Impact of FDI on Urban and Semi Urban consumers in Retail



Who are urban and semi urban consumers Urban Consumers
Data Highlights This data release covers the total population, population (0 to 6 years) and number of literates for each UA/City with a population of 1 Lakh and above as per the provisional population totals of Census 2011. Towns: For the Census of India 2011, the definition of urban area is as follows; 1. All places with a municipality, corporation, cantonment board or notified town area committee, etc. 2. All other places which satisfied the following criteria: i) A minimum population of 5,000; ii) At least 75 per cent of the male main working population engaged in non agricultural pursuits; and iii) A density of population of at least 400 persons per sq. km. The first category of urban units is known as Statutory Towns. These towns are notified under law by the concerned State/UT Government and have local bodies like municipal corporations, municipalities, municipal committees, etc., irrespective of their demographic characteristics as reckoned on 31st December 2009. Examples: Vadodara (M Corp.), Shimla (M Corp.) etc. The second category of Towns (as in item 2 above) is known as Census Town. These were identified on the basis of Census 2001 data. Urban Agglomeration (UA): An urban agglomeration is a continuous urban spread constituting a town and its adjoining outgrowths (OGs), or two or more physically contiguous towns together with or without outgrowths of such towns. An Urban Agglomeration must consist of at least a statutory town and its total population (i.e. all the constituents put together) should not be less than 20,000 as per the 2001 Census. In varying local conditions, there were similar other combinations which have been treated as urban agglomerations satisfying the basic condition of contiguity. Examples: Greater Mumbai UA, Delhi UA, etc. Out Growths (OG): An Out Growth (OG) is a viable unit such as a village or a hamlet or an enumeration block made up of such village or hamlet and clearly identifiable in terms of its boundaries and

location. Some of the examples are railway colony, university campus, port area, military camps, etc., which have come up near a statutory town outside its statutory limits but within the revenue limits of a village or villages contiguous to the town. While determining the outgrowth of a town, it has been ensured that it possesses the urban features in terms of infrastructure and amenities such as pucca roads, electricity, taps, drainage system for disposal of waste water etc. educational institutions, post offices, medical facilities, banks etc. and physically contiguous with the core town of the UA. Examples: Central Railway Colony (OG), Triveni Nagar (N.E.C.S.W.) (OG), etc. Each such town together with its outgrowth(s) is treated as an integrated urban area and is designated as an ‘urban agglomeration’. In the 2011 Census, 475 places with 981 OGs have been identified as Urban Agglomerations as against 384 UAs with 962 OGs in 2001 Census. Number of UAs/Towns and Out Growths (OGs): Type of Towns/UAs/OGs Number of towns 2011 Census 2001 Census 1. 2. 3. 4. Statutory Towns 4,041 3,799 Census Towns 3,894 1,362 Urban Agglomerations 475 384 Out Growths 981 962

At the Census 2011 there are 7,935 towns in the country. The number of towns has increased by 2,774 since last Census. Many of these towns are part of UAs and the rest are independent towns. The total number of Urban Agglomerations/Towns, which constitutes the urban frame, is 6166 in the country. Population of UAs/Towns: 1. The total urban population in the country as per Census 2011 is more than 377 million constituting 31.16% of the total population. 2. Class I UAs/Towns: The UAs/Towns are grouped on the basis their population in Census. The UAs/Towns which have at least 1,00,000 persons as population are categorized as Class I UA/Town. At the Census 2011, there are 468 such UAs/Towns. The corresponding number in Census 2001 was 394. 3. 264.9 million persons, constituting 70% of the total urban population, live in these Class I UAs/Towns. The proportion has increased considerable over the last Census. In the remaining classes of towns the growth has been nominal.

4. Million Plus UAs/Towns: Out of 468 UAs/Towns belonging to Class I category, 53 UAs/Towns each has a population of one million or above each. Known as Million Plus UAs/Cities, these are the major urban centres in the country. 160.7 million persons (or 42.6% of the urban population) live in these Million Plus UAs/Cities. 18 new UAs/Towns have been added to this list since the last Census. 5. Mega Cities: Among the Million Plus UAs/Cities, there are three very large UAs with more than 10 million persons in the country, known as Mega Cities. These are Greater Mumbai UA (18.4 million), Delhi UA (16.3 million) and Kolkata UA (14.1 million). The largest UA in the country is Greater Mumbai UA followed by Delhi UA. Kolkata UA which held the second rank in Census 2001 has been replaced by Delhi UA. The growth in population in the Mega Cities has slowed down considerably during the last decade. Greater Mumbai UA, which had witnessed 30.47% growth in population during 1991-2001 has recorded 12.05% during 2001-2011. Similarly Delhi UA (from 52.24% to 26.69% in 2001-2011) and Kolkata, Moving to the Cities India’s still strong growth reflects the fact that it remains a principally rural nation. According to the 2011 census, only 31% of the population of India lives in urban areas. Urban migration, of course, is continuing but at a considerably slower rate than in China. According to the United Nations, the urban population of India will be less than 35% in 2020 and approximately 40% in 2030. Yet despite this, the number of new urban residents will be substantial. By 2030, another 225 million people will be added to the Indian urban areas, more than the population of Japan and Germany combined. The Largest Urban Areas During the last decade, the number of urban areas (areas of continuous urban development) in India rose by one half, from 34 to 51 (Table). However, growth was somewhat less than forecast in the largest urban areas, a phenomena that appears elsewhere, such as in now slower growing Mexico City, Sao Paulo, New York and Los Angeles. This pattern seems to be found all around the world, according to a report by the McKinsey Global Institute. India: Urban Areas Over 1,000,000 Population: 2011 Rank Urban Area 2001 1 Delhi, NCT-UP-HAR 15,358,000 2 Mumbai, MAH 16,554,000 3 Kolkata, WB 13,217,000 4 Chennai, TN 6,425,000 5 Bangalore, KAR 5,687,000

2011 21,622,000 18,790,000 14,113,000 8,696,000 8,499,000

% Change 41% 14% 7% 35% 49%

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

Hyderabad, AP Ahmadabad, GUJ Pune, MAH Surat, GUJ Jaipur, RAJ Kanpur, UP Lucknow, UP Nagpur, MAH Indore, MP Coimbatore, TN Kochi, KER Patna, BH Kozhikode, KER Bhopal, MP Thrissur, KER Vadodara, GUJ Agra, UP Visakhapatnam, AP Malappuram, KER Thiruvananthapuram, KER Kannur, KER Ludhiana, PJ Nashik, MAH Vijayawada , AP Madurai, TN Varanasi, UP Meerut, UP Rajkot, GUJ Jamshedpur, JH Srinagar, JK Jabalpur, MP Asansol, WB Vasai Virar, MAH Allahabad, UP Dhanbad. JH Aurangabad, MAH Amritsar, PJ Jodhpur, RAJ Ranchi, JH Raipur , CHH

5,534,000 4,519,000 3,756,000 2,811,000 2,324,000 2,690,000 2,267,000 2,123,000 1,639,000 1,446,000 1,355,000 1,707,000 880,000 1,455,000 330,000 1,492,000 1,321,000 1,329,000 170,000 889,000 498,000 1,395,000 1,152,000 1,011,000 1,195,000 1,212,000 1,167,000 1,002,000 1,102,000 971,000 1,117,000 1,090,000 293,000 1,050,000 1,064,000 892,000 1,011,000 856,000 863,000 699,000

7,749,000 6,352,000 5,050,000 4,585,000 3,073,000 2,920,000 2,901,000 2,498,000 2,167,000 2,151,000 2,118,000 2,047,000 2,031,000 1,883,000 1,855,000 1,817,000 1,746,000 1,730,000 1,699,000 1,687,000 1,643,000 1,614,000 1,563,000 1,491,000 1,462,000 1,435,000 1,425,000 1,391,000 1,337,000 1,273,000 1,268,000 1,243,000 1,221,000 1,217,000 1,195,000 1,189,000 1,184,000 1,138,000 1,127,000 1,123,000

40% 41% 34% 63% 32% 9% 28% 18% 32% 49% 56% 20% 131% 29% 462% 22% 32% 30% 899% 90% 230% 16% 36% 47% 22% 18% 22% 39% 21% 31% 14% 14% 317% 16% 12% 33% 17% 33% 31% 61%

46 47 48 49 50 51

Kollam, KER Gwalior, MP Durg-Bhilainagar, CHH Chandigarh, CH Tiruchirappalli, TN Kota, RAJ

380,000 866,000 924,000 809,000 847,000 705,000

1,110,000 1,102,000 1,064,000 1,026,000 1,022,000 1,001,000

192% 27% 15% 27% 21% 42%

Delhi: Delhi (National Capital Territory, Uttar Pradesh and Haryana) was reported by the United Nations to have become the second largest urban area in the world, following Tokyo in 2010. However, the Delhi urban area was nearly 1,000,000 people short of the population than projected by the United Nations. However, over the decade, Delhi managed to become the nation's largest urban area with a population of 21.6 million people, an increase of 41% over its 15.5 million people in 2001 (Note 1). This is an impressive accomplishment, since some demographers have long maintained that Mumbai could be destined to become the largest urban area in the world in future decades. Mumbai: Mumbai (formerly Bombay), in Maharashtra, placed second with a population of 18.8 million. This compares to a population of 16.6 million in 2001. The Mumbai urban area grow only 14% between 2001 and 2011, a much slower rate than before, driven by declines in the urban core of central Mumbai – another general global phenomena – and only modest growth in the suburban Mumbai portion of the central city, with explosive growth in the suburban areas outside the central city (Note 2). Mumbai‘s 2011 population is approximately 1.5 million below the level that would have been indicated by the 2010 United Nations projection.

