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Q1 2013
iNDia
retail Report
INCLUDES BMI'S FORECASTS
ISSN 2040-9109
Published by Business Monitor International Ltd.
INDIA RETAIL REPORT Q1 2013

INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International Copy deadline: October 2012
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India Retail Report Q1 2013
CONTENTS
Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 6
India Retail Business Environment SWOT ........................................................................................................................................................... 6 India Political SWOT........................................................................................................................................................................................... 7 India Economic SWOT ........................................................................................................................................................................................ 8
Market Overview ............................................................................................................................................... 9

Current Trends .................................................................................................................................................................................................. 10 Key Players........................................................................................................................................................................................................ 14
Industry Forecast Scenario ........................................................................................................................... 19

Consumer Outlook .................................................................................................................................................................................................... 19 Retail Growth Outlook .............................................................................................................................................................................................. 21 Table: India Retail Sales Indicators, 2010-2017 ............................................................................................................................................... 22 Table: Retail Sector Breakdown By Key Segment, 2013f ................................................................................................................................... 23 Macroeconomic Outlook ........................................................................................................................................................................................... 24
Regional Retail Outlook ................................................................................................................................. 28

Asia Pacific Retail Outlook ....................................................................................................................................................................................... 28 Table: Asia Pacific Retail Sales, 2010-2017 (US$bn)........................................................................................................................................ 28 Table: Share Of Regional Retail Sales, 2010-2017 (%) ..................................................................................................................................... 29 Table: Asia Pacific Food Consumption, 2010-2017 (US$bn) ............................................................................................................................ 31 Table: Asia Pacific Macroeconomic Outlook, 2010-2017 ................................................................................................................................. 37
Risk/Reward Ratings...................................................................................................................................... 38
Asia Pacific Risk/Reward Ratings ............................................................................................................................................................................. 38 Table: Regional Retail Business Environment Ratings ...................................................................................................................................... 38 India's Retail Risk/Reward Ratings ........................................................................................................................................................................... 39 Limits To Potential Returns ............................................................................................................................................................................... 39 Risks To Realisation Of Returns ........................................................................................................................................................................ 40
Mass Grocery Retail ....................................................................................................................................... 41

India Mass Grocery Retail Industry SWOT ....................................................................................................................................................... 41 Market Overview ...................................................................................................................................................................................................... 42 Leading MGR Players ....................................................................................................................................................................................... 43 Table: Structure Of Mass Grocery Retail Market By Estimated Number Of Outlets, 2005-2011 ...................................................................... 45 Table: Structure Of Mass Grocery Retail Market Sales By Format (US$mn), 2005-2011 .............................................................................. 45 Table: Structure Of Mass Grocery Retail Market Sales By Format (INRmn), 2005-2011 .............................................................................. 46 Table: Grocery Retail Sales By Format (%) Historical Data & Forecasts ..................................................................................................... 46 Industry Forecast Scenario ....................................................................................................................................................................................... 46 Table: MGR Sales By Format Historical Data & Forecasts, 2009-2016 ........................................................................................................ 48 Table: Average Outlet Sales By Format 2011 ................................................................................................................................................. 48 Industry Developments.............................................................................................................................................................................................. 49
Consumer Electronics ................................................................................................................................... 53

India Consumer Electronics Market SWOT ....................................................................................................................................................... 53 India Electronics Industry SWOT ...................................................................................................................................................................... 54 Market Overview ...................................................................................................................................................................................................... 55
Business Monitor International Ltd
