Preface

| Foreword | Executive Summary | Methodology | Indian Retail Industry | Insights | Interview Section | Company Listing | Sponsors | Launch Event | D&B Editorial Team

Alphabetical Listing Stores Screens Total Area Employee Locations Offerings Catwalk Worldwide Private Limited Khadim India Limited Spykar Lifestyles Private Limited Industry Overview Issues & Challenges Industry Outlook

This section attempts to capture key trends and provides insights into the Indian organised retail sector through two sub sections. In each section, D&B India presents the insights derived from a detailed analysis of data gathered through primary and secondary sources. The first section presents operational insight and the second section presents the impact of economic slowdown on the Indian retail sector and the way forward. The insights are derived from the 123 eligible companies for which more than 80% of the information sought was available. Section I Economic boom lures more retail players into the sector Organised retail took shape in India through various phases. The sector reached its glorious period post-economic reforms, when economic prosperity encouraged many Indian players to enter the sector.

Out of the companies that responded to this survey, 23% were established before 1990. Players like Tribhovandas Bhimji Zaveri, Nilgiris, and Bombay Swadeshi Stores, to name a few, have been successfully operating in the sector for decades. Over the past five decades many of todays retail

majors like Vijay Sales, Khadims, Fabindia, Rhythm House and Apollo Pharmacy made headway for the sector and mostly operated only in the metros; however, the scenario changed dramatically postliberalisation. As mentioned, many players ventured into the retail sector post-liberalisation; 34% of the respondents established their retail business in India during 1990-2000 and opened stores in various parts of the country. Some retail companies that established their foothold in the sector during this period are Shoppers Stop, Pantaloons, Spencer, and Viveks. The Indian organised retail sector witnessed a sea change with the entry of new players. Few foreign players like McDonalds and Dominos also forayed into the Indian market in collaboration with domestic companies and their presence unfolded a new chapter in the highly unorganised sector. The noteworthy development during this period, however, was the emergence of new retail formats like departmental stores, hypermarkets and supermarkets that gained nationwide popularity. Post-2000, organised retail sector emerged as one of the fastestgrowing sectors in India. Over 43% of the surveyed companies started their retail operations after 2000; some of these companies are renowned names today Liberty Retail Revolutions, Welspun Retail Ltd, Hypercity Retail (India) Ltd and METRO Cash and Carry India Pvt Ltd. The sector witnessed a complete makeover with the advent of cash and carry format stores popularised by foreign players in recent times.

More than 55% of the respondent companies were private limited companies followed by public limited companies (24.5%) and proprietorship & partnerships/JV companies account for the remaining. Among the private and public limited companies the apparel and textile segment is the most preferred segment. For the private companies, the second most-preferred segment after textile is food, grocery and beverages segment (26%). For the public companies, home dcor and furnishing segment is the second most-preferred segment after textile.

The organised retail segment is mainly dominated by the apparel and textile segment (25.7% of the respondent companies operate in this segment), followed by the food, grocery and beverages segment (16.1% share). The food, grocery and beverages segment dominates the entire retail market (both organised and unorganised), but its penetration in the organised retail side is relatively low, which is clearly revealed in the survey. The emergence of other segments like home dcor and furnishing, footwear, jewellery, consumer durables and electronics and health, beauty and pharmaceuticals to name a few, has been the highlight of this decade. Franchise model gains popularity The organised retail players predominantly operate under a direct business model; however, over the last couple of years, players have started operating on both franchisee and direct models, and few companies have started operating exclusively under the franchise model. Besides, the leading foreign retail brands operate through the franchisee model in India as 100% FDI is not allowed in the segment. These companies have formed master franchises with Indian companies to leverage their foreign brands in India. For instance, a number of global brands such as McDonalds, Pizza Hut, Ddamas are operating in India under the franchise or joint venture model with their Indian business partners. Under the franchise model, companies (franchisor) can be present in the market by incurring lower capital expenditure and gaining higher flexibility. Therefore, this concept is rapidly catching up in India, as the country offers ample growth opportunities in the organised retail segment.