Kolkata: India's third largest urban area, Kolkata (formerly Calcutta), in West Bengal, registered a population of 14.1 million, an increase of only 7% from its 13.4 million population in 2001. Like the two larger urban areas, the current population of Kolkata is less

than project by the UN. As in the case of Mumbai the shortfall is by approximately 1.5 million.

Chennai: Chennai (formerly Madras), in Tamil Nadu, ranked fourth among India's urban areas with a population of 8.7 million, up from 6.5 million in 2001. This 35% growth rate propelled Chennai to a population more than 1 million above expectation. Bangalore: Information technology center Bangalore (Karnataka) was the fastest growing of the urban areas over 5 million people, with a population of 8.5 million, an increase of 49% over its 2001 population of 5.7 million. Should Bangalore's population growth rate continue, it is likely to pass Chennai over the next decade to become the fourth largest urban area. Like Chennai, Bangalore registered a population at least 1 million higher than anticipated. Hyderabad: Hyderabad (Andra Pradesh), another of the nation's leading information technology areas, rose to a population of 7.7 million people, from 5.5 million in 2001. With a 40% growth rate, Hyderabad exceeded its population estimate by at least1 million people. Ahmadabad: Ahmadabad, in Gujarat, is the last of the seven urban areas with more than 5 million population had 6.4 million people, which is an increase from 4.5 million in 2001. Ahmadabad grew 41% and achieve the population at least one half million higher than was expected. Surat: The fastest growing urban area of the 16 Indian urban areas with more than 2 million people was Surat, in Gujarat. Surat grew from 2.8 million people to 4.6 million, for an increase rate of 63%.

Income of the Urban Population:

Income Distribution in India Income distribution refers to the spread of a country's income percentage throughout its population and yields a ratio between incomes of the richest in a country to the poorest. When income is not proportionally distributed, it is called income inequality. A great portion of India's population is a victim of rising monetary deficits, most of which has crossed well under the poverty threshold. While the top 10% of India’s population enjoys 31.1% of the country’s income, the lowest 10% suffers with me rely 3.6%.

The Consumerization of Urban India India is one of the world's youngest nations with nearly two-third of its population under the age of 35 years. Urban India accounts for nearly 30% of this burgeoning young population. There is a significant shift taking place in the consumption pattern of the young urban Indian consumer, aged between 21 and 40 years, led by various demographic, psychological and economic factors. Demographic trends and the strong growth in the Indian economy in the last few years are charting a new growth path for many consumer goods and services companies. The growth in the number of young working people in urban India who have grown up post liberalisation, rise in their aspiration levels and increase in their spending power will be the key drivers of growth for these businesses. Favourable demographics India's urban dwellers form 28% of the total population but account for about 42% of the total private consumption expenditure. Larger number of urban centres and the migration of the young rural population to urban centres for higher education and employment have driven urban growth rates. The growing share of young people in the population as well as development of urban India is leading to a rising number of working population in the cities who have higher spending power, led by high income growth and credit availability. The urban population between the ages of 15 to 34 years is expected to increase from 107 m in 2001 to 138 m in 2011, an increase of 30%. Also the proportion of young urban dwellers is growing. The migration to urban areas for better career opportunities will lead to an increase in the 15-59 age groups in urban areas. This group will boost consumption - as they have higher earning capacity and will also be able to spend more on themselves. Aspiration levels Strong economic growth, increasing globalisation, easy availability of credit and the rise of BPO and retailing has resulted in higher household incomes, and these continue to rise with the Indian economy. Also, the easy availability of credit has raised these aspirations. In India there has been significant increase in the percentage of households in the high-income and middleclass groups in recent times. This higher income is driving aspirations, especially

amongst the middle class, leading to an increase in the desire to change lifestyles by increasing consumption. Western lifestyle exposure through more foreign travel and higher penetration of television, internet and other media, has increased the desire of this class to update its lifestyle. Also, wide availability of financial products and lower interest rates has accelerated the penetration of credit. Ease of payment due to higher penetration of plastic money is also driving consumer-spend on impulse purchases.

Households in India (m) The Classes 1994-95 1999-00 2005-06 Rich (above US$ 4600) 1 3 6 Consuming (US$ 970-4600) 29 66 75 Climbers (US$470-970) 48 66 78 Aspirants (US$340-470) 48 32 33 Destitutes (less than US$ 340) 32 24 17

In the last three to four years, there has been a marked shift in the consumption pattern. The consumers are not satisfied by purely spending on basic products and services; they want to indulge by consuming goods and services that satisfy their lifestyle needs, which can broadly be classified as leisure, convenience & comfort, wellness and aspiration needs. The malls are rapidly replacing the kirana stores and the cinema houses are now turning into multiplexes. The number of mobile users has increased by 86.6% CAGR since 1997 to 2006. Going forward, the demand for lifestyle goods is likely to witness robust growth. The favourable demographics, rising income and change in lifestyle will lead to an explosive growth in the lifestyle categories like retail, ready to eat foods, gems, autos, travelling, hospitality etc. over the next few years. Not only the basic but the lifestyle goods and services are likely to be the next growth drivers. Lifestyle and the spending Pattern of the Urban Consumers: Global retail chains are chomping on the bit to enter the Indian retail market. The promise of growth in the emerging Indian market, the saturation of growth in their home retail markets and the lack of mature organized retail markets in India are all reasons for their interest. Conventional wisdom about Indian consumers is that they consider the cost of the product or service as the main criterion to make a purchase decision. But this has changed with time. The organized retail market in India is growing, but over 90%, of Indian consumers still depend on micro-shops and street vendors for their daily requirements. The organized retail

chains are gaining popularity in the bigger metros, but with growing opportunities in tier-2 cities, the potential for a huge market exists. The urban Indian retail consumer, values product attributes freshness as well as unobservable attributes such as place of produce or environmental friendliness and is not driven by the low-prices only. Products (and retailers) that do not share enough information regarding the production methods tend to be preferred less by the urban Indian consumer. For retailers interested in the Indian market or those seeking to enter the retail trade, it is important to note that consumers, on an average, Value the transparency in the supply and production chain and do not use price as the primary factor to make purchase decisions – there exist distinct consumer groups. Prefer fresh products, but products that are not local are also well accepted. Prefer environmentally friendly products and attach high utility to products that represent this information pictorial on the packaging do not accept anymore products with no information. Urban Indian customers appear to fall into 3 major groups depending on their product and purchase choices. Environment conscious group Majority of the urban population (around 44%) falls in this group. These consumers attach maximum value to environmental impact of the products purchased. They prefer local produces and are willing to pay a small premium to get products that have these characteristics. Health conscious group This group prefers products that are not treated with pesticides and are particularly sensitive to health issues. Price dependent group Consumers belonging to this group make their product choices by considering the price alone and they are not heavily affected by the method or place of production. They also do not worry substantially about the environmental impact of the products purchased. The urban Indian consumer has grown to a large extent from being a price only driven buyer to a more discerning buyer who needs to be convinced about a product's attributes. Urban Indian consumers are aware of potential environmental impacts and the effect of biotechnology on farming. Retailers need to improve their communication related to products, the supply chain operations and provide better organized retail experience to meet the requirements of the informed urban Indian buyer who is willing to pay a price premium.

Comparisons between the marketing strategies adopted in Rural and Urban Areas

State West Bengal Andhra Pradesh Maharashtra Karnataka Tamil Nadu Madhya Pradesh Haryana Bihar Western UP Gujarat Rajasthan Punjab Eastern UP Orissa Central UP Chhattisgarh Kerala Jharkhand Himachal Pradesh Uttaranchal Total

No. of Towns 43 40 27 26 22 20 19 18 16 15 13 11 8 8 6 6 5 4 1 1 309

Semi Urban Areas Surrounding residential areas of a bigger city, with a population ranging 1 to 5 lacks are said to be sub urban areas. A group of these can collectively be regarded as the suburbs. Generally they pertain to residential districts.