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Computers ......................................................................................................................................................................................................... 55 Table: Computer Sales, 2009-2016.................................................................................................................................................................... 55 Drivers............................................................................................................................................................................................................... 56 Netbooks ............................................................................................................................................................................................................ 58 Tablets ............................................................................................................................................................................................................... 59 Low-Cost PCs .................................................................................................................................................................................................... 60 Table: Total Desktop Sales ................................................................................................................................................................................ 60 AV ...................................................................................................................................................................................................................... 61 Table: AV Sales, 2009-2016 .............................................................................................................................................................................. 61 Mobile Handsets ................................................................................................................................................................................................ 65 Table: Mobile Communications: Demand, 2009-2016 ...................................................................................................................................... 65 Industry Forecast Scenario ....................................................................................................................................................................................... 70 Table: Consumer Electronics Overview, 2009-2016 ......................................................................................................................................... 71 Industry Developments.............................................................................................................................................................................................. 71 Government Authority ....................................................................................................................................................................................... 73
Automotives .................................................................................................................................................... 75
India Autos Industry SWOT ............................................................................................................................................................................... 75 Industry Forecast ...................................................................................................................................................................................................... 76 Production And Sales ........................................................................................................................................................................................ 76 Table: Autos Sales And Production ................................................................................................................................................................... 76 Trade ................................................................................................................................................................................................................. 77 Table: Autos Trade ............................................................................................................................................................................................ 77 Industry Developments.............................................................................................................................................................................................. 77 Passenger Cars ......................................................................................................................................................................................................... 79 Production And Sales ........................................................................................................................................................................................ 79 Table: Autos - Passenger Cars .......................................................................................................................................................................... 79 Company Developments .................................................................................................................................................................................... 81
Demographic Outlook .................................................................................................................................... 83

Table: India's Population By Age Group, 1990-2020 ('000).............................................................................................................................. 84 Table: India's Population By Age Group, 1990-2020 (% of total) ..................................................................................................................... 85 Table: India's Key Population Ratios, 1990-2020 ............................................................................................................................................. 86 Table: India's Rural And Urban Population, 1990-2020 ................................................................................................................................... 86
BMI Methodology ........................................................................................................................................... 87

How We Generate Our Industry Forecasts ............................................................................................................................................................... 87 Sources ..................................................................................................................................................................................................................... 88
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Executive Summary
The Indian Retail Report examines the long-term potential of the local consumer market, but flags shortterm concerns about the impact on India's economic outlook of soaring twin deficits in the fiscal and current accounts. The report examines how best to maximise returns in the Indian retail market while minimising investment risk, and also explores the impact of the risk of a prolonged deflationary slump in the eurozone on the Indian consumer and on the ability of producers and exporters to realise returns in the short term. The report also analyses the growth and risk management strategies being employed by the leading players in the Indian retail sector, as they seek to maximise the growth opportunities offered by the local market. India comes second (out of seven) in BMI's Asia Retail risk/reward ratings, although it underperforms for risk. Among all retail categories, Mass Grocery Retail (MGR) will be the outperformer through to 2017 in growth terms, with sales forecast to increase by 107.9% between 2013 and 2017, from US$34.79bn to US$72.33bn as India's emerging middle class continues to drive demand for new goods and services, and rural retailing presents expansion opportunities. In the competitive arena, BMI sees upside potential in the removal of foreign direct investment (FDI) restrictions in multi-brand retail announced in September 2012. Over the last quarter, BMI has revised the following forecasts/views:
A modest growth print of 5.3% y-o-y in Q4 FY2011/12 (Jan-Mar) and soaring twin deficits in the fiscal and current accounts have convinced consensus to de-rate dramatically India's economic outlook, with most calling for much weaker headline expansion in the current fiscal year. While the current state of play appears dire, BMI still sees sufficient evidence to suggest that the investment cycle has bottomed out, and that economic growth will re-accelerate within a couple of quarters. Our core view is that real GDP growth will come in at an improved 6.9% in FY2012/13, up from a nine-year low of 6.5% in the previous fiscal year.
Household spending will represent one area of relative weakness over the coming fiscal year. Having ramped up expenditure in recent years, BMI believes that the current bout of rupee weakness will have a lingering impact on the Indian consumer. We see private consumption growth falling to 5.2% in FY2012/13 from 5.5% in the previous fiscal year.