According to the survey results, 72.7% of the respondents are operating under a direct model, 19.3% are operating under both direct as well as franchisee models and 8% companies are operating exclusively under a franchisee model. Big companies also join the fray The retail sectors growth has been supported by the strengthening economic fundamentals, favourable demographics, change in lifestyle etc. The sector has undeniably benefitted from the gradual liberalisation (51% Foreign Direct Investment (FDI) is allowed on single brand through Foreign Investment Promotion Board (FIPB) route, and 100% FDI is allowed on cash and carry format through the automatic route) even though 94-95% of the Indian retail sector is unorganised. The rapidly evolving shopping centres, multi-storeyed lifestyle malls, giant complexes that offer shopping, food and entertainment concepts in tier I, II and III cities are overwhelming and they are attracting companies to invest in the rapidly growing Indian organised retail space. Retail companies are focussing on increasing their footprint in the flourishing new retail formats such as departmental stores, supermarkets, hypermarkets, convenience stores, specialty stores; as a result, investments in the Indian organised retail sector have risen incredibly. Indias leading business houses like Reliance Industries Ltd, Aditya Birla Group, Tata Group etc have also set their footprint in the sector over the past few years. Some companies have expanded their presence in the booming market through the inorganic route by acquiring existing retail players; for instance, the Aditya Birla Group took over Trinethra supermarkets and Indiabulls acquired Piramyd Retail Ltd.

The top 10 players in terms of floor space accounted for 77.2% of the total floor space of the respondent companies and operated in multi-segments and different formats spread across major cities in the country. Evidently, majority of the top 10 companies concentrated on the food, grocery and beverages segment, and the apparel and textile segment. Nonetheless, the consumer durable and electronic goods segment is fast-evolving as another important segment for retail companies. Major retail players like Reliance Retail (Reliance Digital), Pantaloon Retail Ltd (eZone and Electronic Bazaars), Videocon (Next Retail Ltd), Tata Sons (Croma), Sumaria Appliances and Vijay Sales are retailing in this space. In the endeavour to maximise returns on average floor space and store, retail companies are adopting various promotional/discount activities to retain customers, especially in the current economic slowdown. Alliances with foreign brands are also gaining momentum with rapid lifestyle changes, particularly in metros and this set-up benefits both parties as they get to leverage on each others reach and brand. West-based companies constitute lions share of the total floor space According to the survey, companies from the western region had the highest share (67.1%) in the total floor space in India, followed by companies from the north (19.1%), south (7.8%) and east region (6.0%), respectively. Likewise, in terms of average floor space per store, the western region had the highest space at 5,345 sq ft as compared with the national average of 3,491 sq ft, while the southern region was second at 2,789 sq ft, followed by the northern region at 1,894 sq ft and the eastern region at 1,872 sq ft. Majority of the companies in the western region are based in the commercial capital of India, Mumbai.

As per the survey, the total store count of the respondent companies as on Dec 2008 was 19,989. In terms of region-wise contribution to total retail outlets, the western region had the largest share at

43.1%, followed by the southern region with 24.1% share, and the northern and eastern regions at 20.7% and 12.1%, respectively (see chart below). Majority of these stores is specialty, convenience stores, supermarkets/hypermarkets that are spread across the country; companies are increasingly focusing on various retail formats to enhance their presence in all major locations in a city/ town to cater to all sections, societies and communities of people.

Mumbai emerges as the preferred location for retailing In the study, among 24 popular locations for organised retail in India, Mumbai was found to be the most p3.referred location as 7% of the respondent companies reported to have retail stores/ outlets in Mumbai, and 6.5% respondents had stores/outlets in Bengaluru. Nonetheless, the northern region is also popular among these companies as 35.6% of the companies denoted their preference to have their retail stores in the northern region. This region has been riding high on the success of the IT and ITeSBPO companies operating in the region, especially the NCR that has witnessed a spurt in the development of shopping malls, which appears as the primary reason for the regions increasing preference among retailers.

According to the study, two cities from the south feature among the top five locations Bengaluru and Hyderabad On an overall basis, 29% of the respondent companies have presence in the western region and three cities from this region (Mumbai, Pune, and Ahmedabad) are among the top 10 preferred locations for organised retail in India, according to this study The top five cities as a combination Mumbai, Bengaluru, Kolkata, Delhi and Hyderabad were preferred by 31.8% of the respondent companies

Retail an important employment generator Since the retail revolution, the retail segment has churned out employment opportunities in India. The organised retail segment particularly has bettered job prospects for the younger generation. According to the survey results 84% of the employees were employed on a fulltime basis and the remaining on contract basis. The retail sector employs a high number of under-graduates who work as sales executives in the stores. The survey revealed that 56% of the employees employed by the respondent companies are under-graduates. This was followed by graduates and post-graduates with 36% and 8% respectively. Graduates and post-graduates can not only handle daily work but are also an important tool in retaining and attracting consumers, because they could better understand consumer needs and better interact with them. Recently, many leading retailers have also tied up with various educational institutions to provide specialised courses in retail management.