Semi Urban Consumers

Male Profile

Female Profile

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He is aware about myriad products that are on offer in the market place, thanks to television He is a responsible, family person and starts looking for employment at an early age He looks for respect more than anything else He could be a bank clerk, an accountant, a factory worker, small shop owner, a teacher etc. His annual income is pretty low as compared to an urban male but he is recognizing better lifestyle needs & aims for a higher income

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She is coming out of her closet and is exercising her choice in selected categories She is literate, but now transforming as a career oriented woman Mostly women seek work in Home Sciences She is comfortable going out in groups and tries to find similar company She is a content woman, happy with her changing lifestyle and recognition

Buying habits
 They buy daily usable things in large quantities like wheat flour, edible oil etc. Besides the daily use items; they buy things in small quantities and are not concerned with economy They recognize the need of advanced quality products but buy them only on special occasions like wedding or festival They like to show what they have bought when in groups, or evening meets, very common in semi urban The samples or small quantity bottles, in FMCG, is more often preferred by women There is a general perception that if more quantities are bought, it would lead to more wastage. They are also flamboyant at times with their purchases so often they go to their neighbors after shopping or take them along.

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Purchase Patterns
 Influence Customs - They believe in old customs and traditions which influence a lot on the purchasing decision. They look at functionality than on the style, brand and features. Packaging and Color - The size, color, shape, and packaging of the product matters a lot. For example, in the south people prefer yellow as good, but in the North it is a sign of a disease. Retail Outlet Friendly - More retail outlet friendly customers, and there are fewer stores available per 1000 population. Long Term Usage - They buy the product if they feel that the product will sustain for long term usage Economical with Good Quality - There is a saying in Hindi "sasta, sundar, mazboot” They buy the product if it is in their budget. But if the product is good in technology, quality and adds value to their role and status in the society then they do not look at money to buy it. If it is good and long lasting then there is no go back from the consumers. Society - They are driven by society. Word of mouth is the key factor in purchasing a product

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Decision Making Pattern in Semi Urban Category Automobile Influencer Peers, Neighbours Decision Maker User




Peers, Neighbours


Friends, Acquaintances, Relatives


Peers, Friends, Neighbours

 The Male Member in the family exercises the right to make purchase decisions  Only decisions with respect to the eatables are chiefly contributed by the woman in the family  The neighbours, friends and peers play a crucial role in the decision making for a semi urban consumer  As he is a society man primarily, he also wants to buy what his neighbor or his friends have purchased

UP, Haryana, Punjab, MP, HP, Rajasthan

Potential Congregations

    

Markets University/College areas Hotels/Tourist Complexes NRI Defense Areas

Reasoning UP, Haryana, Punjab, MP, Rajasthan » People are very flamboyant, enjoy festivals and spend lavishly during festivals » Most expensive weddings take place in these states, also the gatherings are enormous » HP is a state with high educational preferences and only sources of development as usually research work is undertaken there (Agri studies)

Bihar, Jharkhand, Maharashtra, Kerala, Tamil Nadu, Karnataka, Orissa

Potential Money Belts

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Industrial Govt. Offices Banks Fisheries/Beach IT Belts

Reasoning Bihar, Jharkhand, Kerala » Extremely rich people, coal and diamond mines, rubber plantations(Kerala, Maharashtra, Karnataka) » IT Hubs, Industries in all sectors (Orissa, Tamil Nadu) » Bank chains, posh residential societies

Types of Retail outlets urban and semi-urban consumers in India presently use for shopping:Mom and Pop Store (also called Kirana Store in India) Mom and Pop stores are the small stores run by individuals in the nearby locality to cater to daily needs of the consumers staying in the vicinity. They offer selected items and are not at all organized. The size of the store would not be very big and depends on the land available to the owner. They wouldn’t offer high-end products. Merchandise: Eggs Bread Stationery Toys Cigarettes Cereals Pulses Medicines Department Stores A department store is a set-up which offers wide range of products to the end-users under one roof. In a department store, the consumers can get almost all the products they aspire to shop at one place only. Department stores provide a wide range of options to the consumers and thus fulfil all their shopping needs. Merchandise: Electronic Appliances Apparels Jewellery Toiletries Cosmetics Footwear Sportswear Toys Books CDs, DVDs Examples - Shoppers Stop, Pantaloon Discount Stores Discount stores also offer a huge range of products to the end-users but at a discounted rate. The discount stores generally offer a limited range and the quality in certain cases might be a little inferior as compared to the department stores.

Wal-Mart currently operates more than 1300 discount stores in United States. In India Vishal Mega Mart comes under discount store. Merchandise: Almost same as department store but at a cheaper price. Supermarket A retail store which generally sells food products and household items, properly placed and arranged in specific departments is called a supermarket. A supermarket is an advanced form of the small grocery stores and caters to the household needs of the consumer. The various food products (meat, vegetables, dairy products, juices etc) are all properly displayed at their respective departments to catch the attention of the customers and for them to pick any merchandise depending on their choice and need. Merchandise: Bakery products Cereals Meat Products, Fish products Breads Medicines Vegetables Fruits Soft drinks Frozen Food Canned Juices Warehouse Stores A retail format which sells limited stock in bulk at a discounted rate is called as warehouse store. Warehouse stores do not bother much about the interiors of the store and the products are not properly displayed. Speciality Stores As the name suggests, Speciality store would specialize in a particular product and would not sell anything else apart from the specific range. Speciality stores sell only selective items of one particular brand to the consumers and primarily focus on high customer satisfaction. Example -You will find only Reebok merchandise at Reebok store and nothing else, thus making it a speciality store. You can never find Adidas shoes at a Reebok outlet. Malls Many retail stores operating at one place form a mall. A mall would consist of several retail outlets each selling their own merchandise but at a common platform.

E Tailers Now a days the customers have the option of shopping while sitting at their homes. They can place their order through internet, pay with the help of debit or credit cards and the products are delivered at their homes only. However, there are chances that the products ordered might not reach in the same condition as they were ordered. This kind of shopping is convenient for those who have a hectic schedule and are reluctant to go to retail outlets. In this kind of shopping; the transportation charges are borne by the consumer itself. Example - EBAY, Rediff Shopping, Amazon Dollar Stores Dollar stores offer selected products at extremely low rates but here the prices are fixed. Example - 99 Store would offer all its merchandise at Rs 99 only. No further bargaining is entertained. However the quality of the product is always in doubt at the discount stores. Retailers in India Retailer Pantaloon Retail Stores Big bazaar, Food bazaar , Hometown, furniture bazaar, collection-I,e-zone, shoefactory,Depot,,Bowling co. Shopper's Stop, Crossword, Homes stop, Mothercare. Westside, Star India Bazaar, Croma, Titan, Tanishq. Foodworld, Spencer's, Music World Lifestyle, Home Centre, Landmark International, Max Retail, Funcity. TruMart, Priamyd Megastore Reliance Hyper-mart Louis Phillipe, Van Heusen, Allen Solly, Peter England, Trouser town.

K Raheja Group Tata Group RPG Group Landmark Piramal Group Reliance Aditya Birla Group

Impact of retail in USA
The Pre-Modern Period (pre-1945) - During this era, mom-and-pop stores and general stores operated throughout the country. The mom-and-pops were family-run businesses (grocery stores, hardware stores, etc.) that served the needs of townspeople. “General Stores” were common and offered a variety of items that consumers could buy in one place. Retail Development 1945-1975 During this era, the development of store chains took place, and bigger discount and department stores opened across the U.S. The names Woolworth, Sears, J.C. Penney, WalMart, Montgomery Ward, and Macy’s became more common in cities and suburbs. Big Box and Category Killers 1975-1990 This period saw the tremendous expansion of discounters such as Wal-Mart and Kmart, plus other national chains like Sears and J.C. Penney. It also saw the introduction of specialty store “category killers.” These chains introduced specialty superstores that covered an entire category, such as Best Buy and Circuit City (now bankrupt and out of business) in the consumer electronics business, or Office Depot and Staples in the office-supply business. Throughout the U.S., malls, strip centres, stand-alone specialty stores, and big-box general merchandise chains sprouted up. Markets became saturated and, in many cases, overstored. The Consolidation of Retail 1990-2000 This period was marked by rapid industry consolidation in all retail channels, where the big chains got bigger and many regional chains and mom-andpop stores were laid to waste. Today every retail channel features several companies that capture a bulk of the market share. Wal-Mart and Target in the discount industry, Home Depot and Lowe’s in the home improvement business, CVS, Walgreens, and Rite Aid in the drugstore industry, Best Buy and Circuit City in the consumer electronics industry, and Wal-Mart, Kroger, Safeway, Ahold, Costco, and Albertson’s in the grocery business. This decade also saw the rise of the supercenter and warehouse club concepts, which emphasize one-stop shopping for everything from food to clothes to electronics to tires. These big, impersonal stores with everything under one roof took root, in stark contrast to the mom-and-pop stores that had once emphasized service and community. They offered a single destination for shoppers and low prices. The supercentre became Wal-Mart’s biggest growth vehicle in the 1990s and helped make it, by far, the world’s largest retailer. A retail study in 1990 predicted that 50% of all retail stores would be out of business by the year 2000, a bold prediction that, in retrospect, proved fairly accurate. The long list of venerable retailers who existed in 1990, but who are now defunct include Ames, Bradlees, Caldor, Alexander’s, Montgomery Ward, Hills Department Stores, F.W. Woolworth, G.C. Murphy, E.J. Korvette, McCrory, S.S. Kresge, Venture Stores, Jamesway Corp., Zayre, etc. The list goes on and on. The smaller mom-and-pop stores, unable to

