India Retail Industry analysis | Retail | Supply Chain

Indian retail industry 2009

Saurabh Gadkari Balaji Institute of Telecom and Management(BITM), PUNE

INDIAN RETAIL INDUSTRY 2009

India Retail Industry
India retail industry is the largest industry in India, with an employment of around 8% and contributing to over 10% of the country's GDP. The Indian retail market, which is the fifth largest retail destination globally, has been ranked as the most attractive emerging market for invest ment in the retail sector by AT Kearney's eighth annual Global Retail Development Index (GRDI), in 2009. The share of retail trade in the country's gross domestic product (GDP) was between 8–10 per cent in 2007. It is currently around 12 per cent, and is likely to reach 22 per cent by 2010. A McKinsey report 'The rise of Indian Consumer Market', estimates that the Indian consumer market is likely to grow four times by 2025. Commercial real estate services company, CB Richard Ellis' findings state that India's retail market is currently valued at US$ 511 billion. Further, CB Richard Ellis states that India has moved up to the 39th most preferred retail destination in the world in 2009, up from 44 last year.

India Retail Market Statistics
720 million Indians to join consuming age by 2010 55% of the Indian population w ill be under 20 years of age by 2015 32% rise in urbanization by 2008 10% annual growth in Retail market since 2000 7% of the population is engaged in retailing A booming US$ 300 billion retail market in India 5.5 retail outlets per 1000 population, highest in the world 25-30% annual growth in retail loans and credit cards The organized retail sector currently accounts for around 5 per c ent of the Indian retail market. Organized Retail is predicted to capture 15 – 20% market share by 2010. Over 100 malls of over 30 million sq feet of new shopping centre space are projected to open in India between 2009 and end-2010.

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INDIAN RETAIL INDUSTRY 2009

Foreign direct invest ment (FDI) inflows as on July 2009, in single-brand retail trading, stood at approx. US$ 46.60 million, according to the Depart ment of Industrial Policy and Promotion (DIPP). India's overall retail sector is expected to rise to US$ 833 billion by 2013 and to US$ 1.3 trillion by 2018, at a compound annual growth rate (CAGR) of 10 per cent. Also, organized retail, which is pegged at around US$ 8.14 billion, is expected to grow at a CAGR of 40 per cent to touch US$ 107 billion by 2013. This sector is expected to invest around US$ 503.2 million in retail technology service solutions in the current financial year. This could go further up to US$ 1.26 billion in the next four to five years, at a CAGR of 40 per cent. India has emerged the third most attractive market destination for apparel retailers, according to a study by global management consulting firm AT Kearney. It further says that in India, apparel is the second largest retail category and is expected to grow by 12-15 per cent per year. Apparel, along with food and grocery, will lead the organized retailing in India. India has one of the largest numbers of retail outlets in the world. The sector is witnessing exponential growth with retail developments taking place not only in major cities and metros but even in tier-II and tier-III cities in India.

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INDIAN RETAIL INDUSTRY 2009

Reasons behind retail growth:
1. Consumer spending has risen sharply at 75% as the youth population (more than 33 percent of the country is below the age of 15) has seen a significant increase in its disposable income. 2. Retail industry in India is expected to rise 25% yearly being driven by strong income growth, changing lifestyles, and favorable demographic patterns. 3. India‘s retail still unexploited and under penetrated.

4. Easy availability of credit, and large scale real estate developments were fuelling the growth of India‘s approximately USD 25 billion organized retail market. 5. Ever-expanding middle- and upper-class consumer base, there will also be opportunities in India‘s tier II and tier III cities. 6. The greater availability of personal credit 7. The terms commonly used include ―billion-plus‖ population, ―a middle class consisting of hundreds of millions‖, ―rapidly-grow ing income and consumption‖. 8. India has had one of the consistently highest GDP growth rates of the last few years. 9. Newer opportunities such as airport real estate are emerging with the upgrade of the major and secondary airports, as well as a change in government policy allow ing expansion of retail activity at airports.