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SWOT Analysis
India Retail Business Environment SWOT
Strengths
India attracted US$16.9bn in foreign direct investment (FDI) inflows in 2006, according to the UN Conference on Trade and Development a 153% year-onyear increase. A cheap, skilled, English-speaking workforce can do the jobs of Western workers for a fraction of the wages paid in North America or Europe. Average annual GDP growth of 7.0% is predicted by BMI through to 2017. With the population expected to increase from 1.28bn in 2012 to 1.34bn by 2017, GDP per capita is forecast to rise 84.4% by the end of the forecast period, reaching US$3,096. The value of the retail segment is expected to grow from an estimated INR24.11trn (US$573.95bn) in 2013 to INR36.15trn (US$939.06bn) by 2017, a rise of 50.0%. The competitiveness of local firms is undermined by official red tape, from foreign investment restrictions to inflexible labour laws. Intellectual property rights are poorly protected in India, one of 12 countries on the 2009 priority watch list compiled by the US Trade Representative. The rural population of India represents more than 70% of the total, while almost 37% is classified as not economically active by the UN. This is a major obstacle for retailers seeking to rapidly expand their customer base. India could enhance the competitiveness of the local industry through further liberalisation and deregulation. Prime Minister Manmohan Singh is eager to reform the banking sector to increase the availability of long-term financing, particularly for large infrastructure projects. The value of the OTC drug sector is forecast to grow by almost 92% by 2017, when it will be worth an estimated US$7.54bn. The arrival of Western players, including management consultancy Accenture and technology company IBM, is raising local wages in the outsourcing sector. International retailers are restricted by India's strict FDI regulations, although laws were relaxed in January 2012 to allow foreign investors to own up to 100% of single-brand retail trading companies in the country. However, they must source 30% of the goods they sell in India from small and medium enterprises (previously they could own no more than a 51% majority stake in a joint venture with a local partner). Multi-brand retailers must still operate through a franchise or cash-and-carry wholesale model.
Weaknesses
Opportunities
Threats
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India Political SWOT
Strengths
India is the world's largest democracy. A secular constitution, framed in 1950, officially guarantees justice, liberty and equality while aiming to promote fraternity among the citizenry. More than 1,000 political parties registered for the April-May 2009 general elections, competing for the preference of India's 714mn eligible voters. Despite its multitude of problems, India has generally managed to avoid hard authoritarian rule or military coups, which have happened in many other developing countries, including India's neighbours Bangladesh, Myanmar and Pakistan. Large coalition governments complicate policymaking at the centre as coalition partners and outside parties pursue their own agendas. The competence of state government varies enormously across India's 35 states and union territories. India's tense relationship with Pakistan still weighs on regional stability. The two countries have gone to war three times since they were 'partitioned' on independence from British rule in 1947. Issues such as the ineffectiveness of the executive and judiciary in controlling underhand practices, the apparent arbitrary allocation of government licences, and the uneasy influence of special interest groups remain key investor concerns. India has in recent years edged closer to the US in foreign policy. Both the US and India are democracies and face threats from militant Islamists; this, combined with the presence of a 2mn-strong affluent Indian diaspora in the US, is bringing the two countries closer together. Thawing relations with Pakistan has made it easier for the parties to defuse potentially explosive situations, such as the Mumbai attacks in November 2008, which Islamabad acknowledges were planned and launched from its territory. India's growing regional rivalry with China, if unchecked, could lead to a more hostile regional outlook. India has experienced a series of serious terrorist attacks over the past two years, perpetrated by radical Islamist and rural Maoist groups. The surge in Naxalite attacks in recent years has raised the spectre of further violence.
Weaknesses
Opportunities
Threats
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India Economic SWOT
Strengths
India has a very large domestic market, and rising domestic demand is a major driver of economic growth. A vast supply of inexpensive but skilled labour has turned India into the back office of the world. Around half of the population is younger than 25. Despite rapid economic growth, India remains a very poor country. According to BMI estimates, India's GDP per capita was roughly US$1,500 in 2011, a third that of China's. Agriculture remains inefficient, and poor monsoon rains can slash rural incomes and consumption. Two-thirds of the population depend on farming for their livelihood. India runs chronic trade and fiscal deficits, both of which are near historic highs. The government spends a significant part of its revenue on interest payments, subsidies, salaries and pensions. This limits the amount of money available for infrastructural improvements. India's emerging middle class will continue to drive demand for new goods and services. A wealthier society, combined with tax reforms, would serve to boost revenue receipts, relieving fiscal pressure. The government has implemented some tax reforms. A uniform goods and services tax to be implemented in the near future should help boost compliance, thereby raising government revenue. With Chinese labour costs rising aggressively, India may well enjoy a manufacturing boom in the coming years as multinational look to take advantage of a young, competitive workforce and major transport network improvements India's dependency on oil imports is problematic. This undermines the trade balance and makes India vulnerable to energy price-driven inflation. India is at risk of severe environmental problems. Many of its cities' air and rivers are heavily polluted, raising questions about the sustainability of the economy's rapid growth.