compete with the growing number of megastores on price, were affected even worse. The study recognized the impending growth and power of chains like Wal-Mart, Target, Costco, and Home Depot, and rightly projected that many small and midsized regional chains would vanish from the retail landscape. The list of retailers above once represented the core business of many midsized manufacturers. As the decade progressed, vendors found their list of accounts shrinking, with only several retailers commanding a large percentage of their business. To their dismay, these retail giants began to exercise greater power in negotiating on price and supply chain procedures, and reduce the number of suppliers. Many vendors have felt powerless to dispute or challenge the demands of the big chains for fear of losing a significant portion of their business. The Future Takes Shape 2000-2005 Industry consolidation has had profound effects on merchandising strategies, on shopping patterns, and on suppliers. One result has been the loss of clout of brand names as the big suppliers, as well as retailers’ private brands, converge in the middle of the marke t. On the one hand, discount and mass retailers are finding it advantageous to introduce exclusive, name-brand merchandise lines, while higher- price department stores are trying to lower costs and increase unit sales by developing store brands, which offer consumers essentially the same quality as brand names without the higher price tag (and with higher margins for the retailer). Shoppers Combining Shopping Experiences Consumers are finding it advantageous to buy their groceries in the same places that they buy electronics, toys, shoes, and auto parts. Time-pressed consumers can avoid spending all day travelling to various stores to do their Christmas shopping. To accommodate this, bigbox retailers are expanding their offerings. Discounters are selling food and drugs; drug chains are selling food and items for the home; home improvement chains are offering electronics and appliances; and super-centres and warehouse clubs offer everything under the sun. Costco - A good example of the evolution of shopping can be seen at Costco. This warehouse club operator offers limited selections of high-quality goods at low mark-ups. And it makes a handsome profit by keeping its operating costs at a minimum. Consumers can buy items in bulk, thus reducing the amount of shopping trips while saving money. The addition of gasoline has put warehouse clubs into competition with gas stations and related convenience store operators like Circle K and 7-Eleven. Wal-Mart Supercenters and its Sam’s Club division provide similar experiences for lower-income shoppers. The Mass Merchandisers – The unrelenting consolidation that has characterized the world of mass merchants continues to this day. Even though their growth has slowed, Wal-Mart continues to expand its super-centers, putting local merchants out of business. We see retail consolidation among mass merchants and in other channels continuing unabated. Supermarkets in Developing Countries Supermarkets have been around for half a century in several developing countries, but the phenomenon was limited mainly to large cities, upper-middle-class or rich consumer

segments, and domestic capital chains. In contrast, a supermarket revolution in developing countries took off in the early-to-mid-1990s. The patterns and determinants of that revolution are detailed in the following subsection.

Diffusion of Modern Retail over Regions and Countries
The spread of supermarkets has taken place in three established waves and continues in a fourth emerging wave. The first-wave countries experienced supermarket sector takeoff in the early-to-mid-1990s. Included in that group are much of South America and East Asia (outside China and Japan, north-central Europe and the Baltic countries, and South Africa. In those countries, the average share of supermarkets in food retail went from roughly 10 –20 percent in 1990 to 50–60 percent on average by the early 2000s (Reardon and Berdegué 2007). Comparing that to the roughly 75–80 percent share that supermarkets had in food retail by 2005 in the United States and western Europe, it appears a process of convergence was taking place. The first-wave countries saw supermarket diffusion in a single decade that took some five decades in the United States and the United Kingdom. The second-wave countries are Mexico and much of Southeast Asia, Central America, and south-central Europe. In those areas, the share went from about 5–10 percent in 1990 to 30–50 percent by the early 2000s, with the takeoff occurring in the mid-to-late 1990s. In the third-wave countries, the supermarket revolution started in the late 1990s or early 2000s, reaching about 5–20 percent of national food retail today. These areas include parts of eastern and southern Africa, some countries in Central and South America, “transition” East Asia (China and Vietnam), Russia, and India. It is somewhat anomalous that they are latecomers in the third wave, because their demand-side characteristics (income, absolute size of the middle-class population, urbanization rate, and share of women in the workforce) make them similar to many countries in the second wave, which had supermarket take-off some five to seven years earlier. The main reasons for the lag were policies imposing severe constraints on retail foreign direct investment (FDI) that were progressively relaxed in China and Russia in the 1990s. Note that the growth rates of supermarket food sales and retail FDI are inversely correlated with the waves. Thus, the fastest growth occurred in the supermarket sector in China (about 40 percent a year), whereas the more mature, relatively saturated supermarket sectors in Brazil and Taiwan saw growth of only 5–10 percent. Example: China China ranked fourth, fifth, and third in the AT Kearney Global Retail Development Index in 2005, 2006, and 2007, respectively, and is a fascinating case of extremely rapid supermarket diffusion. Modern retail in China comprises roughly 10 percent of the national retail and 30 percent of urban food markets (Hu et al. 2004). China had no supermarkets in 1989, and food retail was nearly completely controlled by the government. From its beginning in 1990, the supermarket sector climbed meteorically to about 15 percent of food retail nationally (some 35 percent in the big cities) by 2003, and today its annual sales are roughly $100 billion. Many of the driving forces for super marketization were in place (e.g., rising incomes, urbanization), and all it needed to become a reality was the progressive

privatization of the retail market and, even more importantly, the progressive liberalization of retail FDI that started in 1992 and culminated in 2004, as a provision of World Trade Organization (WTO) accession. FDI drove intense competition in investment among foreign chains and between foreign chains and domestic chains that even accelerated before WTO accession and thereafter with full liberalization of FDI. Diffusion over space within a country Supermarkets tend to start in large cities, then spread to intermediate cities and towns, and then enter small towns in rural areas. The business strategy is the same as for chains, spreading in waves over countries: the richest and largest market is entered first because it offers the highest profit per capital invested; competition and saturation of the initial base drives investment by a given chain into the series of subsequent markets. While the gross return declines, cost savings result from economies of scale and the procurement system change discussed later in the report. Often the multinational chain acquires or joint ventures with the large domestic chain and both acquire smaller local chains operating in various regions of a country. Competition from larger chains in turn pushes intermediatecity-based chains to extend into the hinterland towns, seeking refuge from the increasing competition in its base market; this process accelerates the diffusion of supermarkets over space. Diffusion over consumer segments and socioeconomic strata Controlling for the pattern of spatial diffusion, similar waves of diffusion occur over socioeconomic groups and consumer segments. Obeying the same business logic as in spatial diffusion, supermarkets focus first on upper-income consumer segments (national and expatriate), move into the middle class, and finally enter the markets of the urban poor. Format diversification with diffusion over space and strata As modern retail spreads, format diversification tends to occur to facilitate the spatial and consumer segment differentiation. For example, to penetrate the markets of inner cities and small towns where space is limited and product assortment can be narrow, chains use discount stores, convenience and neighbourhood stores, and small supermarkets. Diffusion over product categories The penetration by supermarkets of food retailing has occurred in the following waves of food categories: 1. The first wave of product penetration is in processed foods (canned, dry, and packaged items such as rice, noodles, and edible oils). This is a result of the economies of scale in procurement as well as direct relations with processed-food manufacturers. 2. The second wave is in semi processed foods (with extensive or minimal processing such as dairy products) and minimal processing and packing (chicken, pork, beef, and fruit).

3. The third wave, by far the slowest and the longest in starting in developing countries, is into the vegetable market (particularly for leafy vegetables and bulk vegetables). Example: China compared with Hong Kong In a study of a random sample of 1,200 consumers in the six largest cities in China, Goldman and Vanhonacker (2006) found that modern retailers already have a retail market share of 94 percent in non-food goods, 79 percent in packaged and processed goods, 55 percent in baked goods, 46 percent in meat, 37 percent in fruit, 35 percent in poultry, 33 percent in fish, and 22 percent in vegetables. Compare that to the more advanced case of Hong Kong, which likely represents the average Asian consumer sometime in the medium-term future. Hong Kong supermarkets have a 59 percent share in fruit retail and a 55 percent share in vegetables (thus, a share similar to supermarket penetration of produce retail in Brazil), 52 percent in meat, 39 percent in poultry, and 33 percent in fish (Coca-Cola Retailing Research Council Asia 2005). Evidence emerging from a large ACNielsen consumer survey in Asia suggests that younger consumers are “forsaking wet markets” and that in less than a generation the average produce buyer may well be substantially more supermarket oriented, which will accelerate the effects of the retail transformation on the horticulture sector (Planet Retail Daily News 2005). Example: Indonesia AC Nielsen (2007) undertook a survey of 1,300 consumers in the capital of Jakarta (capital) and in the second-tier cities of Bandung and Cirebon, focusing on consumers’ buying habits in supermarkets versus traditional markets. The survey revealed that penetration of grocery retailing has occurred much more rapidly in processed, dry, and packaged foods and in household and personal care products, for which supermarkets gain a cost advantage as a result of economies of scale from centralized procurement and distribution. Savings are passed on to consumers, drawing them to the channel. The supermarkets’ progress in gaining control of fresh-food markets has been slower because of procurement challenges, price, cultural habits, and perspectives regarding freshness; moreover, shoppers still purchase fresh produce mainly at wet markets and small vegetable stalls, where they get low prices, credit, and personal service.

