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technopak
Arvind SinghalTiE – Delhi
22nd July 2006
Indian Retail Sector
Trends & Opportunities
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Contents
Overview of Indian retail opportunity
The emerging Indian consumer
Changes in the retail sector
Impact Areas
Conclusion
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Overview Of Indian Retail Opportunity
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Size of the economy
Fiscal Year GDP at current prices (US$ Billion)
2005-6 804
2009-10 1133
2014-15 1721
Sources• 2006 GDP :Central Statistical Organization (CS0) • Growth Rates :Goldman Sach’s BRIC report (For details please refer to the appendix of this presentation)
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GDP US$ 804 Bn
Private Consumption
US $482 Bn (60%)
RetailUS $300 Bn (62%)
Non-RetailUS $182 Bn (38%)
UrbanUS $135 Bn (45%)
RuralUS $165 Bn (55%)
..With high Private Consumption
India is a consumption led economy : Private Final Consumption Expenditure (PFCE) is 60% of the economy (as against 42% of China and 55% of Japan)
Source :Central Statistical Organization (CS0) and Technopak Analysis
Public Spending and Gross Capital Formation 40%
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Growing Retail Market
300
427
637
0
100
200
300
400
500
600
700
US $ Billion
2006 2010 2015
Source :Technopak Analysis
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Retail Market : Rural/Urban Split
Almost half of retail market in 2006 is in rural India; although share of urban market is increasing by almost 5% every 8-10 years
Source :National Account Statistics; Monthly per capita Expenditure and Technopak Analysis
% Split
Urban 45%
Rural 55%
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Retail Market : Urban Split
Source :RK Swami BBDO
City Type
% of Population
% of Urban Market
(Cumulative)
% of Total Market
(Cumulative)
Cumulative Market
US $ Billion
Top 4 16% 20% 9% 27
Top 9 24% 30% 13% 40
Top 62 43% 50% 22% 67
Top 141 53% 60% 27% 80
Top 338 63% 70% 31% 94
Top 530 69% 75% 33% 100
Top 784 74% 78% 35% 104
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Retail Market : Rural Split
Rural India consists of 720 Million consumers across 627,000 villages
17% of these villages account for 50% of the rural population and 60% of the rural wealth implying reaching out to almost 100,000+ villages to address even 50% of this rural opportunity
Source: Census; National Council of Applied Economic Research (NCAER)
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Retail :Share of categories Market
Size $billion
2006
% Share 2006
Growth Rate b/w 2010-05
Market Size
$billion 2010
% Share 2010
Growth Rate b/w 2015-10
Market Size US $billion
2015
% Share 2015
Food, Beverages and Tobacco 195 65% 7.0% 256 60% 6% 342 54%
Personal Care 15 5% 11% 23 5% 9% 35 5%
Apparel 21 7% 11% 33 8% 9% 50 8%
Footwear 5 2% 11% 7 2% 9% 11 2%
Furnishings 4 1% 15% 7 2% 12% 12 2%
Consumer Durables & IT 14 5% 15% 24 6% 12% 43 7%
Furniture 9 3% 15% 16 4% 12% 28 4%
Jewellery & Watches 15 5% 12% 24 6% 9% 37 6%
Medical Care and Health Services
8 3% 12% 12 3% 12% 21 3%
Recreation 2 0.6% 17% 3 1% 15% 7 1%
Others 12 4% 18% 23 5% 18% 53 8%
300 100% 9% 427 100% 8.4% 637 100%
Above are indicative calculations only Share is % share of Retail market. The share would be about 60% of the above numbers in case they are to be seen as % PFCE. For example Food, Beverages and Tobacco would be about 40% of the PFCE
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Key Trends Impacting The Market…
Urbanization? How rapid is it going to be?
What is the likely impact on consumption and its growth/trends?
Changing family structures? What is the future family structure?
How is it going to impact shopping behavior?
How is it going to impact the spending power and hence consumption?
Demographic Changes? What would be the demographic structure of India in next 5, 10, 15 years?
How is it going to impact shopping behavior?
How is it going to impact the spending power and hence consumption?