Weaknesses
Opportunities
Threats
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Market Overview
Retail is the second-largest employment sector in India, after agriculture, and employs 44mn people. The industry is dominated by an estimated 15mn independent retailers, consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, paan and beedi (small corner shops) and handcart and pavement vendors, which together make up the 'unorganised' market. BMI estimates that this fragmented offering still accounts for about 95% of the country's grocery retail sales.
However, this is changing fast, as multinationals begin to seek opportunities to enter India and as local organised players accelerate their own expansion and business-activity efforts in preparation for greater competition. The emergence of organised retail formats is transforming the face of retailing in India, as domestic and foreign players challenge the dominance of the country's traditional 'mom and pop' stores by opening chain and speciality stores across the country to satisfy increasing consumer demand.
The country enjoyed the second highest growth in foreign direct investment (FDI) inflows in the world during 2011. According to Ernst & Young's 2012 India Attractiveness Survey, investors view India as an attractive investment destination. India stands as the fourth most attractive destination for FDI in the survey's global ranking. Domestic market's high potential driven by an emerging middle class, cost competitiveness and access to a highly qualified workforce are the major factors that has been the magnet force to attract global investors.
FDI inflow rose by 55% to US$28.4bn during April-February 2011/12, while the cumulative amount of FDI equity inflows from April 2000 to February 2012 stood at US$246.6bn, according to the latest data released by the Department of Industrial Policy and Promotion.
The sector that attracted the most FDI inflow during the 11-month period in 2011/12 was services, with US$5.05bn of FDI. India received FDI worth US$2.21bn in February 2012, representing year-on-year (yo-y) growth of 74%. Cumulative inflows for April-February 2011/12 stood at US$28.40bn.
A.T. Kearney, in its 2011 Global Retail Development Index (GRDI), stated that 'the time to enter [India] is now'. India's strong growth fundamentals 9% real GDP growth in 2010; forecasted yearly growth of 8.7% through 2016; high saving and investment rates; fast labour force growth; and increased consumer spending make for a very favourable retail environment and the fourth spot in the GRDI.
'As has been the case for several years, Indian consumers continue to urbanize, have more money to spend on non-food purchases, and have more exposure to brands. The result is a powerful, more discerning consumer class. India's population of nearly 1.2bn forecast eventually to overtake China's also is an attractive target.'
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In the 2012 GRDI, India slipped one place to fifth, but Kearney stated that the country 'remains a highpotential market with accelerated retail growth of 15 to 20 percent expected over the next five years'. With organised retail penetration remaining low, at an estimated 5-6%, the report pointed out that there was room for growth. It also commented on the ongoing FDI regulations 'story', stating that the changing FDI climate was leading to several international retailers 'stepping up inquiries' to enter the market, while others seek local partners.
Following New Delhi's moves in September 2012 to open retail businesses to foreign ownership, IKEA has applied to the Indian government to set up its stores in the country, the Financial Times has reported. 'We know that many people are eagerly waiting for the first IKEA store to open in India,' said Mikael Ohlsson, president and chief executive. 'Once our application is approved, we will develop a solid plan for the establishment of IKEA stores for many years to come.'
IKEA announced in September 2012 that it plans to double the pace of its store openings globally to 2025 stores a year, focusing on emerging markets such as China and India. The company indicated earlier in 2012 that it could invest up to US$757mn in the first stage of its plan in India, and that its total investment in India over the next decade or two could eventually reach US$1.9bn.
Other vibrant sectors of the retail market include internet shopping, with online retail market likely to be worth around INR70bn (US$1.57bn) by 2016, up from around INR20bn (US$0.4bn) at present, helped by increased internet access and the entry of more 'e-tailers', NamNews has reported. According to industry body Assocham, the market is growing at a rate of 35% annually, and India will have the third largest number of internet users in the world by 2013.
Assocham also carried out a survey of around 5,000 shoppers in the country's major metros, and found that 40% prefer to shop online because of convenience and the ease of being able to compare prices. Consumers in Mumbai were most active in online shopping, followed by those in Ahmedabad and Delhi.
