An Overview of India’s Consumer and Retail Sectors

A Recap of Events of the Past A Look into the Future Conclusion 27 31 32

0% 7.1% 7. on the back on stronger consumer confidence. we expect organised retail to see 30 per cent plus growth in the coming years.1% 8.1 per cent and growth in private consumption went down from 8. Exhibit 1: Impact of Slowdown on Consumer Confidence. return in consumer confidence and growth in private consumption tracking GDP growth.5 per cent to 2.1 per cent in 2008-09. consumption expected to stay at 60 per cent of GDP nominal growth in private consumption is expected .9 per cent). which was growing at over 30 per cent year on year in 2005-06 and 2006-07.2% 2010 8. Private consumption growth.9% 5.6 per cent). In the first few quarters of 2008-09. While the impact of the slowdown on overall GDP was limited.3% 2007 9.2% 5. This provides a very significant opportunity for Indian and international companies to develop and create large business in the consumer products and retail sectors in India.1% 1.5% 2008 7. growth in GDP came down from 9. growth in organised retail has returned and we estimate the sector to have grown by 21 per cent in 2009-10. This dip significantly impacted the consumer products and retail sectors. and private .30% 7. This means a doubling in private consumption in five years time. slowed down to around 16 per cent in 2008-09.5% 7.0% 2011P 8. to reach about Rs 67 trillion by 2015.9 per cent. Technopak Analysis and Estimates Real Growth Rates Changes in Private Consumption and Retail Growth Private consumption in India currently adds up to about Rs 34 lakh crore and accounts for ~60 per cent of GDP With growth in GDP expected at over 8 per cent. took a significant dip on account of poor consumer confidence. Organised retail.6% 2010 Q2 21% 31% 29% 27% 25% 25% 6.5% 2015P Organised Retail GDP Private Consumption Source: Ministry of Finance. With the revival of economic growth from the second quarter of 2009-10 (GDP grew by 7.7% 6. 27 | An Overview of India’s Consumer and Retail Sectors .5% 2013P 9.9% 2009 6.0% 2012P 8.6% 2010 Q1 7. Private Consumption & Organised Retail India was relatively insulated from the events in the global economy over the last two years.0% 7. private consumption was impacted substantially. This growth was primarily led by government spending and growth in the rural areas. Private Consumption & Organised Retail 33% 31% 27% 16% 9.1% 2. As a result. India’s GDP grew by 6. which was largely tracking GDP growth till before the slowdown. This trend is already visible and is substantiated by data in exhibit 1.10% FY 2006 9.5% 7.5% 2014P 9. private consumption growth has returned (grew by 5.1 per cent to 6.perspective | Volume 04 a quar terly repor t by Vol u me 0 4 / 2 0 1 0 A Recap of Events of the Past Impact of Slowdown on Consumer Confidence. to be 14-15 per cent. inflation expected at 6-7 per cent. as compared to 9 per cent plus growth in the previous few years. On the basis of various projections that India’s GDP will grow at over 8 per cent in the coming years.

footwear. This means a tripling of the current size and scale of organised retail in the next five years. and the MRP regime) coupled with the fact that many mom & pop stores have geared up for competition from new age stores (through improved store ambience. and pharma. We project this segment (unorganised retail) to grow by over Rs 4. organised retail has established a strong value proposition with the Indian consumer. especially in categories such as food & grocery. Growth of Organised Retail: Real or Hyped? Some recent high profile failures in organised retail have led to a belief that growth in organised retail is not as promising as it was believed to be. and pharma it is not same. flexibility to deliver very small quantities home.Hence.) puts them on a strong footing.0 lakh crore (5 per cent share). real estate and labor costs not fully accounted for in P&Ls. furniture and home. which is currently estimated to be Rs 1. and consumer durables and electronics. is projected to reach Rs 3. etc. in some very large categories like food & grocery. • In certain consumer categories like apparel. better product mix and support from brands / manufacturers in training. Given the large share that traditional retail will continue to occupy. it is important to note that a larger part of the Rs 7. So the same shopper visits organised retail for the former categories and traditional retail for the latter. Exhibit 3: Evolution Curve of Various Industries Industry Size TO T1 T2 T3 T4 T5 T6 T7 T8 T9 T10 T11 T12 T13 T14 IT Organised Retail BPO Telecom Source: Technopak Analysis An Overview of India’s Consumer and Retail Sectors | 28 .0 lakh crore (11 per cent share) by 2015.9 GDP 27 3 Private Consumption All values in Rs lakh crore Source: Technopak Analysis and Estimates Real Growth Rates & Values.perspective | Volume 04 a quar terly repor t by Vo l u m e 0 4 / 2 0 1 0 The total retail (organised and unorganised) industry in India is currently estimated to be Rs 20 lakh crore. We project this to reach Rs 27 lakh crore by 2015. While organised retail will grow at a fast pace. Inflation assumed at average 7% • Inherent strengths of traditional retail (entrepreneurial drive.5 lakh crore in the next five years.0 lakh crore growth in total retail will come from unorganised retail. and for organised wholesalers (cash & carry). Exhibit 2: Projections for Private Consumption and Retail 93 62 29 12 0. The growth in organised retail is very similar to some of the other large sectors however. relationship management with catchment. Some key reasons for this trend are as below: • Growth in private consumption in India is so sizable that even with 30 per cent plus growth rates. Organised retail. However. the only difference being that it not as consolidated as in sectors like Telecom (where 4-5 players command majority of market share).3 Organised Retail 20 0. retail operations. In order to take an objective view of the organised retail market in India. Technopak traced the growth trajectory of some of the other large sectors in India. organised retail will be unable to garner a larger share in absolute terms in the next 5 years. it will continue to be an important channel for consumer goods companies. furniture and home. despite a few setbacks Technopak expects that the organised retail would emerge much more stronger than ever before and would also see significant players emerging in the next few years.