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In View Of The Rapidly Expanding Spend Categories…
1. Food and Grocery2. Clothing3. Footwear4. Consumer durables 5. Home linen6. Movies and theatre7. Eating out
19911991
1. Food and Grocery2. Clothing3. Footwear4. Consumer durables 5. Expenditure on DVDs and VCDs6. Home linen7. Home accessories 8. Accessories9. Gifts10. Take-away/ Pre cooked / RTE meals11. Movies and theatre12. Eating out13. Entertainment parks14. Mobile phones and service15. Household help16. Travel packages 17. Club membership18. Computer Peripheral & Internet
Usage
20042004 20102010
1. Food and Grocery2. Clothing3. Footwear4. Consumer durables 5. Expenditure on DVDs and VCDs6. Home linen7. Home accessories 8. Accessories9. Gifts10. Take-away/ Pre cooked / RTE meals11. Movies and theatre12. Eating out13. Entertainment parks14. Mobile phones and service15. Household help16. Travel packages 17. Club membership18. Computer Peripheral & Internet Usage19. ???20. ???21. ???22. ???Note: The above categories account for 80% of consumer spending
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Two-faced Indian Consumers…
Seeking upgradation in some categories & value in the others! Key issue for any retailer is to identify the “upgrades” and “value-focused”
product categories to rationalize the product mix and maintain healthy margins
Consumer SpendsConsumer SpendsGroceryApparel
Eating Out
Upgrading
Mobile phonesHousing
AutomobilesDurablesEducation
Seeking cheaper options
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Implications
Profile of the Indian consumer is changing and so are the aspirations and buying behavior
Consumer understanding and consumer orientation will be one of the key drivers of future success
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Current Retail Channels
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Current Channels
Over 12 million outlets in India
95% of outlets are smaller than 500 sq ft
Indian retail space per capita at 2 sq ft/ person is lowest in the world
Indian retail density of 6% is highest in the world
Highest number of outlets per person (7 per thousand)
One of the most fragmented markets in the World
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The share of organized retail is less than 3% of the total retail market
The size of modern retail is about US$ 8 Billion and has grown by 35% CAGR in last five years
85% 81%
55%40% 36% 30%
20% 20% 3%
0%
20%
40%
60%
80%
100%
US Taiwan Malaysia Thailand Brazil Indonesia Poland China India
Traditional Channel Modern Channel
Current Channels : Organized Retail
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Market Size : US $ 8billion
Current Channels : Organized Retail
9%
17%
9%
3%5%1%7%7%
9%
20%
2% 9%
2%
CDIT F&G Footwear
Furniture Pharmacy Home improvement
Books and Music J ewellery and Watches Non store
Restaurant Apparel Entertainment
Misc Products and Services
Source: Technopak Analysis
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Leading Players (Illustrative List) : Turnover
Name US $ Million
Future Group (Pantaloon) 444
Shoppers Stop 133
Landmark (Lifestyle) 80
Trent 53
Subhiksha 44
Vishal Mega Mart 25
The above analysis does not include the specialty retailers like Bata, Titan and Tanishq
Source: myIRIS,Media and Technopak Analysis
The biggest players are small as yet !
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Rapid Transformation Anticipated
Top 20 players put together will target about US$ 60+ Billion revenue by 2011, accelerating the growth of Modern Retail
Retailer Estimated Investment
in US$ Billion
No. Of Years
R1 6.0+ Within next 5years
R2 2.0+ Within next 5years
R3 2.0+ Within next 5years
R4 2.0+ Within next 5years
R5 1.0+ Within next 5years
Next 15 Retailers 7.0+ Within next 5years
Total 20+
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Rapid Transformation ….
Investments in the range of US$ 20+ Billion expected in the next 5years in Retail & its Supply Chain alone
Size of modern retail likely to touch US$ 60+ Billion by 2011
At least 2.5 Million additional direct jobs likely to be created in the next 5 years
Hyper-competition is expected to set in by 2008-9 as the footprint of the top-5 players starts significant overlapping in top 20 – 30 towns
Significant impact on other retailers and branded good players – creating new opportunities and threats
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Impact Areas
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Impact Areas
Traditional Retailers
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TREM: Technopak Retail Evolution Model
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G-1 Shift In Channel Mix (Value)
2010
31.56%
19.92%5.74%
2.07%5.32%
4.42%
7.30%
0.75%
22.92%
2005 :0.68 Million
2010 :0.88 Million
2015 :1.29 Million
Source: Technopak Retail Evolution Model
Retail Universe:
Grows by 28%
Reduces by 16%2005
42.66%
20.42%
7.81%
2.51%
9.04%
5.44%
7.99%0.05% 4.06%
For the Key Categories stocked by the Kirana Stores
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2005 :0.84 Million
2010 :1.09 Million
2015 :1.58 Million
2005
46.29%
27.22%
6.17%
8.36%
4.11%2.76% 1.07%
0.23%3.78%
2010
35.77%
20.60%4.12%
5.39%
2.89%1.76%
26.28%
0.46%2.74%
Source: Technopak Retail Evolution Model
Retail Universe
Grows by 34%
Reduces by 18%
G-2 Shift In Channel Mix (Value)
For the Key Categories stocked by the Kirana Stores
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2005
80.67%
12.81%
0.92%
0.97%
0.42%0.52%
0.11%
3.57%
2010
75.53%
15.77%
3.42%
2.32%
0.66%
0.48%
1.04%
0.77%
Modern Grows by 3.4%
Reduces by 8%
G-3 Shift In Channel Mix (Value)
2005 :5.61 Million
2010 :6.71 Million
2015 :9.53 Million
Retail Universe:
For the Key Categories stocked by the Kirana Stores
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Impact On Traditional Retailers
Impact confined to perhaps 300,000 to 500,000 retailers across India coming in direct range of about 1000 Hypermarkets and about 3000+ supermarkets by 2011
Overall, the universe of traditional retailers will actually increase by 2011 and even by 2015
Importance of traditional channel to become even more for established FMCG and other consumer product companies
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Impact Areas
Current Modern Retailers
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Current Modern Retailers
Most will come under severe pressure
Most are grossly undercapitalized, and have largely invested in the “front end” rather than the back end
Most have weak business processes and IT systems
Most have no serious understanding or investment in supply chain
Most have no real margin drivers in their business model that can enable them to make exceptional investments in the immediate future
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Value Driver in Retail
Illustrative :The Food & Grocery Sector
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Farmers
Traders
Commission Agents
Wholesalers
Retailers
Indian farmer trapped in a vicious cycle of low risk taking ability, low investment, low
productivity,weak market orientation, low value addition,
low margin. Indian agribusiness globally
uncompetitive, despite rich & abundant natural resources.