Current Trends
As of July 2009, foreign direct investment (FDI) inflows to single-brand retail trading stood at approximately US$46.60mn, according to the Department of Industrial Policy and Promotion (DIPP). However, FDI inflows to the services sector dropped by 30% to US$2.16bn between April and October 2010, according to the Industry Ministry's latest data.
Industry observers attributed this to India's strict FDI regulations: until January 2012, foreign investors could own no more than a 51% majority stake in a joint venture with a local partner, but regulations have now been relaxed to allow foreign investors to own up to 100% of single-brand retail trading companies in India, as long as they source 30% of the goods they sell in India from small and medium enterprises.
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UK-based footwear company Pavers, which sells premium leather footwear under the Pavers England brand, became the first foreign retailer to seek government approval to operate without a local partner after 100% foreign investment was allowed in single-brand retail. Pavers approached the Foreign Investment Promotion Board (FIPB) with a proposal to invest US$20mn through its joint venture with London-based Foresight Group, the Economic Times reported.
Pavers formed a joint venture with the Foresight Group in 2008 to explore growth opportunities in India. The venture launched wholesale operations in the country and appointed Triton Retail as the master franchisee to sell its range of men's and women's shoes and accessories.
In July 2011, the Committee of Secretaries (COS) recommended that multi-brand retailers should have the same rights as single-brand retailers (although they would have to dedicate at least 50% of their proposed investment to back-end supply chain infrastructure and commit a minimum FDI of US$100mn). However, both ruling Congress party allies and opposition parties, fearing job losses for millions of small shopkeepers, disrupted parliament for two weeks in protest at the proposed relaxation of the rules, stalling some key bills, such as increased food subsidies for the poor, leading the government to back down over the issue.
Liberalisation was eventually achieved in September 2012, opening up India's retail doors to retail giants such as Walmart and Carrefour. Walmart had previously said it was ready to open hundreds of retail outlets if rules were liberalised, with international players set to bring in their logistical capabilities and aid in a potential overhaul of the country's distribution infrastructure. Improvements in India's supply chain infrastructure will lift production efficiencies and lower the wastage of farm output, in turn increasing consumer goods supplies and easing supply-driven inflationary pressures in the country.
In 1999 India had three shopping malls, collectively covering less than 1mn square feet (sq ft), or 92,903 square metres (m2). By the end of 2006 the country had 137 shopping malls, occupying 28mn sq ft (2.6mn m2). In December 2008 it is estimated that there were more than 450 malls in India, accounting for at least 120mn sq ft (11.1mn m2) of retail space.
According to the Mall Realities India 2010 report by property consultants Jones Lang LaSalle Meghraj (JLLM) and Cushman & Wakefield India, in association with Shopping Centres Association of India (SCAI), more than 100 malls with 2.8mn m2 of shopping space were expected to open in India before the end of 2010.
India and China top the list of the leading 20 destinations with the strongest retail real estate momentum in a 2012 report from Jones Lang LaSalle. Shopping centre stocks in the two countries are projected to grow by around 15% per annum until 2020. However, India falls short of China due to weaker real estate investment momentum and a smaller international retailer presence, says the report.
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The increased retail space is attracting new entrants to the market. In April 2009, the home fashion retailer Maspar teamed up with one of India's leading retail companies, Lifestyle, to open stores in Hyderabad, Mumbai, Chennai and Noida.
The global recession failed to stop leading domestic retailer Future Group. Its retail division, Pantaloon Retail India (PRIL), posted a year-on-year (y-o-y) sales increase of more than 30% in March 2009 and announced plans to open 15 new Fresh Fashion stores, each with an average retail space of 1,860m2, in major cities across India, including in Chennai, Kolkata and two in Bangalore in the next two years.
The company also announced plans to hive off its value retailing business, including its Big Bazaar, Food Bazaar and other value retail formats, into a wholly owned subsidiary of PRIL, Future Value Retail (FVRL). Pantaloon said the main purpose of the restructuring was to increase its focus on the value retailing segment, as well as increasing its financial flexibility. Future Group was named 'Most Admired National Retail Group in East India' at IMAGES East India Retail Awards in January 2011.