While CDIT has shown tremendous growth (primarily led by high growth in mobile handsets market). one would expect the apparel sector to witness a higher growth. so need be continually replaced Services that are becoming essential High impact (dependent on discretionary spends) Clothing. Telecom. have. Education. a smaller volume growth and a higher price growth translating to a low price performance value to the consumer was observed. Furnishing. Exhibit 5: Sector Growth Rates 25% 20% 15% 10% 5% 0% 2005 2006 2007 2008 FMCG Source: Technopak Analysis Growth Rates 2009 CDIT 2010 (P) Apparel 2011 (P) 2012 (P) 2013 (P) 2014 (P) 29 | An Overview of India’s Consumer and Retail Sectors . while the volume increased by about 76 per cent on a yearly basis. Non-durables Limited impact (due to basic nature of products) FMCG. In the apparel and home textiles categories. However. Food Products Services Limited impact (necessity based services) Healthcare. Automobiles Categories Durables Semi-durables Goods that are neither perishable nor lasting Goods that do not last for long. players in apparel have not offered the same value as the players in telecom or CDIT or automobiles etc. LCD’s showed a similar trend too. FMCG. The cost of laptops (which are in the CDIT category) decreased by about 25 per cent. CDIT and Apparel categories have experienced very different growth trajectories over the last few years. FMCG which has been a well penetrated market has been growing a stable rate. on a price performance value proposition to the consumer. We believe that.perspective | Volume 04 a quar terly repor t by Vol u me 0 4 / 2 0 1 0 Exhibit 4: Consumer Sector in India – Effect of Recession and Recovery Description Heavy goods intended to last 3 or more years Impact of Recession Highest impact Product examples Refrigerators. etc. the actual growth rate has been fairly low. etc. Washing Machines. Given the fact that the discretionary income of the Indian population is rising at about 15 per cent every year. Home Textiles.

The EBITDA and ROC for the retail sector is about 10-12 per cent. while for the FMCG sector. Thus . A comparison of Indian apparel retailers with international retailers highlights this point. automobiles recovered the fastest whereas categories like apparel. 150 An Overview of India’s Consumer and Retail Sectors | 30 . home furnishings etc. automobiles and travel as shown in exhibit 6. are still to recover completely. categories like consumer durables. The low level of returns in retail is primarily due to the high level of inefficiencies at the back end. Exhibit 7: Financial Comparison of FMCG Companies and Retailers (FY09) Vishal Retaii Westside Koutons Shoppers Stop Pantaloon Retail Britannia ITC GSK Marico Dabur P&G HUL 0 15% 30 EBITDA/Sales Source: Technopak Analysis 60 ROCE 90 1% -4% 8% 3% 22% 20% 12% 10% 11% 8% 25% 23% 19% 12% 19% 32% 35% 38% 39% 48% 35% 121% 120 FMCG Companies 28% Retailers Financial Performance The financial performance of retail sector vis-à-vis FMCG sector is different. the numbers are higher. Inventory management which is an integral part of any successful retail operation is currently lacking. While gross margins of apparel retailers in India are almost similar to any other international retailer.perspective | Volume 04 a quar terly repor t by Vo l u m e 0 4 / 2 0 1 0 Thus.there is an opportunity for the retail sector to get these financial metric right. to CDIT. high inventory levels have led to significantly lower returns. Exhibit 6: Apparent Shift in the Share of Wallet Categories Talk time Volume CAGR (Last 4-5 years) 80% Per Unit Price Change -24% Laptops 76% -20% LCD’s 40% -20% Premium Shirts (Apparel) 6% 15% Home Textiles 12% 25% This hypothesis is further strengthened by the fact that post recession. A significant amount of capital of an Indian retailer is blocked in inventory leading to a strain on the balance sheet. the share of wallet appears to have shifted from categories like apparel. home furnishings etc.

