Challenges & Opportunities in Indian Retail Industry

Agenda
Retailing : An overview Indian retail The change factor FDI in Indian retailing

Why FDI ?
How FDI ?

FDI in Indian retailing

Retailing: An overview

Retailing Worlds largest private industry US$ 6.6 trillion sales annually Indian retailing Largest employer after agriculture - 8%* of population Highest outlet density in world Around 12 mn outlets Still evolving as an industry Long way to go

An overview

Retailing: An overview

An overview

Wal-Mart Topmost global Fortune 500 company(3 Consecutive Years) Annual Sales of over US$ 250 bn Indias two largest retail player turnover around US$ 158 mn (Bata) and US$ 102 mn (Shoppers Stop) Fortune 100 9 Retailers Carrefour, Ahold, Home Depot, Kroger, Metro, Kmart-Sears, Target, Albertsons

Evolution of Indian retail

Historic/Rural Reach Traditional/Pervasiv e Reach Government Supported Modern Formats/ International

Exclusive Brand Outlets Hyper/Super Markets Department Stores Shopping Malls PDS Outlets Khadi Stores Cooperatives Convenience Stores Mom and Pop/Kiranas Weekly Markets Village Fairs Melas
Source of Entertainment Neighborhood Stores/Convenience Availability/ Low Costs / Distribution Shopping Experience/Efficiency

Evolution of Indian retail

Indian retail

Informal retailing Sector Typically small retailers. Evasion of taxes Difficulty in enforcing tax collection mechanisms No monitoring of labor laws Formal Retailing Sector Typically large retailers Greater enforcement of taxation mechanisms High level of labor usage monitoring

Categories of Indian retail

Indian retail

Corporate Houses Tatas: Tata Trent RPG group: Food World, Health and Glow, etc ITC: Wills Life Style Rahejas(ShoppersStop), Hiranandani(Haiko), DLF(DT cinemas) etc. Dedicated brand outlets Nike, Reebok, Zodiac etc Multi-brand outlets Vijay Sales, Viveks etc Manufacturers/ Exporters Pantaloons, Bata, Weekender

Classifying Indian retail

Indian retail

Modern Format retailers Supermarkets (Foodworld) Hypermarkets (Big Bazaar) Department Stores (S Stop) Specialty Chains (Ikea) Company Owned Company Operated Traditional Format Retailers Kiranas: Traditional Mom and Pop Stores Kiosks Street Markets Exclusive /Multiple Brand Outlets

Large Indian retailers

Hypermarket

Big Bazaar Giants Shoprite Star Lifestyle Pantaloons Pyramids Shoppers Stop Trent Fame Adlabs Fun Republic Inox PVR

Department store

Indian retailers

Entertainment

The changing Indian consumer

Indian consumer

Greater per capita income Increase in disposable income of middle class households 20.9%* growth in real disposable income in 99-03. Growing high and middle income population Growing at a pace of over 10%* per annum over last decade Affordability growth Falling interest rates Easier consumer credit Greater variety and quality at all price points

The changing Indian consumer

The urban consumer Getting exposed to international lifestyles Inclined to acquiring asset More discerning and demanding than ever No longer need-based shopping Shopping is a family experience Changing Mindset Increasing tendency to spend Post Liberalization children coming of age 100 mn 17-21 year olds*. Tend to spend freely. Greater levels of education

Indian consumer

Challenges in the Industry

Low domestic competition Because of fragmented nature of industry

Industry Challenges

Lack of exposure to global best practices Low entry barriers for unorganized retailing Moderate entry barriers for organized retailing
Wholesale system under-invested leading to 20-40% wastage Non level playing field issues Wide differences in treatment of small and large retailers

Challenges

Real Estate Costs Supply Chain Inconsistency Poor Infrastructure Lack of Skilled Manpower

issues

Opportunities
Market size Current market size is roughly US$ 286 bn* 96% of the 12 Million stores are less than 500 Sq. ft. Forecast Growth rate for the retailing industry is roughly 8.3% for 2003-2008 Sales from large format stores would rise by 24-49%** Formal and modern format retailing would enjoy rapid growth

Anticipated growth

Growth factors

Growth factors

Growth determining factors Government Policy Infrastructure development GDP growth Employment generation and job creation In several new sunrise industries Implies greater purchasing power

The Indian advantage

India ranked 1st in the Global A.T Kearney Retail Development Index

Advantage India

India

Russia
China

THE SIZE OF THE OPPORTUNITY

Products Total Retail Organised Organised

Rs. Billion
6422 980

Retail
Rs. Billion 50 185

Retail as %
of Total 1 19

Food & Grocery Textiles & Apparel

Jewelry & Watches

Consumer durables Pharmaceuticals Home Solutions

554
415 364 351

30
43 10 32

5
10 3 9

Books, Music & Gifts

Others Total

115
1159 10360

15
111 476

13
10 5

FDI in Indian retailing

FDI in Retail not permitted

Current Indian FDI Regime FDI not permitted in retail trade sector, except in: Private labels Hi-Tech items / items requiring specialized after sales service Medical and diagnostic items Items sourced from the Indian small sector (manufactured with technology provided by the foreign collaborator) For 2 year test marketing (simultaneous commencement of investment in manufacturing facility required)

FDI in Indian retailing

Metro Group of Germany Cash-and-carry wholesale trading Proposal faced strong opposition Entities established prior to 1997 Allowed to continue with their existing foreign equity components. No FDI restrictions in the retail sector pre1997 Foodworld 51:49 JV between RPG and Dairy Farm International, Leading food retailer in India now Mc Donalds

Current FDI

International retailers in India: Strategies

How they are present

Franchise International company gives name and technology to local partner. Gets royalty in return In case master franchise is appointed for region or country, he has right to appoint local franchisees Nike, Pizza Hut, Tommy Hilfiger, Marks and Spencer, Mango Manufacturing Company sets up Indian arm for production Bata India. It also has right to retail in India

International retailers in India: Strategies

How they are present

Distribution International company sets up local distribution office Supply products to Indian retailers to sell Also set up franchised outlets for brand Swarovski, Hugo Boss Wholesale trading Cash and Carry operations 100% FDI permitted Metro Cash n Carry

Why FDI?

Benefits of FDI

Improve competition Develop the market Greater level of exports due to increased sourcing by major players Sourcing by Wal-Mart from China improved multifold after FDI permitted in China Similar increase in sourcing observed for Metro in India Provides access to global markets for Indian producers

Why FDI?

Investment in technology

Benefits of FDI

Cold storage chains solve the perennial problem of wastage Greater investment in the food processing sector technology Better operations in production cycle and distribution Greater level of wages paid by international players usually More product variety Newer product categories Economies of scale to help lower consumer price Increased purchasing capacity of consumers

Better lifestyle

How FDI ?

FDI should be allowed in stages Initial stages: 26% FDI

2 yrs 2 yrs 2 yrs

Establishment Phase: 49% FDI

Mature Phase: 100% FDI

How FDI ?

FDI policy No incentives needed to attract FDI Market size and potential are sufficient inducers No need for costly tax breaks, import duty exemptions, land and power subsidies, and other enticements

Thank you