The India Retail Opportunity

Group 5 Atisha Banjare Ramesh Narayanaswamy Rashie Ratan Sandeep Divakar Thamaraiselvi A

Agenda
• Backdrop
– Then and Now; India and Retail

• A changing India…
– Macro: Economic, social, regulatory – Micro: Psychographic

• … and a changing retail scenario • Current scenario • Perspectives

Backdrop

Backdrop: then and now
Then • • • • • Self reliant mindset; closed economy High import tariff; high excise duty; low per capita incomes International brands unheard of; not much variety available Shopping: a task Savings oriented; high interest rates on small savings schemes Now • • Liberal, open economy; entry of MNCs; high entrepreneurial spirit Reduced excise duty; low tax; high disposable income; affordable price Availability of variety Shopping: an experience; Policy direction: more consumption oriented

• • •

A changing India

Changes in India
• India second fastest growing economy in the world • One of the youngest countries
– Median age is 24; 70% of population below 35; like the US baby boomers – Younger population growing fast – The Liberals form a large part of this segment (9.8% of population)

• Current consumer base is 217m people, 27% of population, equivalent to US population
– By 2013, 200m more people to join productive age bracket – Net addition–5x Australian population

Demographic shift
55+

45-54

35-44

2013

Age

25-34

2001

1991

15-24

5-14

0-4

0

50

100

150

200

250

300

Population in million

Demographic changes—youth
• Cultural habits changing
– Acquiring Western look
• High mobile usage and high subscriber base new retail format development of an entire

– Changing attitudes like
• “having a good time” attitude driving growth of pubs, clubs, coffee bars, fast food joints etc.

– Increasing awareness and spending on grooming and lifestyle

Socio-economic changes
• High disposable incomes
– Lower tax rates – Entry of foreign firms and private competition; competitive salaries

• Middle class dwelling revamped
– Modern conveniences natural and normal – Hectic lifestyles and increasing disposable incomes leading to increasing convenience sought – Price affordability due to
• Reduction in import tariffs, excise duty • More competition leading to fall in prices

Spending changes
• Role of banking
– Decreasing interest rates, easy availability of loans leading to more investments increased affordability
• Tax adjusted EMIs halved

– Increased usage of credit cards (20% CAGR 2001-03)

• Net job creation positive
– Young workforce; average age of employees often below 30; – IT and BPO; higher propensity to spend in youth

Market changes
• Before liberalization
– Many consumer durables not available – Government disallowed imports of most products – Luxury items banned/had high import tariffs

• Post liberalization
– Enhanced availability of superior quality goods at affordable prices

• Two incidental factors
– Spread of cable and satellite television influencing consumer behavior, – Emergence of Maruti, the small car—first foreign product available at affordable price; whetted consumer appetite

Mindset changes
• One-stop shopping, speed and efficiency of purchases • Consumerist attitude
– – – – Guilt-free spending Savings not very high priority Spending money for feel-good factor: affordable indulgence Rising income levels; new kinds of high profile jobs (VJs, TV anchors etc. ) rise of young, ambitious population

Other changes
• Policy direction favors consumption over savings
– Interest rates on small savings schemes have fallen

• Infrastructure
– Golden Quadrilateral (2% of total road length but 40% of total traffic) – North-South and East-West corridors adding to connectivity

• Largest recipient of remittances; addition to incomes

Private transfer of funds to India
14 12.8 12.4 12 11.8 12.3 12.1

10.3 10 8.5 8.1 8

US $ bn

6

5.3

4

3.9

2

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

year

Cracks in the system
• Fiscal consolidation; Threat: High fiscal deficit can reverse low interest rate trend, unless government takes significant steps to cut expenditure or increase reforms
– Public debt is 80% of GDP, interest payments are 48% of revenues

• Power sector reforms: 7b USD losses in state electricity boards • Water resource management: impacts agricultural earnings, impact private consumption

Changing retail scenario
Economic development growing affluence retail boom

Changing retail scenario
• USD 230b total; 3% organized modern formats
– Organized retailing, then: garments, footwear and watches – Organized retailing now: expanding to food, grocery, jewelry, entertainment, cosmetics, home furnishing etc.

• Booming consumerism
– Socio-economic factors (USA 1960s, China 1990s) fuelling consumer spending – USA: Baby boomers attained spending age; strong economic growth (910%); shift in employment from primary to manufacturing; mass migration from rural areas to cities; “ready to splurge” – China: Strong economic growth (10+%); significant upticks in investments and foreign fund inflows

Changing retail scenario
• Shift to organized formats (from kirana shops to hypermarkets) • Capital no longer a constraint – easy loans • Availability of quality real estate
– Easing land regulations and releasing more land for retail; investment in real estate by organized players is on the up – 100% FDI under automatic route for real estate development townships over 25 acres of land or commercial/retail development on floor space of over 500,000 sq. ft.