Even in the late 1990s, Brazil was just like any other emerging economy, characterized by extremes of wealth and abject poverty with no social class dividing the bridge between. A decade and more down the line,the effervescence in the middle cannot be missed. Yes, the great Brazilian middle class – defined as those who earn between $690 and $2,970 a month – has arrived and is here to stay. If Brazil has made a name in the global retail sector, it had better thank these late comers, empowered with good purchasing power and access to credit. Fast Facts          Brazil is the fifth largest country in the world and the largest Latin American economy. The Economist Intelligence Unit had forecasted that Brazil will overtake the U.K. to become the sixth- largest economy in 2011. Brazil is the biggest exporter of iron ore and the largest exporter of meat, coffee, and chicken. Brazil is the fifth most populated country in the world Over the last two decades, thanks largely to welfare schemes launched by the government, the poverty rate has halved in Brazil. Income equality in the country has also fallen sharply, declining on average by 1.2% a year. The Brazilian retail market is worth about $230 billion. More than 30 million Brazilians have risen out of poverty since 2003 to create a new middle class. Demographics also favor the growth of the consumer- oriented sectors of the economy. About 80% of the country’s 190 million population lives in urban areas.

Of course, the commodities powerhouse has benefited from the high prices of iron ore spurred by China’s voracious appetite. But what makes the Brazilian success saga stand out is that some shrewd social engineering by some of the country’s visionary leaders ensured that the commodities wealth trickled down to the poorest sections of society. To put things in perspective, the so-called middle class, who comprised some 38% of the country’s population in 2001, currently accounts for a whopping 55%. Social welfare schemes such as the Bolsa Familia implemented by former president Lula da Silva after he took over in 2003 also ensured that in addition to benefiting from liberal handouts, low-income families also received the golden opportunity to educate their children, which made a real difference in their lives. The scorching growth of the domestic retail sector over the course of the last decade or so, triggered by the emerging middle class, also has something to do with the country’s demographics. Economists have pointed out that about 80% of Brazil’s population of 190 million lives in urban areas.

Hyperinflation and its aftermath By the mid-1990s, international retailers woke up to the fact that developed markets had reached a point of saturation and offered little scope for further expansion. Quite naturally, their eyes fell on the newly emerging markets, especially those Eastern European nations that had come out from behind the Iron Curtain around the same time. Despite the shift in the retailers’ mindset during the decade, due to a number of economic issues Latin America did not figure on their radar screens until toward the end of the 1990s. To begin with, South American markets as a whole were characterized by economic instability. High levels of public debt and hyperinflation were the hallmarks of many Latin American economies and Brazil was no exception. To put things in perspective, inflation in Brazil had touched a mindboggling 5000% in 1994. This daunting inflation scenario worked to the detriment of both consumers and retailers alike. If buyers were forced to make purchases soon after they received salaries for fear of losing the real value of their money, retailers too had to revise their price lists frequently. To sum up, the economic situation was not encouraging for retailers as they tried to gain a toehold in the domestic sector. Thankfully, the situation changed for the better under Fernando Cardoso, the visionary leader who was the president of Brazil from 1995 to 2002. Cardoso launched what has come to be known as the Real Plan, which introduced a new Brazilian currency. The Plan, which was nothing short of a shock treatment for the economy, also helped tame inflation. The initiative unleashed a generation of consumers who for years had been fettered by high inflation. Granting the central bank operational independence in 1999 also helped, with the bank setting its inflation target at a slightly variable 4.5% beginning in 2005. Brazil was lucky to have an equally competent successor to Cardoso in Lula da Silva who assumed office in 2003. In addition to family welfare schemes, Lula’s programs included subsidized housing, an easier access to credit, and generous pay hikes, among other initiatives. Consumer lending was boosted as banks were allowed to deduct interest charges on debt directly from the workers’ payroll. According to a study by Brazil’s Getulio Vargas Foundation quoted in the Financial Times, about 49 million low-income Brazilians rose to the ranks of the middle and upper-middle classes since 2003. Meanwhile, China’s role in the emerging market story was playing out well in the background, with the Asian economy eclipsing the United States as Brazil’s largest trading partner. The current incumbent Dilma Rousseff expanded the scope of the good work initiated by her predecessors, boding well for consumers and industries alike. With this, the stage was set for consumer-oriented sectors such as retail to train their guns on the Brazilian market. Besides the availability of credit, which was a big boost to the growth of the retail sector in the country, a typical Brazilian shopping trait also played a role. According to a 2011 McKinseytrait Quarterly Report, Brazilian consumers are more open to using credit than consumers in other Report, emerging markets, and low income groups in particular require consumer finance products to markets, low-income purchase goods. The report reveals that 60% of people use credit in Brazil, while in India it is 30%, and in Russia and China the use of credit stands at 24% and 13% respectively.

DIRECT CONSUMER CREDIT (CDC) Direct Consumer Credit (CDC) was one of the earliest consumer finance products to be launched in Brazil. Under this system, consumers purchase goods in instalments through bank orders or pre-dated bank checks. This form of credit, which mostly works in arrangement with retailers, has been usurped by credit cards in recent times. HSBC’s consumer finance unit Losango, which has been put up for sale, follows this business model. PAYROLL LOANS Under this system, payments are deducted from the borrower’s pay check itself. Payroll loans are considered less risky to lenders as credit is given against payroll guarantees. This form of credit benefits consumers too, as interest rates tend to be lower than the direct credit offered by retailers. CREDIT CARDS Over the years, credit card transactions have become the favored buying instrument for Brazilians. The credit card processing segment in Brazil is valued at about $420 billion a year, with Reuters reporting that there are more than 630 million outstanding credit cards in Brazil. Home-grown credit card processors Cielo and RedeCard have a vise-like grip on the industry, while the likes of Visa, MasterCard, and Citibank’s Credicard unit have big plans chalked out for the Brazilian market.

Retail segment in Brazil Although organized retail in Brazil could be traced back to 1948 when the current market leader Companhia Brasileira de Distribuicao (CBD), better known as Pao de Acucar, started off as a small bakery, the last decade witnessed hectic activity in the sector. Among foreignowned entities, French retailer Carrefour S.A. was among the early birds to set up shop in Brazil, coming in as early as 1975. Walmart Brazil, the third in the pecking order, was established in 1995. However, the deep-pocketed foreign players would soon realize that the Brazilian market was a different kettle of fish when it came to consumer behavior patterns. In contrast, home- grown retailers such as Hypermarcas and apparel retailer Lojas Renner S.A. have continued to grow at faster rates, helped by their knowledge of the local market. Brazil became a hot destination for investors since it found a place for itself in the now famous BRIC group of emerging economies. While some of Brazil’s bigger counterparts r an for cover during the financial crisis of 2008-09, the Latin American economy managed to keep its head above water, thanks to the consumption potential of its people. Of course, various stimulus packages rolled out by the government also put more money in the hands of consumers. Brazil’s retail market is estimated to be worth about $230 billion, driven mostly by domestic demand. Besides the 40% growth in GDP per capita during the last eight years or so, population distribution also plays a vital role in encouraging the growth of sectors such as retail. About 30% of the country’s population lives in the 10 principal metropolitan cities. Sao Paulo brims over with a population of 18 million, while Rio de Janeiro has 10 million. Still, the consumption habits of this predominantly urban population are diverse. As a PwC report points out, the lower income sections tend to spend more on essentials such as food and beverages, while those in the upper income bracket splurge on leisure, durable goods, as well as luxury items. The Brazilian market is also perhaps the most internationalized among the BRICs, as the top 10 retailers corner almost 60% market share among themselves. Food retailers, apparel retailers, consumer goods makers, appliance retailers, and consumer staples companies form the backbone of the sector. Major Players Brazil has emerged as the world’s third-biggest grocery market, next only to America and China, thanks to the aggressive growth strategy adopted by players operating in the market, both foreign and domestic. Global retailers such as Walmart and France’s Carrefour bank on the Brazilian market to make up for sagging sales elsewhere. At the same time, domestic market leaders such as Pao de Acucar give them a run for their money. Still, the new entrants find it tough to gain a foothold in the highly competitive market, which offers great potential for growth.