it puts pressure on the categories that are not offering competitive price performance value to the consumer. • Diminishing power of manufacturers’ brands operating in such categories. of Players 5 15 3% 2008 2009 Nokia Market Share 56% 54% Spice Lava Micromax Karbonn Nokia Market Share 64% 28 18% 60% 56% 52% 48% Market Share of Local Players Source: Technopak Analysis Emergence of private labels and increasing retailer presence across the country would see a rapid commoditisation across various categories. and the next one is poised to bring those to reality. just the fiber composition of the garment and the confidence in the retailer / brand etc. we expect that there would be a new way of classifying the consumption of Indian consumers. travel and leisure have been witnessing rapid growth.000 crore. • Consumers will optimize their purchases largely on simple attributes of price and convenience (time efficiency) in order to release more resources (money. time. health and beauty services. Categories which are mainly need based would see low consumer involvement resulting in commoditisation of these categories. Exhibit 8: Commoditisation in the Mobile Phone Market Market Share of Local Players 20% NOKIA 63% 16% 12% 8% 4% 0% 1% 2007 No. doctor and having healthcare services have become important and have overtaken clothing in the consumption basket. will imply: • Consumers zeroing on just one or two attributes for taking the consumption decision e. in turn. Categories like education. personal transport. We are already witnessing a certain degree of commoditisation in the mobile phone market with the emergence of large number of smaller brands challenging the market leader. the categories with highest consumption included food. 31 | An Overview of India’s Consumer and Retail Sectors . Low-involvement. The size of the education market. The new order being “roti doctor kapda makan”. Recently.perspective | Volume 04 a quar terly repor t by Vol u me 0 4 / 2 0 1 0 A Look into the Future The last decade (2000-2009) has given India the confidence to dream big. Consumers are also taking their decision based on one or two main factors like price. mental involvement) for the aspiration / lifestyle based consumption categories. For example. clothing and housing. As India enters a new decade of growth there would be significant changes at both consumption and retail level. textile and apparel and there would be aspiration based categories like personal transport. jewellery and watches. battery life etc. As the size of these categories is dependent upon the consumer’s wallet. Commoditisation Trap: Bigger Threat than Before for Brands Given the changing consumption habits of the Indian consumer and share of categories. just the capacity of the refrigerator.g. Thus. containing the spending on self learning and coaching as well as tuitions is equivalent to the size of the organised retail market in India. Going ahead it is expected that emergence of new categories would put significant pressure on some of the categories which lag on price performance matrix. Some key themes expected to emerge in next few years which can have a direct impact on retailers and consumer goods companies include: Dramatic Changes in the Indian Consumption Basket Around 4-5 years back. our spending on self learning and coaching amounts to about Rs 45. footwear. just the size of the LCD panel for the TV. the spending on this category is coming from the same share of wallet. Categories of apparel. On one hand there would be a need based consumption categories like food and groceries. home textiles and housing are expected to move below education as there are significant changes that are expected in the education sector.

improvement through better sourcing and private label programme. Hence. Profitable growth would be the emphasis for retailers and investors in the time to come. Focus on Financial Returns Last year has been a steep learning curve for the organised retail. (nominal growth of Rs 33. Lilliput and successful listing of Jubilant Foodworks (Domino’s) on the stock exchanges have revived investor interest in the sector. We expect that in the next 5-10 years. investments in mega projects and development of infrastructure is expected to create “new hot spots” in India. the scale of business opportunity and pace of change would be fundamentally different from what it has been in the past.perspective | Volume 04 a quar terly repor t by Vo l u m e 0 4 / 2 0 1 0 Emergence of New Hot Spots of Consumption Currently the top 8-10 cities contribute to disproportionate share of the markets in most of the consumer goods categories.gupta@technopak. The industry is again Same store sales growth emerging as a strong contender for private equity “New” growth 0. it is expected that consumption is likely to double in India over the next 5 An Overview of India’s Consumer and Retail Sectors | 32 . President | raghav. This would imply focusing on performance improvement through better inventory management. Conclusion The events of the last 15-18 months have provided a steep learning for the retail and consumer product industry. Going forward we expect an increased focus on the financial returns by retailer rather than just the top Pranay Gupta. going ahead growth in India would be far more exclusive as the new hot spots of consumption (primarily driven by investments in these regions) appear on the Rohit Bhatiani. retailers tend to look at new growth as the key area that they want to take back to investors for valuation of business.gupta@technopak. retail and consumer product industry Performance Metric Correlation to Value attracts a large quantum of investments through ROCE 0. In the near future. Revival of Investor Interest Globally. Pre 2008 we saw a number of private 0. Principal Consultant| rohit. The same store sales and the new stores growth comes second. Generally. gross margins. The recent deals in Café Coffee Day. There is going to be significant changes in the overall consumption basket hence brands in low involvement categories would be under the increasing threat of commoditisation. We expect that profitable growth would be the way forward for organised retail than top line growth. Consultant | pranay. ROCE has the highest correlation with the performance of retail business and other parameters.65 private equity. understanding what the markets reward will be the key. This calls for almost every company to go back to the strategy drawing board and develop a vision for the next decade in order to emerge as a successful player in the consumer and retail sector.75 lakh crore). However.20 investments. While the last decade (2000-2009) has seen significant addition to consumption and retail market.bhatiani@technopak. it would be very important for retailers to focus on generating returns through better performance and working capital management. Authors Raghav Gupta.40 equity deals in the retail space. As retailers look to raise fresh capital. In the international market. These new centers of consumption would present an opportunity for both retail and consumer product companies to focus on and derive growth from the consumption potential of these new hot spots.

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