Industry Analysis - Retail

Industry Analysis - RetailAbhinav Sirohi, NSC2 NITIE, MumbaiContentsOverview of Indian Retail Evolution of Indian RetailIndian Retail Market and its Value ChainModern Retail Internet RetailingGrowth Drivers Policy decisions on Retail Challenges to Indian Retail

Overview(1/3)

Rising income and demand for quality products to boost consumer expenditure Consumer expenditure estimated to be USD3.6 trillion by 2025 vis--vis USD1.0 trillion in 2010 Indian retail one of the fastest growing markets in the world due to economic growth Favourable government policies to boost investor confidence and thereby investments across modern retail formats Retail market in India to reach USD866 billion by 2015 from the current USD516 billion Modern retail market to expand to USD88.3 billion by 2015 from USD40.5 billion in 2012 Overview(2/3)

Robust consumption, rural markets to augment FMCG market FMCG market expected to increase to USD100 billion by 2025 from USD12 billion in 2006 Increasing participation from foreign and private players to boost retail infrastructure Rising number of tier-2 and tier-3 cities to enhance supermarket space in the country Modern retail stores projected to reach 67,100 by 2016 from 11,192 in 2006 Supermarkets to total 8,500 by 2016 from 500 in 2006 Overview (3/3)70% of the growth is expected from urban centres and it will be interesting to watch the transformation of the urban retail landscapeAccording to a study by the EIU (Economist Intelligence Unit), India along with China shall drive the growth of the retail industry in the APAC region

The Indian retail industry has experienced growth of 10.6% between 2010 and 2012 and is expected to increase to USD 750-850 billion by 2015. Food and Grocery is the largest category within the retail sector with 60 per cent share followed by Apparel and Mobile segment.

Within the organized retail sector, Apparel is the largest segment. Food and Grocery and Mobile and telecom are the other major contributors to this segment.

Slowdown effect ??India falls nine spots in the GRDI to 14th; its previous low ranking was 6th place in the inaugural Index in 2002, and it was first as recently as 2009. The report highlights that However, the long-term fundamentals remain strong: in particular, a large, young, increasingly brand- and fashion-conscious population. Retail growth of 14 to 15 percent per year is expected through 2015. Modern retail remains limited (7 percent in 2012), but it is expected to grow as the country urbanizes and retailers make new investments.What are the reasons of the fall

Evolution of Indian RetailValue chain of RetailCan we get an average amount of money spent in all of he efforts from sourcing till store operations. If not average, if possible, do it for one particular product or MT player.The idea is to get a rough estimate of the amount of money spent in each of the echelons of the process.Indian Retail MarketUnorganized Retail Market No numbers here??Organized Retail MarketOrganized Retail

Both the share and growth rate of Organized retail is expected to have a accelerated growth.Evolution of Organized Retail

Evolution of Organized Retail in India has been led by Apparel and Footwear, with investments in Food & Grocery picking up recentlyGrowth in organized retail has been led by non-Food & Grocery segments in India e.g. apparel, footwear Liberalization led to an exponential increase in organized retail across categoriesHowever, it is only in the past 6-7 years that Food & Grocery has witnessed the entry of large domestic and foreign players

Challenges faced by Organized Retailers

The Indian market presents major structural challenges Rising real estate costs are posing a key challenge for retailers across all sectors MRP constraints compel retailers to operate onthin margins Competition from kiranas as well as an increasing number of foreign retailers has intensified over the past decade Poor supply chain (including cold chain) due to inadequate infrastructure leads to high wastage and impacts timely availability of products% current value growth, retail value rsp excl sales tax2011/122007-12 CAGR2007/12 TotalDirect Selling 24.519.2140.9Homeshopping 10.220.8157.0Internet Retailing 35.837.4389.6Vending ---Non-Store Retailing 28.726.5223.4Note: Vending data captures vending systems installed in public and semi-captive environments only.