Leveraging the large customer base of Future Group, Future Capital announced the launch of India's first financial retail superstores offering multi-range financial products, the Business Standard reported in April 2011. The company planned to launch 100 of these financial branches by March 2012.
Announcing the launch, V Vaidyanathan, vice chairman and MD of Future Capital, said: 'We believe that our biggest competitive advantage and differentiator is the ability to provide services to the customers of the Future Group stores.' The company is targeting in excess of 100,000 customers during year one.
The consumer electronics sector also largely bucked the downturn. Mobile handset manufacturer Nokia set up a joint venture (JV) with India's HCL Infocomm to establish retail outlets selling handsets and services, while Panasonic aims to have 100 consumer electronics and IT shops across India.
The India Brand Equity Foundation (IBEF) has compiled a list of retail projects in the pipeline:
Jewellery manufacturers and retailers Gitanjali Group and MMTC are behind the chain of exclusive retail outlets called Shuddhi-Sampurna Vishwas, with the first outlet opening at Lajpat Nagar in New Delhi in 2009. The JV is aiming for a total of 150 stores by the end of 2012 (see 'Key Players' section).
Mahindra Retail, part of the US$6.7bn Mahindra Group, invested US$19mn between 2009 and 2010 to boost its specialty retail concept Mom & Me.
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PRIL invested more than US$103mn in expanding its seamless Central mall and the value fashion format Brand Factory over the same period.
Bharti Retail has introduced eight Walmart private labels including Great Value and George to its supermarket chain Easyday, hoping to attract more consumers with international design and packaging.
Italian sportswear brand Lotto has launched two new footwear brands, Sabots and Calcetto, in India. The company told the Economic Times that it planned to spend US$10mn by 2014 to corner 7% of India's branded sports apparel and equipment market. Lotto Asia Pacific business unit director Luca Tomat told the newspaper: 'India is among the top 10 markets for the company, and it will be among the top five [by 2014].'
The home furniture retail arm of DS Constructions, Ebony Homes, plans to have invested US$25bn setting up a chain of 20-25 furniture stores called Ebony Gautier across India by March 2012.
In addition, retail brands such as United Colors of Benetton, Tommy Hilfiger and Puma are opening factory outlets to sell excess stock and attract price-conscious buyers.
The IBEF said the next phase of growth in the Indian retail market is expected to come from rural areas: 'Rural India is set to witness an economic boom, with per capita income having grown by 50% over the last 10 years, mainly on account of rising commodity prices and improved productivity.'
In 2008, advertising agency RK Swamy BBDO said in its Guide to Market Planning that 51 districts in India had at least one town with a population of more than 500,000 people. Together, these towns have twice the market potential of the four metros (Mumbai, Delhi, Chennai and Kolkata) combined.
ITC launched the country's first rural mall, Choupal Sagar, offering a diverse product range that includes fast-moving consumer goods (FMCG), electronic appliances and automobiles, attempting to provide farmers with a one-stop-shop for all their needs. DCM Sriram Group's Hariyali Kisaan Bazaar has started off by providing farm-related products and services but there are plans to introduce the complete shopping basket in due course.
A study by the Confederation of Indian Industry (CII) and YES Bank estimated that the rural retail market would be worth US$60.43bn by 2015. In the 2011 GRDI, A.T. Kearney noted that domestic players were: '... shifting gears to tier 2 and 3 cities. The increased salaries and growing aspiration levels of tier 2 consumers is allowing the neighbourhood store, the large-format retail store and the foreign
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investor-funded retail store to coexist. Retailers with plans to enter tier 2 cities include Spencer's, Spar, Reliance Retail (RRL), Pantaloon Retail, Shoppers Stop and Trent's Westside.'
The potential growth of the rural market should be viewed against the backdrop of a general rise in consumer spending. In the H112 MasterCard Worldwide Index of Consumer Confidence (conducted between 24 April 2012 and 10 June 2012 among 11,376 respondents aged 18-64 in 25 countries within Asia/Pacific, Middle East and Africa), Indian consumers were the most optimistic in the region (82.1 Index points against a regional score of 57.2 Index points). 'India, being the least dependent on either global or China demand, is by far the most domestic oriented among the key markets in the region. Its relative optimism reflects the perception that the economy has become more stable after growth declining for two years,' said Dr Yuwa Hedrick-Wong, global economic advisor, MasterCard Worldwide.