Easing regulations
• Regulatory framework falling into place
– Implementation of VAT (no tax evasion by traditional players) – Increasing availability of quality real estate
(mm. sq. feet) NCR Mumbai Bangalore Hyderabad Pune Rest of India Total FY05 3.7 4.95 1.8 3.5 2 9.05 25 FY07E 22.5 20.25 3.75 5.25 3.75 19.75 75

Retail—ripe for consolidation
– India: 1 retail outlet for 280 people – Global: 1 retail outlet for 1,800

Government: meeting midway
Government regulatory changes made

Regulatory changes awaited

VAT

Industry status to retail sector

FDI in real estate

FDI entry through ownership route

Foreign entry through franchisee Route, single brand retailer or B2B segment

Real estate mutual fund / real Estate investment trust

Supply dynamics
• Changing supply dynamics
– Earlier:
• Limited funding options, lack of quality retail properties, complex taxation system, manufacturers’ non-acceptance of modern retail channels

– Demand = Ability + willingness to spend; but Market = Demand + supply – Now:
• Investors giving value to retail—funding options opening up

Inflexion point
• Just before the cusp of growth revolution, industry is fragmented and densely populated with players operating in limited geographies—this has been the case for every industry worldwide • Economic development growing affluence retail boom
– India second fastest growing economy in the world – Younger generation more adventurous; brought up in the postliberalization era – Consuming class is burgeoning; rising disposable incomes; no guilt of consumption

Retail life cycle
• Place in the retail life cycle: development phase
– Compressed evolution cycle: no grind of building models that succeed and fail; – Leapfrog effect
• India took only 10 years what US/UK took 40 years; global experiences at disposal

– Multiple stages of evolution across India
• Speed of execution; enhanced business offering; operating efficiency and SCM

• Industry ripe for foreign entrants;
– Successful retailers have stumbled in new markets – FDI increases competition and competitiveness – Leveraging best practices, supply chain efficiencies

Organized retail - development phase
Changing supply dynamics Funds + Quality real estate + government regulations Upbeat consumerism driving demand Affordability + Willingness to spend India is here •Core models are in place Retailers adding newer formats and categories • Retailers gearing up pace of scale up •Players extending beyond large cities •Newer players making an Entry

Infancy

Development

Maturity

Decline

A glimpse into future
• Massive expansion ahead
– More floor space, penetration into Tier II cities – Experimentation with models:
Hypermarket Malls Big Bazaar, Giant, Spencer Sahara, Ansal Plaza, Crossroads

Shopper's Stop, Pantaloon, Department Stores Westside Convenience Stores Speciality stores Entertainment Apna Bazaar, Foodworld, Nilgiris Bata, Titan, Tanishq, Raymond, Hallmark, Mc Donald, Pizza Hut PVR, Adlabs, Inox

Current changes
• Organized formats booming in the South
– Chennai, Bangalore, Hyderabad – Lower real estate prices

• 12m retail outlets; most of them <500 sq. ft.
– Highly fragmented

• India: 6000 grocery outlets per million population • Increasing sales through modern trade

Current changes
• 79% of shopping done by women
– Men still have strong influence on shopping decision (46% of cases)

• Top 5 (organized) retail categories—by value
– Clothing; food; consumer durables; footwear; furniture

• Food, jewelry and beauty & personal care represent only a small percentage (1%, 2%, 2% respectively) • Highest penetration
– Watches (40%), footwear (25%) and clothing (13.8%)

Future perspectives

Perspectives: food and grocery
• Drivers
– Busy lifestyle; pre-packaged, ready-to-eat preferred – Changed mindset from “packaged is stale” to “packaged is quality and hygienic” – The Eating Out Effect – Consumer spending is 40% on foods and grocery, but retail penetration is only 0.5% – Fastest growth prospect – Malls also drive growth

• Future format: towards hypermarket

Perspectives: apparel
• Drivers
– Fashion consciousness
• 50% of Indian youth are fashion conscious of which 37% are highly fashion conscious

– Untapped segments like maternity wear, lingerie and school wear will be exploited – Going out and outdoor wear; peer acceptance

• Future format: Specialty stores for the upper crest, private labels and discount stores for lower end

Perspectives: consumer durables
• Drivers
– Nuclear families and increased housing – Increased awareness leading to increased penetration for categories like microwaves and washing machines – Convenience factors (working women, time-saving products) – Higher end products increasingly becoming status symbols

• Future format: Multi-brand outlets, specialty stores for high end products/high-breadth

Perspectives: home furnishings
• Drivers
– – – – Increased nuclear families and housing Customizability (DIY) Self-expression Convenience (one stop shop)

• Future format: Departmental store

Thank you
Q&A

Appendices

Promising categories
• Foods and grocery
– 40% of consumer spending pie – Purchases still from kiranawallas; – Low penetration due to requirement of setting up complex supply chain; inadequate logistics facilities; street vendor competition; low margins; high capital infusion

• Jewelry
– Only 2% in organized retail

• Home solutions
– Over 200m homes; nuclear families; growing affluence and housing boom

Promising categories (contd.)
• Value retailing
– Hypermarket most sought after – No player has currently sufficient scale to the extent of say, a Wal-Mart – Top 15 global retailers operate in the value retail space

• Rural retailing
– 68% of population in rural

Understanding the Indian youth
Age group Key decisions Influencers Spending power Consumption areas Brands

Early Youth 13-21

Education and career

Parents and peer group

Rs. 10002000 per month (mostly from parents)

Clothing, accessories, food and entertainment (incl. communication) Personal clothing and accessories, food, entertainment and consumer durables Household, kids products, personal clothing and accessories, food and entertainment

Develops preferences but brand consumption is occasional and aspirational, looking for value for money Can afford the brands he/she aspired for; not price conscious, but quality conscious, seek feel-good factor and expression of identity Prefers a mix of status and fun brands

Middle youth 22-28

Career and relationships

Peer groups Rs. 7000and workmates 40,000 per month

Late youth 29+

Children and career advancement

Peer group, Rs 40,000 workmates, and above spouse, kids and “inner voice”