GRUPO PAO DE ACUCAR Pao de Acucar is by far the biggest diversified retailer in Brazil, selling everything from groceries to home appliances to clothing. The company, which has a market share of about 18%, has made strides under the stewardship of Abilio Diniz. The company’s foray into the sale of home appliances has been spurred by the acquisitions of the Globex Utilidades SA’s Ponto Frio chain as well as the Casas Bahia outlets. The retailer operates under brand names such as Pao de Acucar, Sendas, Extra, CompreBem, and Extra Eletro. CARREFOUR S.A. The French retailer, second only to Walmart worldwide, has been a significant market presence in Brazil for more than 25 years with a market share of about 14.5%. Brazil figures prominently in the diversified retailer’s game plan after its hypermarket format failed to click and European sales tumbled. However, Carrefour’s attempt to combine itself with Pao de Acucar last year had to be abandoned after a major shareholder in the Brazilian market leader objected to the deal. WAL-MART BRAZIL Though the world’s largest retailer took some time to become established in the country, its Brazilian unit is now one among its best performing subsidiaries. Last year, Walmart Brazil, which has a market share of 12%, created ripples in the market when it implemented its “Everyday Low Prices” strategy to take on its rivals. Though Walmart Brazil first entered the market through a joint venture with local player Lojas Americanas, its growth has been driven by acquisitions of the local units of Netherlands’ Royal Ahold and Portugal’s Sonae. Apparel Retailers Unlike the retail grocery and household appliance market, local and traditional brands dominate the apparel and fashion sector in Brazil, the world’s fifth largest apparel marketplace. With more than 60% of the country’s population below the age of 29, the apparel market has been growing at a rate of 7% a year, according to a McKinsey Quarterly Report published in July 2011. Fashion-conscious Brazilians are heavily swayed by clothing lines endorsed by local celebrities. Moreover, unlike in other emerging market, they tend to purchase apparel on credit more frequently. LOJAS AMERICANAS Founded in 1929 by four Americans, the discount retailer sells clothing lines, toys, household goods, small household appliances, chocolates and candies, as well as CDs and DVDs. Lojas also has a presence in the online retail space under the brand B2W Varejo. LOJAS RENNER S.A. This discount clothing retailer’s clientele is comprised primarily of young females, with the company clocking 60% of its sales revenues through credit. American department store

chain J.C. Penney had a controlling stake in Lojas, which it divested later. COMPANHIA HERING (CIA HERING) Still owned by the founding Hering family, CIA Hering is easily the oldest home-based textile and clothing maker. In recent times, the retailer has focused on opening stores in tier 2 Brazilian cities aimed at the newly emerging middle class who have access to credit. The mega deal that never materialized It all began in June 2011 when Carrefour publically announced that it received a proposal to combine its Brazilian operations with those of Pao de Acucar. Under the terms of the deal, both Acucar and Carrefour Brazil were supposed to merge into Gama, a holding company funded by the government-owned Brazilian National Development Bank (BNDES). The combined entity, as The Economist pointed out, would have had sales of $43 billion or a 21% share in the fast - growing retail market. The deal would have no doubt benefited both the sides, but for the objections of Casino, a French retailer which holds a 37% stake in Acucar. Expectedly, Casino cried foul, terming the deal illegal. The stand-off also strained Acucar-Casino ties, according to media reports from Reuters. Although the business proposal had the implicit blessings of Brazilian policy makers eager to create true national champions in fast-growing sectors such as retail, the deal ultimately had to be shelved.

Store Formats
As pointed out by a July 2011 McKinsey Quarterly Report on the retail sector, Brazilian shoppers stand out for some unique behavioral patterns. First of all, shopping for them is a relaxing, everyday activity where they expect salesmen at the counter to treat them royally. Most shoppers, the report observes, would like to travel to the stores by foot, which means they prefer retail shops located closer to their homes. Another marked trait of the domestic shopper, the study shows, is that he or she is extremely price-conscious compared to their peers in India, China, and Russia. Keeping these trends in mind, Brazilian retailers have devised a variety of store formats to reach out to this lucrative consumer. Rather than focusing on a particular format, these ambitious players have pursued a multi-pronged approach which includes neighbourhood supermarkets, hypermarkets, convenience stores, discount stores, and online stores. Supermarkets Supermarkets, the typically large modern-day self-service grocery stores, tend to dominate the segment, accounting for 80% of purchases made. Leading players such as GrupoPao de Acucar, Wal-Mart, and Carrefour all follow this format. Hypermarkets The hypermarket format, a superstore which combines a supermarket and a department store, is also very well entrenched in the Brazilian retail market. Carrefour, for instance, makes three quarters of its sales from its hypermarkets, in addition to its other store

formats such as supermarkets, cash&carry, and convenience stores. Convenience Stores (Hybrid Indigenous format) Big retailers were quick to realize that the “one-size fits all” model could not be applied to the Brazilian market. Thus, retailers operating in Brazil adopted the concept of the convenience store, mostly located in gas stations, to augment the traditional retail format. E-Commerce According to Euromonitor International, Brazilian Internet retailing has shown impressive growth in recent years. The report points out that increasing access to broadband and falling prices of personal computers have driven the upsurge. E-commerce has increasingly expanded beyond traditional economic hubs like Sao Paulo, as lower-income groups join the Internet bandwagon. Encouragingly, women, who have traditionally lagged men in making purchases online, now make up 50% of web shoppers in Brazil.

The road ahead for retail
Still, the Brazilian juggernaut would do well to realize that it may not be wise to bank solely on fluctuating commodity prices and an overstretched consumer in its march forward. Beneath the glitz and glamor of Brazil’s shopping aisles lurk some issues that are comm on to many emerging markets, such as rampant inflation, hot capital inflows, and poverty, among other factors. First, the country, through its education system, will likely need to focus on training a future workforce to support the burgeoning retail industry. Poor infrastructure, the bane of the Brazilian retail industry for years, is also a concern, although preparations for the 2014 soccer World Cup and 2016 Olympics are expected to go a long way to address the need. Although sectors such as natural resources and banking are dominated by what is known as state capitalism, where the government exerts control of strategically important companies, notably Brazil’s retail industry has remained more or less independent. Still, corruption and bureaucratic red tape hamper the development of the retail sector and, as media reports point out, big foreign players find it difficult to navigate the byzantine ways of Brazilian bureaucracy. Many analysts are alarmed over Brazil’s rapid credit growth, fearing that a U.S .-model credit bubble may be brewing. However, as a Financial Times report pointed out, this concern may be unfounded as about 60% of consumer loans are made against payrolls, property, or cars and are offered at fixed rates. To sum up, the Brazilian retail success story should be understood in the wider context of the rise of its middle class as is the case with many emerging markets. Yet, unlike in other developing markets, deep-pocketed multi-nationals such as Wal-Mart and Carrefour have tasted unprecedented success in the retail sector. Amid the unraveling Euro-zone crisis and slowing global growth, Brazil, despite all its shortcomings, may yet prove to be an oasis of growth for global retailers.

Ever since China reformed its economy, understood the immense importance of FDI and also urged for foreign capital participation in the economy-the country has received remarkable amount of FDI since 1979. It has become the second largest recipient of FDI just behind the US and definitely the largest among the developing. The FDI in China becomes most popular since 1979 and it has received $306 billion in between the next 20 years. That is attributed to few major incidences in that span of 20 years including the establishment of Special Economic Zones (SEZs). The government of China established four SEZs in Guangdong and Fujian provinces and offered special incentive policies for FDI in these SEZs. That make the movement of FDI in the country towards upward direction and the trend has not been changed. To fully appreciate the economic strength of China, one needs to understand the macro factors that are driving the country. China’s economy is the second largest in the world roughly 2.3 times larger than Japan’s and 70% of the world’s largest economy, the US. Since 1978, China has achieved an average 9.9% annual GDP growth, and the International Monetary Fund (IMF) forecasts the Chinese economy to surpass the US by 2016. Although growth projections are less bullish for the next five years, the projected 9% annual growth rate still outpaces other BRIC countries.

Fast Facts
    Retail sales increased 16.3% in 2011 Q1, while GDP expanded 9.7%. Retail sales are expected to double in the next three years. Retail sales in China amounted to nearly $2.1 trillion in 2010, nearly 50% of those in the U.S. China’s retail sales are expected to grow by around 10% in 2011. China’s retail sector is showing some signs of consolidation in 2011. The market share of the top 20 retail chains rose to 8.9% in 2011 from 8.4% in 2010 Over 25 of the world’s largest retailers are conducting business in China.

  

Five of China’s domestic retailers are ranked among the 250 largest global retailers on the Global Powers of Retailing for 2010. By 2015, China is poised to zoom to the position of the third biggest consumer market globally, after the U.S. and Japan. China slipped to the 6th rank on A T Kearney’s Global Retail Development Index 2011, from the top position in 2010.