Sales in Non-store Retailing by Channel: % Value Growth 2007-2012Source: Euromonitor International from official statistics, trade associations, trade press, company research, trade interviews, trade sourcesRs bn, retail value rsp excl sales tax200720082009201020112012Apparel Specialist Retailers 1,331.51,486.21,668.51,872.22,115.52,549.2Electronics and Appliance Specialist Retailers 412.9454.1495.0549.5613.9715.1Health and Beauty Specialist Retailers 325.1339.7354.3376.5402.0433.6Home and Garden Specialist Retailers 423.7454.7473.8505.7542.2614.4Leisure and Personal Goods Specialist Retailers 856.6953.61,094.91,298.31,561.71,880.9Mixed Retailers 49.260.861.375.192.3111.2Other Non-Grocery Retailers 19.721.523.225.527.630.6Non-Grocery Retailers 3,418.73,770.54,170.94,702.85,355.16,335.0Sales in Non-Grocery Retailers by Channel: Value 2007-2012% retail value rsp excl sales taxCompany2009201020112012Tanishq Titan Industries Ltd0.20.20.30.3Big Bazaar Future Value Retail Ltd-0.30.30.3Reliance Reliance Retail Ltd0.20.20.20.2Amway Amway India Enterprises Pvt Ltd0.10.10.10.1Shoppers' Stop Shopper's Stop Ltd0.10.10.10.1Lifestyle Lifestyle International Pvt Ltd0.10.10.10.1LG Shoppe LG Electronics India Pvt Ltd0.10.10.10.1Vishal Mega Mart Vishal Retail Ltd0.10.1--Big Bazaar Pantaloon Retail India Ltd0.3---Subhiksha Subhiksha Trading Services Pvt Ltd----Others Others99.098.898.898.7Total Total100.0100.0100.0100.0Retailing Brand Shares: % Value 2009-2012Source: Euromonitor International from official statistics, trade associations, trade press, company research, trade interviews, trade sourcesKey Strategies of Indian Retailers

There shouldve been a brief explanations of these models as to how do they workSome Successful Innovations of Indian Retailers

Modern Retail Modern Retail Verticals

Shift in the Indian Shopping Landscape

A simple comparison with other developed and emerging economies in Asia indicates room for a manifold increase in Modern Trade density.Contrasted with the density for Traditional Trade outlets (at approximately 7000 stores per million), the lower density of Modern Trade is poised to changeSource NielsenModern Trade in Urban IndiaEach of the key market have shown a double digit growth rates , with the share of Modern Trade exceeding a fifth of total sales

Footfall to Modern Trade outlets spike The number of shoppers who visit Modern Trade on a regular basis, has doubled over a five year period.They are not simply strolling through the air conditioned aisles they are purchasing more than ever before as wellMT dominates the share of wallet

Internet Retailing(1/2)Issues with e-commerceUse of credit cards, debit cards and online banking Touch and feel of the product is a critical attribute Internet or the electronic media used for search, research, price comparison and finally the store locater to buy the product.E-commerce has become very popular in the areas of-apparel, arts and handicrafts, books, car rentals, computers and electronics, cosmetics, financial services, gifts and novelties, etc.E-Retail market will be worth US$ 70 billion by 2015 (according to ASSOCHAM) with a steady growth of 35% CAGR.Growth of Internet user is accelerating growth of this sector. According to Google, India has more than 100 million internet users, half of whom make online purchases, and the number is growing every year. Online retail (also known as e-tail) is a web-enabled interface between a retailer and its target consumers for selling products and services on the web with the facility of ecommerce. These kinds of retailers are also known as e-tailers.Among Indian states, Maharashtra has the best IT infrastructure, both for retailers as well as consumers. Mumbai accounts for a 24% of Indias e-commerce transactionsSource pwc-The Indian Kaleidoscope: Emerging trends in RetailGrowth Drivers-convenience lower price points vast variety of brand optionscash on delivery option developed trust in the channel Consumers in 2012 started practicing show-rooming to get the best bargain on a product post the touch and feel experience at a store-based retailer.Store-based retailers increased their focus.

Internet Retailing (2/2)Big Bazaarwww.futurebazaar.com,Infiniti Retails Cromawww.cromaretail.com K Raheja Corps Shoppers Stop www.shoppersstop.comFuture Impact- Expected to grow at a CAGR of 8% and the highest growth rate for products such as toys and games, personal goods and eyewear, consumer health and tissue and hygiene are expected to be via internet retailing channel.The channel will take a minimum of 10-15 years to affect store-based retailing as in 2012, 99% of the total retailing was store-based.Apparel, footwear, personal accessories and eyewear will particularly be the most crowded product categories for internet retailers as these products have minimum losses after the cost of packaging, free shipping and delivery is taken into account. Grocery retailers will not be affected by internet retailers in the short term Growth drivers of Retail Favorable demographicsRising Income levelsChanges in consumer needs, attitudesIncreased credit friendlinessIncreased consumer awareness

Favorable demographics

One of the youngest populations in the world, with a median age of 25 years. 60% of the population today is below the age of 30 yearsBy 2020, the number of people in the working age population in India is expected to grow by more than 47 million.