Target market of the organised retailer In 2008, Indias working population (in the 15-49 years age group) constituted around 53% of the population as compared with 48.6% in the UK, 49% in the US, and 53% in Russia. In addition, this population is more dynamic than the previous generations because their consumption is driven by wants rather than needs. Thus, the organised retailing, which thrives on lifestyle products, is expected to receive a boost because of the young population by 2020. The survey revealed that a majority of the respondent companies (48.1%) cater to age group of 25-40, followed by 41% of the companies catering to the age group of 18-25.

The survey also revealed that a majority of retail companies, 33.6%, cater to the customers falling in Rs 100,000 to Rs 500,000 income bracket, followed by 26.2% companies catering Rs 500,000 to Rs 1,000, 000 income brackets. High volume-low margin business model more popular The survey revealed that 38% of the respondent companies operate in the high volumelow margin business model and cater to the value segment. The supermarkets and discount stores that provide daily usage products to consumers at a discounted price come under this category. As per the survey, 33% companies operate in the high volumehigh margin business model and cater to the lifestyle segment.

Private labels gain importance Private labels generally offer 5-7% higher margins to retailers and are therefore considered a very safe and profitable bet. These labels offer higher margins because they exclude the middlemen and other related charges. Besides, these labels also offer many added benefits to retailers, which are along the lines of building consumer loyalty, improving market position and offering more variety to consumers.

According to the survey results, 56% of the respondent companies retail private labels in their stores. Among this 56%, the apparel segment had the maximum representation in private labels and had a 40% share in the private labels pie, followed by the food and grocery segment that had a 12% share.

A quick glance at the share of private labels in the total sales of the respondent companies revealed that for a majority of companies, 34%, private labels constituted 10-25% of the total sales followed by 25-50% and more than 75% share for 22% companies each. In the long run, private labels will be a very important product in a retailers basket; in fact the Indian retail companies will be looking at increasing the share of private labels from the current rate to 2040%. Inventory management plays a key role Inventory management is the most crucial aspect for any retailer, regardless of whether the retailer is from the organised or unorganised segment. A retailer needs to be accustomed to not only the market trend but also consumer behaviour, which will help him stock the right inventory mix in his warehouse. The inventory turnaround time, which varies from segment to segment and product to product, also plays a very important role in effective and efficient inventory management. According to the survey results, a majority of the respondent companies (40%) maintained an average inventory level of 30 to 60 days. Most of these companies were found to be operating in the lifestyle retailing category that follows a high margin-low volume business model. On the other hand, companies operating in the value-retailing category, which included the food, grocery and beverages sector, maintained an average inventory level of less than 15 days. Evidently, higher inventory levels (of more than 60 days) were observed among the highpriced, luxury goods retailers.

Retailers use outsourcing to improves efficiencies Transportation is the most outsourced activity for the retail companies that responded to this survey, as 48% companies were found to depend on third party logistic management companies; the other

most outsourced activities were warehousing/storage activity (12%), distribution (12%) and inventory management (11%) in that order. Transportation, warehousing and inventory management, are vital activities in terms of costs, which is why companies are re-arranging their focus on reducing inventory levels and adopting just-in-time approach. Besides lowering inventory carrying costs outsourcing also enables retailers to capitalise on the specialised services provided by outsourcing partners, which inadvertently lowers costs substantially.

Internal accruals most preferred funding option The respondent companies are poised to meet their funding requirements through internal accruals. These companies ranked internal accruals as the most-preferred financing option for their working capital requirements as well as for future expansion plans. Loans from banks/FIs and funding from promoters were the two most preferred external sources of funding for the retail companies, according to the survey results.

Expansion, working capital requirements top fund utilisation priorities The retail companies are confident about the future of organised retail in India and are therefore planning to utilise a majority of their funds for further expansion. Among the respondent companies, 66.7% want to utilise funds for business expansion. The other two options for using their funds are for fulfilling working capital requirements followed by marketing and advertising.

