfaction

Note: conducted on 320 middle class people in Chennai and Coimbatore

Customer Experience

Important


Examples of Kirana (corner store)

・ Customer experience has greatest correlation with overall evaluation,

followed by quality

・Higher socio-economic classes show this trend strongly


Factors deciding overall evaluation

(customer satisfaction

Effect on Satisfaction

Coefficient of

correlation

with overall

evaluation

Overall evaluation drops due to “unsatisfactory quality.”

Conversely, it rises due to “satisfactory customer experience.”

In other words,

Quality is a necessary condition for satisfaction

Customer experience is a sufficient condition (after fulfilling necessary condition)


Slightly finer analysis shows…


消費者像：日本との共通点・相違点

・ Overall evaluation made up almost entirely 3

factors: quality, price, customer experience

・ Loyalty can be obtained relatively easily

・ Shopping efficiency, time are important (somewhat

impatient)

Facets differing from Japan


with Japan


Model of Overall Evaluation

The above model:

Explains only about 30% of Japanese consumers,

But about 80% of Indian consumers.

(Clear and rational)

Overall

Evaluation

Quality

Price

Customer

Experience






impatient)



with Japan

Loyalty…

インド日本

ロイヤルティ（再来店の意図）

必ず

たぶん

もしかしたら

無し

不満まあ満足満足


Overall

Eval.

Loyalty

Loyalty (intent to return to

store) easier to obtain in India

(esp. when overall eval. is so-so)

Different from Japanese

consumers on this point

Still few supermarkets, so early

entrants may be at advantage

India Japan






impatient)


with Japan


Enter Store

(Start)

Browse

(Middle)

Checkout

(Finish)

Japan Speed Accuracy Empathy

India Speed Speed and

comfort

Speed

“Takes too much time” was seen repeatedly as a factor of dissatisfaction


Indian Consumers Value Speed

Customer Experience Process

Evalu

atio

n

Poin

ts


Image of Consumers in

Exploding Middle Class

Example:

・ Nuclear family: couple in 30s with 1 child, living in urban area.

Husband a professional with university degree, wife also working, no

maid.

・ Normally shop in neighborhood, but on weekend husband drives

them to nearby hypermarket.

(Frozen foods, cereal, daily goods, cosmetics)

・ Enjoy eating out on weekends. Frequent fast food shops. Great

need for services, emphasis on efficiency; impatient. Concerned about

health, but eating habits becoming similar to developed countries’.

・ Slightly dissatisfied with experience at retail stores, but not many

choices; will continue current shopping pattern. Evaluates stores

rationally based on quality, price, and experience.

II. State of India’s Retail Industry

and Japanese Companies’ Potential


State of India’s Retail Industry


Segmentalized Market

Family-run small-scale shops

“Kirana”

Make up 93.5% of all shops (2011)

Sell mostly food, daily goods,

sundries.

15 million shops across India.

20位までのシェア（％）

シェア %

　チリ 54.5

　ハンガリー 47.4

　英国 41.6

　チェコ 40.9

　タイ 28.8

　メキシコ 27.8

　マレーシア 25.3

　台湾 24.4

　ロシア 18.1

　インドネシア 9.1

　中国 7.8

　インド 1.9

（出所）IIM: Center for Retailing

Supply:

Vendor Segmentalization

No oligopolization of retail

(Shares of top 20 vendors)


Regional Differences

Ex: 21 official languages other than English and Hindi

(Fewer than 15% understand English; more than 1600 local dialects)

Sales of grains, cooking oil differs greatly by province.

(Urban middle class’s lifestyles and values are becoming similar, but…)

In general, difficult to pursue economy of scale

Even national super/hypermarkets which are large local

conglomerates have small profit margins

Are huge foreign-owned companies like

WalMart also having difficulty?

State of India’s Retail Industry


Japanese Retail Concept

A Co. (Supermarket) Finds differentiation from local conglomerates and huge foreign

affiliates to be difficult.

B Co. (Supermarket) High search costs prevent from moving to feasibility studies.

C Co. (Convenience Store) Interest in Indian home meal replacements. Uncertain of rising real

estate costs and securing HR.

D Co. (Convenience Store) Cultural compatibility of Japanese convenience stores in India unclear.

Depends on agreement partner.

Supermarkets face difficulties ← Indeed

Perhaps convenience stores ← Opportunity

In

summary

Terminal

similar to

MMK (utilities

payment, etc)

Indian Convenience Stores


III. Issues when

Entering Retail in India



Challenges

Permits and Licenses System

Indian government policy is one of liberalization, but with conditions

Conditions:

・ Maximum foreign capital 51％

・ Minimum investment $100 million

・ Limited to urban areas

・ Rear infrastructure investment must account for more than half

・ More than 30% of supply chain must be procured from local

small and medium companies

Separate permits and licenses from provincial government

also needed (policies and attitudes vary by province)

If one can take the risk, large-scale investments like

IKEA’s are welcome

・ Small starts are limited

・ Long-term plan needed


Supply Chain and Distribution

Necessary to either build supply chain and distribution system on one’s

own, or form partnership with organization that already has them.

Ex: American fast food chain

Direct contract with farmers (advise on improving irrigation too)

Establish and tweak cold chain

(Beforehand, refrigerated warehouses, tri-level transportation trucks)

Currently has 500 stores in India

Due to weak warehousing/distribution system, 1/3 of all produce in India

rots every year

Investment very effective (but long-term plan also needed)

Rocketing Real Estate Prices, Securing HR

One idea: turn to kirana (see below)

Challenges

・ Antipathy towards large supermarkets and very strong

competitiveness ・ Low-cost management

・ Strong localties

・ Added services (delivery service, tabs for regulars)


Existence of Kirana

Many consultants/researchers advise coexistence

and cooperation with kirana, but problem is

kirana store owners

Strong antipathy (1/2) Still against it (1/3)

Two ways of thinking

(Esp. towards large stores)

Not much interest (1/2)

(Status quo is fine)

If cooperation with supermarket would

raise sales?

Might think about it (2/3)

Not interested (all)

Challenges

Local food store chain (green sign: respectable modern distribution

chain)

・ Left: next to kirana, split storefront in 2 to make appear smaller.

(central space rented out to cafe/eatery)

・ Right: displays are tidy but similar to kirana’s

Case Study of “Blending In”


Finally…



Urban area: 30% Urban area: 40%

Now In 10-15 years

Rural: 70％ Rural: 60％ 15% of that

70% of that

4-5% of whole (approx 50 million)

Almost 30% of whole (approx 400 million)

Urban Middle Class will Grow Rapidly


Possibilities in health, beauty, entertainment, food

services, insurance, etc.

Ex: E Co. (health appliances maker) (2009 onward) High rate of metabolic syndrome (20% of men, 16% of women in urban

areas, 5.1 million cases of diabetes)

Selling health meters through hypermarkets

Expanding sales channels to hospitals and gyms

F Co. (instant foods maker)(1991 onward) Introduced low calorie products

G Co. (large beef-rice bowl chain)

H Co. (Japanese curry chain)

eCommerce as supply method

Even with internet, many averse to online shopping.

Business models with payment and pickup at kirana counter.

Preparing rollout

Big Opportunities in Related Sectors

Must pursue new image of urban middle class consumer from many angles

India’s Economic Growth and Consumer Market Development · II. State of India’s Retail Industry...

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