Large number of retailers, but most are small and fragmented. Low volume, and low bargain
power.
Numerous intermediaries, lead to cost addition
without value addition while blocking the information flow
Supply Chain Peculiarities
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0
20
40
60
80
100
Quantity drop through Food Supply Chain
•More Intermediaries add to the inefficiency in the Chain :
•Leading to wastage in the Chain
•Drop in the quality of the product
Source : KSA Analysis
… Leading to Significant Quality Drop and Value Loss
Price Increase through the Chain
100125 131
196
344
0
100
200
300
400 Abnormal Cost Addition
Very High Wastage
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High margin buildup at every intermediary and wastage lead to abnormal consumer end prices
Consumer Price is 3.5 times of Farm Gate Price
Farmer Trader Com. Agent Wholesaler Retailer
Addnl. Cost
Wastage
Mark-up
Price 100
5%
10%
25%
125
2.5%
-
5%
131
5%
10%
50%
197
10%
25%
75%
344
Farmer Growers Co-op Distribution Co. Retailer
Addnl. Cost
Wastage
Mark-Up
Price 100
10%
2%
13.2%
113
40%
2%
50%
170
25%
2%
50%
255Illu
strativ
e
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‘Perishable (F&V)’ Supply Chain
Consumer Retailer
Regional Mandi
Local BrokerLocal MandiFarmer 7-8 % Margin
8-9% Commission
6-8 % Margin
13-15% Margins
Back-end
Front-end
Wholesalers
9-11 Margin
Auction rate9-14% Commission
Source: Technopak Retail Research
Illustra
tive
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Potato Cost and Margin Structure
Source: Technopak Retail Research
Cost and Margin Structure of Potato
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Intermediaries
Pri
ce
in
Rs
. / K
g Margin
Storage
Labour
Wastage
Grading/Packaging
Transportation
Cost Price
Margin 0.25 0.35 1.00 1.40
Storage 0.10 0.10 0.30 0.00
Labour 0.05 0.05 0.07 0.03
Wastage 0.10 0.15 0.22 0.10
Grading/Packaging 0.00 0.10 0.40 0.00
Transportation 0.00 0.05 1.00 0.00
Cost Price 3.20 3.70 4.50 7.50
Farmer Local mandi / CA Wholesalers Retailers
Rs. 3.70
Rs. 4.50
Rs. 7.50
Rs9.03
Disintermediation, that is, purchasing directly from the consolidator will add up to 50% of margin at the retailer level, which is 33.3% more than that of an unorganized retailer. . Illu
strativ
e
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Implications …
Farm to Kitchen is the right though most challenging and most capital intensive strategy
Current players have not even dis-intermediated beyond the first level from their front end and hence will find immediate challenge from the new entrants who are focussing on the entire value chain, and can potentially deliver more value (quality, availability, price, service) to their consumers than many of the current players
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Impact Areas
Branded Consumer Goods Players
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Branded Consumer Goods Areas
At the mass market, most Indian consumers are brand-blanked through aspiring for brands (that can denote quality, trust, value)
Most major new entrants will start with heavy proportion of Private Labels, and will probably use branded goods to demonstrate the price – value imbalance between such branded goods and their private labels
Technopak believes that Branded good companies are in for some surprises, and have to go back to the drawing board for strategy – learning from US and UK markets will not be of much use!
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Impact Areas
Opportunities
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Incredible Opportunities In The Supply Side
A new ecosystem of suppliers needed across diverse areas e.g. Manufacturing
All categories of consumer goods
Store fit-outs and accessories e.g. shopping carts, packaging, etc.
Services
Entire gamut including IT, Logistics, Design (Store and Product), Communication, Promotions, HR – recruitment and training et al
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To Conclude ……
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Conclusions
Size of Indian retail market very promising
Indian consumer is already behaving differently and more so in the coming years – fresh learning needed even by the most experienced consumer oriented businesses
Disruptive changes in the offing – however major disruption anticipated for current modern retailers and many consumer product manufacturing and marketing companies. Opportunities for many others
Evaluate investment opportunity on the basis of future change
rather than recent history!
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Thank You !
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For further dialogue, please contact :
Arvind SinghalChairmanTechnopak AdvisorsSecond Floor, Tower D, Global Business ParkGurgaon 122 002 (National Capital Region of Delhi)Haryana, India
Tel : (91-124) 414 1111, 288 1111Fax : (91-124) 414 1112, 288 1112Email : [email protected] : www.technopak.com
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