Retailers attribute their success to a thriving economy As a part of the survey, the selected companies were asked to rank the factors that they think have aided the retail sectors strong performance. These factors were given in the survey and were to be ranked on a scale where 1 was most important and 9 was least important. The analysis revealed that a majority of the retailers ranked the flourishing Indian economy as one of the key growth drivers. According to Technopak, the organised retail industry is set to reach US$ 94.4 billion by FY12 and India has all the potential needed to support this growth. The Indian economy has been the one of the fastest-growing economy in the world and has shown resilience when the major economies of the world were facing difficult times, by staging a decent growth. As per revised estimates of CSO, Indias GDP at factor cost has recorded a growth rate of 6.7% in FY09 and is expected to grow at around 6% in FY10. All these factors augur well for the Indian retail industry. Growing disposable incomes and young population were rated second and third growth drivers, respectively, in the survey.

Section II Economic slowdown pinches retail sector The economic slowdown has been affecting the global retail sector significantly, both from the demand side and supply side. The global demand has been falling consistently over the past one year following the crisis in the US mortgage market. The resultant job losses and the fall in income have aggravated the impact on consumer demand. Besides, job uncertainty (in anticipation of job losses) has led to drop in consumer spending. The global economy, especially the developed economies, has been witnessing contraction in GDP growth over the last couple of quarters; the global GDP growth rate is expected to contract by 2.9% in 20091. On the supply side, however, many retailers are slowing down their expansion plans and many real estate developers are falling behind schedules in their shopping mall projects, considering the credit crunch. The economic slowdown has deeply affected the Indian

organised retail sector in terms of deceleration in retail sales growth, footfalls, store expansions, employment rates and most importantly, profitability.

According to this D&B survey, around 88% of the respondents opined that economic slowdown has affected the sector badly, while the remaining 12% respondents opined that the slowdown has not affected their business. Majority of the retailers who opined to be not affected by the slowdown operate in the food and restaurant segment, which has been spared from the slowdown. Majority of the respondents who felt that they were affected by the slowdown operated in the apparel and textile segment. The survey revealed that apart from the slowdown in the economy, understanding consumer behaviour and customer retention are the other major issues and challenges that the Indian retailers face. Given the current situation, retailers are concerned about decreasing consumer spending, as consumers are deferring their purchases, and the sector is witnessing a paradigm shift from, what is being called, conspicuous consumption to conscious consumption. Moreover, any dip in customer footfall and weak conversion ratio has an impact on retailers inventory turnover, which increases their working capital requirements.

Inventory management is crucial to rebound in present times According to the survey, majority of the respondent companies prioritise inventory management as an important instrument to combat the current slowdown. Proper inventory management helps retailers to have a better understanding about their stocks in the store; therefore, retailers can utilise the floor space optimally. Unnecessary inventory involves costs to retailers in terms of interest, space, manpower, handling damages etc.

Another strategy to combat the challenges is collaborating with suppliers and manufacturers, since retailers are finding it difficult to manage their expenses, especially that of raw materials. The retailers can persuade suppliers or manufacturers; increase their bargaining power over longer credit periods, or further integrate their supply chain to lower working capital requirements. Revenue/profit sharing with real estate players is emerging as an important strategy in view of the current slowdown, because real estate expenses constitute anything between 10-12% of retailers sales. The stupendous rise in real estate prices over the last couple of years has become a major challenge for retailers who are exploring the option of re-negotiating rentals or of forging alliances with builders for revenue/profit sharing to distribute their risks. Furthermore, retailers are also adopting strategies to retain customers through discounts, lower prices, value-added services and increased choice of products by entering JVs with foreign brands. Expansion plans continue undeterred As mentioned earlier, the retailers in India are optimist about growth of the industry in spite of global slowdown. A majority of the respondent companies (49.1%) feel that the industry will achieve an annual growth rate of 15-25% in the next two years while 36.1% companies feel that the industry will grow annually by 5-15% during the same period. India has achieved moderate growth during the time when most of the countries across the globe are falling prey to slowdown and recession and this is one of the key reasons why an average Indian retailer is confident about the growth of the industry.

World Bank- Global Development Finance Report 2009