Urbanization is driving the retail boom
China has experienced unparalleled levels of urbanization since the onset of economic reforms begun in 1978. Compared to 1980, today China’s urban population has increased by over 200%. According to a McKinsey research study, by 2025, two thirds of the Chinese will be living in urban areas. By 2030, China’s urban centers will be inhabited by 350 million more people, this increase itself beating the entire population of the U.S. today. Also by 2025, 221 Chinese cities will boast of a population of over one million, with 23 cities registering over five million. The urban economy is expected to generate 90% of China’s GDP by 2025, with its aggregate consumption and disposable incomes twice those of Germany. While the 1990-2005 period saw the emergence of two mega-cities in China with a population of over ten million, namely Beijing and Shanghai, by 2025 the number of megacities is expected to climb to eight, adding Tianjin, Shenzhen, Wuhan, Chongqing, Chengdu and Guangzhou to the group. These mega-cities are fast emerging as urban retail hubs in China.

The power of the aspiring middle-class
World over, the resurgent demand from the growing middle-class has been instrumental in driving global growth. The World Bank estimates that the global middle-class will grow from 430 million in 2000 to over 1.15 billion in 2030 (incomes ranging from $3650-$7300 annually). More importantly, while the developing countries accounted for 56% of the global middle-class in 2000, this figure is expected to zoom to 93% by 2030. China and India together will account for a phenomenal two-thirds of this expansion. In China, the process of economic growth led to fast-paced urbanization and improvements in the standards of living, and with this, more and more urban migrants were propelled to the emerging middle-class.

The middle-class has become the face of the contemporary and aspiring Chinese consumer, who is now being wooed by domestic and foreign retailers alike. Defining the middle-class as people with incomes ranging from $6000-$25,000 a year. Constituting about 23% of the Chinese population today, the middle-class is raring to grow to 25% in 2010 and 33% by 2020. The urban middle-class will lead this explosive expansion, with over 60% of urban households estimated to join this group by 2016, compared to 39% in 2006.

Evolution of consumer behaviour in China
The consumption behaviour of the Chinese population is evolving quickly, along with rapidly increasing wealth. Wage levels in China have risen steadily after the introduction of the open door policy, and people are becoming more affluent. This has created a shift in consumption patterns, from catering solely to primary needs to indulging in the upper layers of Maslow’s Hierarchy, improving quality of life and increasing social esteem. All six main segments gained over 10% in retail value every year, with outperformers such as gold, silver, jewellery and automobiles, and underperformers such as cosmetics and household appliances and AV equipments.

Increasing consumer power
Increasing income is another major driving force behind the sector’s future growth. In particular, we see rural households and low-income urban households as one of the main drivers of retail sales growth during the 12th Five-Year Plan period, with a higher than average income growth rate. During the period of 2001-2005, the per capita disposable income of urban households increased at a higher CAGR of 10.8% compared to rural households’ net income growth of 7.6%. However, thanks to the government’s policy of improving living standards in rural households, both urban and rural households’ incomes increased at a CAGR of 12.7% during 2006-2010.

The Evolution of the Asset Class
China’s retail market has undergone a transformation over the past two decades, moving away from traditional department stores to large-scale integrated shopping malls.24 Much of this trend can be explained through the transformation of retailing within the country. From the 1980s to early 1990s, the predominant retailers in China were large department stores which were often owned and operated by state-owned enterprises (SOEs). Since the last decade, Chinese shoppers have been gravitating toward more foreign and smallerformat retailers, producing a need for shopping malls to accommodate these stores. Department stores were traditionally a popular way for new brands to establish themselves in China, but in recent years modern shopping centers became mainstream to meet demand. The shopping center format has become the predominant retailing asset of choice in China’s Tier 1 cities, and has begun to take shape in Tier 2 cities as well.

Unleashing the retail dragon through reforms and foreign investment
While by now most prominent global retailers have forged an entry into the thriving retail industry in China, the framework of rules and regulations governing this sector have remained largely ambiguous and fraught with contradictions. Prior to 1992, foreign retailers were prohibited from setting up joint ventures or wholly-owned subsidiaries for wholesale or retail trade in China. Loosening its tight regulations somewhat, in July 1992 the State Council permitted foreign investment in retailing on a trial basis in Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao, as well as the five Special Economic Zones (Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan). By 1997, about two dozen foreign-invested stores in China had been approved by the central government to conduct business. However, hundreds of foreign invested retailing as well as wholesaling enterprises had already established themselves in Chinese cities, having sought approval from the provincial or municipal authorities. In order to curb the mushrooming of foreign-invested retail enterprises, the

central government ordered a moratorium on local approvals, revoking many approvals made in 1997 and 1998 as well. The ownership structure of many of these enterprises was also restructured, making them Chinese majority-owned.

Beyond the First-Tier Cities
Outside of top-tier cities, delivery of products is a bigger problem for retailers than demand. In these regions, appropriate supply is not available to all retailers. The result is a bifurcation where the best retail projects charge high rents, with a substantial drop in rents for nonprime assets. With the exception of Beijing, the majority of Chinese cities are not inundated with top retail properties. Rather, the majority of Tier 2 cities have an undersupply of stock in relation to the demand for products.

Key Criterions
Compiled for closer analysis a list of 19 Tier 1 and 2 cities that will benefit from transportation linkages and interconnectedness with regional economic hubs. Eight variables were taken into consideration, including • Population growth • Disposable income growth • Future wealth creation • Amount of current supply • Historical retail sales growth • The level of infrastructure • Future development pipeline • Rental outlook

Retail formats in vogue
China’s retailing sector remains highly fragmented, housing many small and medium-sized retailers unlike the U.S. where the big retailers have a dominating presence. China was home to over 549,000 retail enterprises. Despite the fact that the number of chain stores has grown in recent years, cross-provincial retailers remain less common because of local

market access barriers. However, China does flaunt a wide array of retail formats, each at a different level of evolution and development: Department stores: These stores were popular earlier on, but are facing intense competition now and are battling to stay ahead. (Golden Eagle, Parkson, Beijing Cuiwei, Shenzhen Suibao) Hypermarkets: The development of hypermarkets has been led by international retailers, who are now spreading their wings to tier 2 and 3 cities, as markets in tier 1 cities reach saturation. (Wal-Mart, Carrefour, Vanguard, Tesco, Metro, RT Mart Shanghai, Trust-Mart) Supermarkets: This highly fragmented market dominated by domestic players, is witnessing cutthroat competition, often leading to weeding out of the weaker players coupled with strategic consolidation. (A-Best Supermarket, Baijia Supermarket) Convenience stores: Though still in the development stage, this format is witnessing increasing competition, mostly among domestic chains. (Quick of LianHua, Alldays & Kedi of NGS) Specialty stores: Electronics/Appliances: This segment is clearly dominated by domestic players, with limited foreign investment. (GOME, Suning) Discount stores: Still evolving, this format remains concentrated in tier 1 cities. The first discount store was introduced by Carrefour in 2003. Franchising: Constituting about 3% of China’s total retail market, franchising seems to have tremendous potential for future growth. (KFC, McDonalds, 7-eleven, Pizza Hut) Direct selling: With direct selling rules introduced in 2005, providing the much needed legal framework, the potential for further growth remains immense. (AMWAY, Mary Kay, Avon) Online retail: Online shoppers grew 68% between 2009 and 2010 to 185 million. Online retail sales have been predominantly consumer-to-consumer transactions. However, with over 29% of its population using the internet, online retail sales are poised to grow over 30% per year. (Taobao, Alibaba, eBay

Lessons Learned
Over the past decade, there has been a surge of interest from both foreign and domestic investors in China retail real estate market. However, hard lessons have been learned by some of these investors, and these lessons include poor asset planning and management, the lack of local knowledge and various issues with partners (such as lack of alignment of interests).

A number of foreign investors entered China retail real estate markets by replicating the Western retail mall’s concept, but many have failed. Main reasons are conflicts with their local partners, and the lack of local knowledge and professionals, such as misunderstanding the local culture and consumer behaviour, mismatching product offerings and poor asset planning and management. When it comes to asset planning and management, some retail assets in China have been plagued by poor property management. Notable trends that tend to occur especially with local owners are:  Leasing space to the highest bidder without much regard on the overall tenant mix.  Strata-titled mall for sale for a quick profit, but inhibiting any future value growth for the property.  No concept for layout and circulation planning leading to inefficient designs.  Max out the leasable space allowed by local zoning without regard for demand, leading to excess space, especially on higher floors.  Lack of proper market analysis and due diligence during the design phase often lead to the wrong product and tenant mix.

Interestingly, the average size of retail projects in Tier 1 and Tier 2 cities reflects the lack of proper planning. The average size of both shopping malls and department stores tend to be significantly larger in Tier 2 cities where demand is arguably much lower. By contrast, Hong Kong has only six projects larger than 100,000 sq m, and they were phased developments. Overbuilding often results in the developer’s eagerness to maximize floor area without taking actual demand into consideration. The lack of sophistication and local knowledge that are often associated with both local and foreign investors has led to numerous failed projects. With the exception of a handful of players, the majority of developers continue to build assets without the proper planning.