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INDIAN RETAIL INDUSTRY 2009

Several challenges:
1. Foreign invest ment is allowed in retail operations only up to a limit of 51 per cent foreign equity, and only in businesses that are selling a single brand (brands such as Louis Vuitton, and most recently Marks and Spencer, have taken advantage of this route). 2. The industry is facing a severe shortage of talented professionals, especially at the middle- management level. 3. Lack of adequate infrastructure with respect to roads, electricity, cold chains and ports has further led to the impediment of a pan-India network of suppliers. Due to these constraints, retail chains have to resort to multiple vendors for their requirements, thereby, raising costs and prices. 4. Even though the government is attempting to implement a uniform value -added tax across states, the system is currently plagued w ith differential tax rates for various states leading to increased costs and complexities in establishing an effective distribution network. 5. Stringent labor laws govern the number of hours worked and minimu m wages to be paid leading to limited flexibility of operations and employment of part-time employees. 6. Multiple clearances are required by the same company for opening new outlets adding to the costs incurred and time taken to expand presence in the country. 7. Government restrictions on the FDI are leading to an absence of foreign players resulting into limited exposure to best practices. 8. Non- availability of government land and zonal restrictions has made it difficult to find a good real estate in terms of location and size. Also lack of clear ownership titles and high stamp duty has resulted in disorganized nature of transactions.

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INDIAN RETAIL INDUSTRY 2009

Major expansion plans in retail sector:
1. Marks & Spencer Reliance India is planning to open 35 more stores over the next five years, according to Mark Ashman, CEO of the company. The 51:49 joint venture between UK‘s Marks and Spencer and Reliance Retail Ltd already has 15 stores in India. 2. Carrefour SA, Europe‘s largest retailer, may start wholesale operations in India by 2010 and plans to set up its first cash-and-carry outlet in the National Capital Region. Currently, Carrefour exports goods worth US$ 170 million from India to Europe, UAE, Indonesia, Europe, Thailand, Singapore and Malaysia. 3. Jewellery manufacturer and retailer, Gitanjali Group and MMTC are jointly setting up a chain of exclusive retail outlets called Shuddi –Sampurna Vishwas. The joint venture, which plans to open around 60 stores across India by end of this year, will retail hallmarked gold and diamond jewellery. 4. Mahindra Retail, a part of the US$ 6.7-billion Mahindra Group, plans to invest US$ 19.8 million by 2010 to step up its specialty retail concept 'Mom and Me'. 5. Pantaloon Retail India (PRIL) plans to invest more than US$ 103.3 million to expand its seamless mall Central and the value fashion format Brand Factory over the next two years. 6. Bharti Retail has introduced eight Wal-Mart private labels—including two of its largest, ‗Great Value‘ and ‗George‘—in its supermarket chain Easyday, hoping to attract more consumers w ith their international design and packaging. 7. Italian sportswear brand Lotto will launch two new footwear brands Sabots and Calcetto in the country in the next few weeks. The plan is to have at least 50 exclusive outlets by March 2010. 8. Steel players such as JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is targeting to increase it to 200 by March 2010. Similarly, Essar Steel also has such retail outlets called Essar hypermarts. With a total 150 such outlets currently, this segment contributes to about 20-25 per cent to the Essar‘s total revenue. 9. EBONY Homes, the home furniture retail arm of the US$ 3 billion DS Constructions, has plans to invest US$ 25.1 billion to set up a chain of 20-25 furniture stores styled Ebony Gautier across the country by March 2012. 10. Gujarat Co-operative Milk Marketing Federation (GCMMF), which owns and markets Asia's largest dairy brand, Amul, plans to add 6,000 Amul retail parlours across the country in FY 2009. 11. Many major international brands are also looking for a foothold in India. The brands planning an India entry include The Pizza Company and Spicchio Pizza (both pizza chains from Thailand), Coffee Club from Australia, Japanese brand Lolita Fashion, Revive Juice Bars from the UK, Mrs Fields Cookies and Jamba Juice from the US, and French fashion brand Jules. 12. Retail brands such as United Colors of Benetton, Tommy Hilfiger and Puma are opening factory outlets to sell excess stock and woo the price-conscious buyers.