Rising Income levelsCurrent Impact - Growth of 13% in annual disposable income across IndiaAlmost 15% in major cities like Delhi and Chennai Per Capita expenditure increased at a rate of 12% in 2011-12Consumers spent more in hypermarkets, apparel specialist retailers, electronics and appliance specialist retailers and health and beauty specialist retailers which enjoyed very strong growths at 20%, 21%, 17% and 8% respectivelyWorld-class luxury is within reach of Indians. The luxury car market in India has grown at a CAGR of 22% (2008-09 to 2010-11) . Mini metros and smaller cities are also showing an increased appetite for luxury car brands a tier 2 city like Indore now has the largest Mercedes Benz showroom in the country!

Source Euromonitor- Retail ReportIncreased credit friendlinessEasy Credit facility which includes zero EMI facility and acceptance of plastic money at majority of the retailers also helped in the growth of retail sector.Card payment transactions excluding commercial transactions witnessed growth of 35% in 2011-12.The CAGR for card payment transactions witnessed growth of 27% in the review period and is expected to increase to 33% in the forecast periodThe number of point of sale terminals witnessed an increase of 16% at 717,000 units. This increased number of point of sale terminals increased the use of cards across all retailing outlets in India.A change in the shopping habit - Instead of going to the local kirana store whenever something is required, most urban consumers nowadays changed the practice to doing grocery shopping once a week. This resulted in one large bill one time every week which 35-40% of all consumers paid for with cards.Use of cards provided consumers with the independence to spend more without the actual act of handing over cash. The average spend per transaction witnessed an increase of 13% in 2012. The government is also constantly focussing and encouraging consumers across the country to use cards and decrease the number of cash transactionsAn case to ponder - Companies such as ValueCloud Ltd introduced Cloud Card. The company has links with 15 retailers which include restaurants, fashion brands, spas and salons such as Clarins, Jimmy Choo, Caf Noir, Bay Leaf and more where these closed loop cards can be used. This will eventually be mirrored by other companies and retailers as well in order to obtain a loyal customer base.Policy decisions on RetailTimeline of Govt. decisions on FDI

FDI in Multi Brand Retail

Timeline of evolution of FDI in MBRT Source- Deloitte Indian Retail Report Implications of 51% FDI in MBRTMinimum FDI of USD 100 millionMinimum FDI of USD 100 million and a constraint of maximum 51 per cent stake of the foreign entity imply that the minimum investment required by both, the foreign and the Indian partner together, is more than INR 1000cr.50 per cent of FDI in backend infrastructure in three yearsMinimum investment of INR 250-220cr is to be invested in backend infrastructure in the first three years.30 per cent of sourcing from small industriesThis policy constraint implies that retailers should have at least 30 per cent sales from private label brands or unbranded products sourced from small industries.Only cities with population more than one millionOnly 53 cities in India qualify under this policy condition. This policy constraint restricts the access to retail marketing all sub-one million populated cities and towns.Approval from State Government requiredThere are only 18 cities in India with population more than one million and the corresponding State Government supporting FDI in multi-brand.E-commerce not permissibleMulti-brand retailers with FDI will not be able to use e-commerce, whereas, Indian retailers can use e-commerce as another channel for sales.

Impact of FDI in Retail

GST would simplify the Tax structure

Challenges to Indian Retail SectorEven with FDI reforms for retail, India will be a major challenge. Big Retailers are still sceptical on Indian entry because of political uncertainty over FDI in Retail.

Road network hinders shipment of goods across India.Markets with large land areas must depend on a solid transport infrastructure in order to ship goods across the country.

At only 4% of households, India has one of the lowest levels of passenger car ownership.This limits the scope for large grocery trips This will prove to be a major challenge to foreign companies, like Wal-Mart, aiming to set up big box stores in India.The market is highly fragmented, and chained competitors have inefficient supply chains, resulting in higher costs for retailers and consumers.

Recent M&A deals in Indian Retail

ReferencesIBEF Indian Retail report (August 2013)Understanding Indias New Breed of Shoppers, Nielsen Featured InsightsIndia Boarding Destination- Indian Retail Market, Consulting white paper by Tata Consultancy ServicesThe Indian Kaleidoscope : Emerging trends in retail, A report by pwc and FICCI, September 2012Indian Retail Market- Opening more doors, A report by Deloitte, January 2013A guide to Indias new FDI rules, Euromonitor Passport, December 2011Successful Innovations in Indian Retail, Booz and co. and RAI, February 2013Analysis Indian Retail , Euromonitor International Indian Retail report 2011, Images Group and IRIS Research