Enhanced Welfare Gains for Consumers India
On average in 2004, Indian consumers spent about 51 percent of their total expenditures on food; in rural areas, that figure was about 55 percent and in urban areas it was 42 percent according to the National Sample Survey (Planning Commission 2004). Although India has a large rising middle class, its income levels are much lower than those in developed countries. Most Indians are very price sensitive. Any pressure on prices, especially for food, gets the immediate attention of policymakers. For example, the onion crisis in the summer of 1998 paved the way for the exit of the ruling government at that time (Desai 1999). In 2007, inflation crossed the 6 percent mark, triggering a series of inflation-controlling policy changes spearheaded by food price controls. The lesson seems clear: any relief in food prices makes consumers happy. However, policymakers need to remember that policies to rein in inflation should not conflict with the interests of other major stakeholders in the economy, especially producers (farmers). If falling prices for food are achieved by making transportation, logistics, and procurement more efficient (e.g., by better planning), then both producers and consumers benefit. However, reducing consumer prices by suppressing prices for producers could lead to a conflict, and policymakers would have to make difficult policy choices. The emergence of organized retail undoubtedly gives consumers a wider choice of goods, more convenience, and a better shopping environment, among other benefits. This is feasible because organized retail can take several formats, from small neighbourhood stores in densely populated cities with high real estate prices to large air-conditioned malls in the periphery where real estate is cheaper. Organized retail can appear small but spread in all local markets, providing the convenience of a neighbourhood kirana store but with procurement on a mass scale that keeps prices low and provides greater variety. This is confirmed by the consumer survey in the ICRIER report (Joseph et al. 2008) and the experiences of countries like the United States, Chile, and Mexico. With a reasonably long history of organized retail, the United States has shown that many organized retailers have been able to hold retail prices down, especially for massconsumption goods. Fishman (2006) shows that retailers like Wal-Mart have held the U.S. inflation rate down by at least 1 percentage point (normal inflation hovers around 2 –4 percent). The success of such retailers to hold the price line comes largely from their efficient national and global sourcing and scale economies. In India, given a very large pricesensitive population, holding the price line for a large mass of consumers could be a great boon to consumer welfare. However, that boon is not likely to happen overnight. Organized retailers tend to start off from first-tier cities with high purchasing power and then go to second- and third-tier cities with more price sensitive populations. Several chains in India have started in cities like Hyderabad and Bangalore, which are prospering from the information technology boom, to the metropolitan cities of Delhi, Mumbai, Chennai, and Kolkata, and then very quickly moving to smaller cities like Jaipur and Chandigarh. Some chains have announced plans to start business hubs in rural areas. DSCL's Haryali Kisan Bazaars, Mahindra and Mahindra's Shubh Labh Stores, Tata/Rallis’s Kisan Kendras, Escort’s rural stores, and ITC-led Choupal Sagars are similar business hubs that provide value-added

services like credit services, soil-testing facilities, education services, and agri-input supply to village farmers. In many countries, it takes decades for retail to extend into rural areas. In India, however, it appears that organized retailers are moving very fast in all cities and in all product segments (except meat and meat products). The expected benefits of that expansion are lower consumer prices for the same quality, wider variety, and a better shopping experience. These benefits should soon percolate to the mass of Indian consumers, assuming that organized retailers have free access to global- and pan-Indian sourcing directly through producers, processors, and specialized agents. Another interesting point to note in this connection is that several surveys such as the Indonesian consumer study noted above on consumer behaviour with respect to modern retailing show that consumers prefer organized retailers for their better hygienic environment, indicating a concern for food safety. Although it is difficult to implement any food safety standards in the traditional retailing environment, modern organized retailers could be thought of as an entry point to ensure food safety, not only at the retail end but also all along the supply chain. Large retailers could be encouraged to guard their supply lines and provide extension and support to ensure traceability in production and that food moves from farm to plate in a hygienic environment. This would be an additional gain to consumers, enhancing their welfare. Almost all the convenience and neighbourhood stores launched by modern retailers cater not to high-end consumers primarily but to middle- and lower-income groups. These consumers are attracted to low, discounted price offers. The “Everyday low prices” and “Saving is my right” slogans of the Subhiksha chain have been instrumental in wooing customers and thus escalating the growth of daily footfalls. In 2007, Safal, the largest organized retail network of fruits and vegetables in India under Mother Dairy, reduced the prices of 13 selected winter vegetables to Rs 5 per kilogram. That price was lower than the prices offered by Reliance Fresh for many of the items and 50 percent cheaper than those offered by local vendors (Chakravarty 2007). The underlying idea was to give better prices to both farmers and consumers and reduce the gap between the two prices. This shows that the entry of more players will induce sufficient competition and price wars that will eventually help consumers at the front end and possibly farmers at the backend. Upgraded and Co-Opted Kirana Stores and Hawkers What about the kirana stores? The political debate in India today is hung up precisely on this point. Traditional retailers (kirana stores, street hawkers, and wet market stall operators) occupy an overwhelmingly large space in Indian food retail; almost 99 percent of food and grocery being sold in this country is through traditional retailers. Therefore, what happens to their livelihood as modern retail expands is a legitimate concern that every policymaker must recognize. Experience in China and Indonesia shows that traditional and modern retail can coexist and grow, albeit at different rates, for many years, usually decades. While the kirana stores may be growing at about 2–5 percent or so, organized retail may be growing at 20–40 percent plus. In Indonesia, even after several years of the

emergence of supermarkets, 90 percent of fresh food and 70 percent of all food is still controlled by traditional retailers. In China, the overall story is not very different, although supermarkets have moved faster into cities. Organized retail starts capturing an increasing share of the total retail in food and grocery, although in absolute terms both organized and traditional retail may be growing. However, structural changes in retail will surely start affecting large numbers of small retailers at some stage, be it after one or two decades, especially when the overall share of organized retail in food reaches about 25–30 percent. It may be such that the kirana traders operating at the periphery of the organized sector are the first ones to bear the brunt of its rapid expansion. These traders might lose their businesses to the organized sector relatively early, while the small and marginal traders farther away from the supermarkets continue to survive and flourish. India is likely to reach this stage in the next 10 years or so, provided the growth rates in organized retail remain as they are today or even accelerate under a more benign policy environment. Thus, India has a lead time in which to innovate for greater inclusiveness and train the small players to be a part of the retail revolution. India can also learn from neighbouring countries of Southeast Asia in this regard. As discussed in Section 5, Singapore, Taiwan, and Hong Kong had programs to upgrade traditional retailers to compete with organized retailers, and those who could not be brought up to that level were given grants to find new jobs. India has several options with which it can experiment. It is important to remember that organized retail is not just about big-box malls but is also about neighbourhood stores (as shown by Subhiksha and Reliance) and even pushcarts. Many dairy and ice cream companies (e.g., Mother Dairy, HLL-owned Kwality Walls, Vadilall, etc.) are organizing pushcarts, and ITC has been considering using pushcarts organized through a nongovernmental organization or pushcart vendor association that can organize them and infuse some capital through micro financing. In early 2007, ITC went ahead to launch as many as 300 pushcarts in Hyderabad and Secunderabad in Andhra Pradesh and were in talks with the Municipal Corporation of Hyderabad (Business Line 2007). This could help small roadside vendors develop a brand image and charge better prices for quality products. Another retail format that has gained popularity are exclusive booths and dairy parlors. For instance, Mother Dairy conducts its retail sales of milk and milk products through exclusive milk booths. Amul, the retail brand of GCMMF, has already launched about 200 outlets, mostly in Gujarat, selling all products under the brand GCMMF, including milk and ice cream. It proposed to expand the pilot project and set up 10,000 outlets across the country (Bose 2005). Organized retailers can co-opt several kirana stores and hawkers drawn from the pool of traditional retailers; upgrade them with adequate infusions of capital, design, and training to enable them to better meet the demands of customers; and organize them under their respective banners through franchises, partnerships, or even employees. That is being done in Japan, where big retailers are co-opting convenience stores and upgrading them under their franchise models. In the fast-food industry, McDonald’s now runs more than 30,000 restaurants worldwide (although the company has not yet offered franchises in India). In

India, Nirula’s followed a similar pattern, though on a much smaller scale. The franchise model can also be successful in organized retail, with some outlets directly under company ownership and others under franchise. This can make the chain competitive as well as inclusive. In India, the government as well as industry associations like the Federation of Indian Chambers of Commerce and Industry and the Confederation of Indian Industry are confronting the challenge of incorporating traditional retailers in the modern retail movement. Even civil society could join this revolution to ensure that it benefits most stakeholders in the economy. This would require not only innovative ideas but also significant resources. Interestingly, as the share of organized retail grows, the Indian government is likely to realize a major gain in terms of tax revenues, because it would be much easier to collect sales taxes from organized retailers than from traditional retailers. Tax revenues can be ploughed back into the system to upgrade traditional retailers and improve the wholesale wet markets, as China is doing under the 2006-launched 200 Markets Upgrading Program.

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