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INDIAN RETAIL INDUSTRY 2009

Organized retailing: advantages to Indian economy
1. Organized retail w ill result in a complete revamp of the agricultural supply chain in the country. A recent study by CRISIL has estimated a current annual total loss of about Rs. 1,000 billion in the agricultural supply chain, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions ( CRISIL Research, June 2007). Organized retailers have already st arted procuring fruit and vegetables from farmers directly bypassing the various intermediaries who add more costs than value to the food chain. They are investing heavily on logistics in the form of centralized warehousing and distribution centres, transport and cold storage, either directly or through engaging third party logistics companies . 2. Boost to Exports: Some of the international retailers that have plans for India in the future have already developed suppliers in the country and have started exporting from India. For example, Wal-Mart exported an equivalent of US$ 600 million, and IKEA about 380 million euros from India in 2006-07. 3. organized retailing w ill work w ith farmers to: (i) improve yields by enabling them to obtain quality input supplies; (ii) adopt superior farm technology and practices; and (iii) access timely credit at reasonable rates. 4. Small-scale manufacturers will be the major beneficiaries of private labels. 5. Organized retail‘s direct purchase from farmers and other suppliers compresses the supply chain and eliminates a large number of intermediaries and hence can offer consumers a lower p rice than the traditional channels. 6. Unorganized retailers normally do not pay taxes and most of them are not even registered for sales tax, VAT, or income tax. Organized retailers, by contrast, are corporate entities and hence file tax returns regularly.

What will be the impact on the traditional mom and pop store?
The answer could be a co-existence. The major advantage for the smaller players is the size, complexity and diversity of our Indian Markets. It is too early to predict the erosion of the mom and pop stores in India. This is also proved by countries where Wal Mart the world‘s biggest retailer operates. The smaller stores have a peaceful coexistence in these countries with the number one company in the fortune 500 list.

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INDIAN RETAIL INDUSTRY 2009

India’s retail journey in recession:
With the Q3 growth numbers of FY2008-09 at 10-12 percent as against 35 percent of the previous year, the ‗happy grins‘ are fast turning into ‗nervous smiles‘ While the sector is still registering decent growth, the Heavy invest ments made during the boom period may weigh the retailers dow n.

Disappointing Footfalls: According to KPMG‘s survey, 70 percent of the respondents stated that the slowdown has adversely affected their footfalls.

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INDIAN RETAIL INDUSTRY 2009
Liquidity under pressure: The slowing sales are resulting in lower inventory turnover and increasing working capital requirements for retailers. This in turn has resulted in liquidity pressures for many retailers. To free the cash that has been locked, a large number of companies have been trying to reduce the inventory on their books and shorten working capital cycles.

Margin contraction- Inte rest burden adverse ly impacts profits

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INDIAN RETAIL INDUSTRY 2009

Besides the weak economy and the feeble consume r sentiments, the disappointing retail growth is also attributed to Poor supply chain manageme nt and weak support infrastructure, absence of a mature 3PL player providing high serv ice levels at competitive prices.

Re ntals – skyroc keting to all time high:

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INDIAN RETAIL INDUSTRY 2009

Strategies to help retailers cope with the slowdown:
―Consumers are currently sitting on the fence and the challenge for retailers will be to offer the right baits to get them back to stores. Retailers have to focus on growing profits through sales growth and not mere cost-cutting strategies. There will be a sharp cut in overall sales growth this year, but a marked improvement in bottomlines with players focusing on efficiencies"- Kishore Biyani, Chief Executive Officer, Future Group.

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|Saurabh Gadkari , BITM , DUAL-D

INDIAN RETAIL INDUSTRY 2009

Managing Costs: Cost Cutting Cost cutting is inevitable in a downturn, but strategic decisions with a long term view should be the key focus while making cost containment choices. Many retailers have made the mistake of cutting those costs that are easiest and fastest. An effective strategy should be one that identifies the costs least important to delivering what customers value. This requires a deep understanding of customers‘ needs and re-evaluating the business activities that actually deliver w hat customers value and the ones that do not. This ensures that the costs cut now do not harm the future potential of the business. Resource optimization: A retailer wants to better manage its backend centers, supply chain and stores while improving its prof itability. improving labor productivity Koutons Retail has increased the performance target for its employees to deliver more. ―We have motivated our employees to give that extra 25 percent in the quality and quantity of work they do,‖ --D P S Kohli, Chairman, Koutons Retail India. Vishal Retail is planning to st art a performance-based remuneration process in its back-end operations, whereby employees will get higher perks and salaries based on their performance. ―Though we can‘t do much about labor cost at front -end operations, we are considering performance-based remuneration at the back-end. We are encouraging our people to work harder so that they bring in more efficiency into the system,‖