Ratings agency Fitch is also bullish about the sector. In its '2011 Outlook: Indian Retail' report, it said: 'Retailers in [India] are likely to benefit from buoyant sales, improved working capital management and stable margins.'
A modest growth print of 5.3% y-o-y in Q4 FY2011/12 (Jan-Mar) and soaring twin deficits in the fiscal and current accounts have convinced consensus to de-rate dramatically India's economic outlook, with most calling for much weaker headline expansion in the current fiscal year. While the current state of play appears dire, BMI still sees sufficient evidence to suggest that the investment cycle has bottomed out, and that economic growth will re-accelerate within a couple of quarters. Our core view is that real GDP growth will come in at an improved 6.9% in FY2012/13, up from a nine-year low of 6.5% in the previous fiscal year.
Household spending will represent one area of relative weakness over the coming fiscal year. Having ramped up expenditure in recent years, BMI believes that the current bout of rupee weakness will have a lingering impact on the Indian consumer. We see private consumption growth falling to 5.2% in FY2012/13 from 5.5% in the previous fiscal year (see Macroeconomic Outlook).
Key Players
The MGR sector is dominated by a handful of players, with the largest ones being Pantaloon, Subhiksha, Reliance, Big Bazaar, Margin Free Market and Trinethra Super Retail. The UK's Tesco is the latest foreign entrant into the market, which already includes German Metro, Dutch Spar and US Walmart (see Mass Grocery Retail).
Walmart is slowly expanding its footprint in India, with plans to open more B2B stores with joint venture partner Bharti Enterprises. It had previously put on hold plans to open multi-branded retail stores until the government decided to permit investment in multi-brand retailing, which it has now done, opening the
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way for the US-based retailer to expand further. 'We have recently established our presence in highgrowth markets such as India and Africa with our joint ventures,' a Walmart India spokesperson told the Hindustan Times in April 2012. 'In India we currently have 17 Best Price Modern Wholesale stores and are looking further to expand our presence in the country.'
Other domestic retailers include: Future Group (Pantaloon, Central, Big Bazaar, Depot, Planet Sports, Ezone, Home Town and Aadhar), K Raheja Corp (Shopper's Stop, Crossword, Inorbit and HyperCITY), Tata Group/Trent (Westside, Star Bazaar and Landmark), RPG Enterprises (Spencer's, FoodWorld, Health and Glow, Music World and Books & Beyond), ABRL (More) and RRL (Reliance Fresh, Reliance Digital, Reliance Mart, Reliance Trends, Reliance Footprints, Reliance Jewels, Reliance Timeout, Reliance Autozone and Reliance Wellness).
Future Group has built a chain of 100 Big Bazaar hypermarkets in just seven years and operates more than 1mn m2 of retail space in 63 cities and towns and 65 rural locations across India.
K Raheja Corp has opened three new Crossword stores in Mumbai and one in Bangalore, while RPG Enterprises, which pioneered organised food retailing in India with its Spencer's hypermarkets and convenience stores, has 400 retail outlets across 66 cities. In 2007, RPG Enterprises launched Books & Beyond, which has branches in Gurgaon, Kolkata, Chennai, Bangalore, Hyderabad, Chandigarh and Jamshedpur.
In March 2008, ABRL expanded its footprint into large-format retailing and operates hypermarkets in Mysore and Vadodara. However, according to the Mint daily, ABRL has shut down around 50 of its 'More' supermarkets across India. The chain had reportedly shut down all 28 outlets in Mumbai, as well as 12 stores in Pune, seven in Delhi and four in Punjab. It currently operates around 500 supermarkets and 11 hypermarkets.
CEO Pranab Barua said the company had shut down all its small shops in Mumbai, and some in Pune and Delhi. However, he claimed that 'only four to five stores' had been closed in Delhi and Pune. Talking to the paper, Barua said ABRL was closing the outlets as 'huge funds are required to run these stores. Besides, the rents in Mumbai are high. We will now focus on large stores, but continue to run supermarkets in the south and markets which are doing well, such as Punjab, Haryana, Uttar Pradesh and Kolkata.'