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INDIAN RETAIL INDUSTRY 2009
Manpower rete ntion and training Inventory Manageme nt:

Re negotiating Real estate costs

Entering into revenue sharing model as a gainst fixed rental model ―We believe this is the way forward for all the retailers as it is beneficial for both the developer and the retailer,‖ - Kishore Biyani, Chief Executive Officer, Future Group.

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|Saurabh Gadkari , BITM , DUAL-D

INDIAN RETAIL INDUSTRY 2009
Leveraging Information Technology All the elements within the retail industry right from data warehouses, logistics, supply chain, store management, point of sale, etc. are likely to get impacted positively w ith the usage of technology be it RF ID, GPS, intelligent video analytics, point-of-sales terminals or sensor-based shop carts, Supply cha in visibility etc. Efficie nt store manageme nt, Reevaluating store via bility

Issues facing retailers:

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INDIAN RETAIL INDUSTRY 2009

Some of the strategies adopted by retailers:

Entering into alliances and leveraging expe rtise :

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INDIAN RETAIL INDUSTRY 2009

It’s the time of Private Labeling Private labels enable retailers to offer quality products and earn higher margins. The retailer also derives many advantages of using private labels. In-store labels are at least 5-20 percent cheaper across various categories This is because they cut out middlemen costs and pass on the benefit to the consumer. Private labels enhance the bargaining power of the retailer while negotiating w ith manufacturer (national/ internationa l) brands.

Recession spears private labe l appeal:

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|Saurabh Gadkari , BITM , DUAL-D

INDIAN RETAIL INDUSTRY 2009

Venture into under penetrated markets: Rural Retailing
According to India Retail Report 2009 by Images, "India's rural markets Offer a sea of opportunity for the retail sector. The urban-retail split in consumer spending stands at 9:11, with rural India accounting for 55 percent of private retail consumption." As per IBEF, rural India accounted for almost half of the Indian retail market, which was worth about USD 300 billion. With most of the retail markets getting saturated in Tier I and Tier II cities, the next phase of growth is likely to be seen in the rural markets. Major domestic retailers have started setting up farm linkages. Few Examples include, DCM‘s Hariyali Kisan Bazaars, Pantaloon Godrej‘s joint venture Aadhars, ITC‘s Choupal Sagars, Tata‘s Kisan Sansars and Reliance Fresh are some of the established rural retail chains.

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INDIAN RETAIL INDUSTRY 2009

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INDIAN RETAIL INDUSTRY 2009

Innovate: categories, services, business models…
―Innovation and newness should be the name of the retail game in India. As an industry we have to be radically different in our approach towards consumers, product offering, market segmentation and competition. This would create demand within the target se gment and in turn help attain viability for the business model. Instant gratification as envisaged by the promoters in the past actually reduced the share of the pie resulting in the repelling impact as witnessed today.‖- Anurag Rajpal, Vice President (Appa rel), Spe ncer’s Reta il

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INDIAN RETAIL INDUSTRY 2009

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|Saurabh Gadkari , BITM , DUAL-D

INDIAN RETAIL INDUSTRY 2009

Future outlook:
"We predict an increase in 'value for money' category and a decline in lifestyle category. Also we might see lesser aggression in stores expansion and focus on store productivity, shrinkage and loss reduction"- Narayana n Ramaswamy, Executive Director, KPMG.

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INDIAN RETAIL INDUSTRY 2009

Summary of strategies:

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|Saurabh Gadkari , BITM , DUAL-D

INDIAN RETAIL INDUSTRY 2009

References: • • • • • Indian Retail report :KPMG IN INDIA www.ibef.org www.naukrihub.com http://business.mapsofindia.com http://www.valuenotes.com

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