According to the company, around 15-20% of its supermarkets are not profitable at present, adding to its already heavy debt burden of INR31bn (US$607mn). In fiscal 2011, the company recorded a loss of INR4.2bn on revenues of INR6.9bn.
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RRL launched its first store in November 2006 through its convenience store format Reliance Fresh, its first Reliance Digital store in April 2007 and its first hypermarket (India's largest), Reliance Mart, in Ahmedabad in August 2007. In 2008, it moved into the apparel, footwear, jewellery, books, music, auto accessories and health and wellness sectors by setting up speciality stores.
India's biggest watch and jewellery retailer, Titan Industries, is reportedly aiming to triple its revenue over the next five years. Meanwhile, children's wear brand Lilliput was aiming to have 70 stores in first-, second- and third-tier cities, including Delhi, Mumbai, Jalandhar, Amritsar, Jaipur, Pune, Guwahati and Jodhpur, by the end of 2010.
Bata, one of the leading footwear retailers and manufacturers in India with more than 1,200 stores, opened a large-format outlet in Ludhiana in Q111, India Retailing Bureau reported. Located at Westend Mall, the store occupies an area of 4,500sq ft. 'We plan to open over 60 stores every year and continue to increase store density in tier 2 & 3 markets across the country,' MD Marcelo Villagran said.
Domestic toy retailer Hanung Retail, which has 3,000 stores, is set to expand further under the brand name Funland in association with Franchise India Brands Limited (FIBL). Initial openings will be in major cities including Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Ahmedabad, with a further 10 locations in the pipeline. Up to 400 store openings are planned within the next three to four years.
Prime Retail, a watch retailer with around 20 stores, announced in April 2011 that it would raise funds through an IPO to open 18 new stores across India.
In the same sub-sector, Gitanjali Jewellery Retail, part of jewellery maker and exporter Gitanjali Group, is planning to more than double the number of its branded jewellery retail stores across the country by the end of 2012.
Managing director Santosh Srivastava told the Business Standard that Gitanjali currently had 70 outlets across India, of which 90% were franchisee-run and the rest company-owned. 'Our idea is to have 150 stores with a carpet area of 2,500-4,000sq ft, each with an investment of INR10-12, by the end of 2012,' he said.
Meanwhile, Next Retail India, the electronics, appliances and IT products retail division of Videocon Industries, said it was aiming to increase sales by more than 65% to INR2,500 in the current fiscal year. The company, which currently operates 609 Next stores across the country, is also aiming to take the total number to 1,000 by the end of 2011-12, reported the Economic Times.
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International players are also making steady inroads into the Indian retail sector. Cosmetics and toiletries retailer The Body Shop opened its first outlet in Nagpur in January 2011. The company plans to take its store count from 69 to 150, including outlets in tier two and three cities, over the next four years. Quest Retail, part of the Planet Retail group, is the master franchisee of The Body Shop in India.
Marks & Spencer Reliance India (MSRI), a joint venture between British retailer M&S and RRL, a subsidiary of Reliance Industries, plans to nearly treble the number of stores to 50 from the current 18 by 2013, according to Forbes. M&S has doubled the size of its Mumbai store and store sizes are slated to be upwards of 15,000-25,000sq ft, even in tier two towns such as Pune. M&S plans to operate in smaller and fast-growing cities across the country.
British mother and baby chain Mothercare has 62 stores in India, run by franchise partners. Ben Gordon, chief executive, told the Independent newspaper there was huge potential in India, where 24mn babies are born each year, compared with just 795,000 in the UK in 2010.
UK toy retailer Hamleys opened its first shop in India in March 2010 (in Mumbai), while British furniture and clothing chain Laura Ashley will shortly open its first stores in the country through franchise partners.
In October 2011, the Wall Street Journal reported that India's Tata Coffee and Starbucks were close to announcing a deal that would see the US-based retailer enter the Indian market for the first time. A nonbinding memorandum of understanding was signed in January 2012 whereby Starbucks will explore setting up stores in the Tata group's retail outlets and hotels, besides sourcing and roasting coffee beans at Tata Coffee's Kodagu facility.
Italian clothing retailer Benetton expects its business from India to contribute a significant chunk of its overall revenues in the next 10 years. Benetton India MD Sanjeev Mohanty told the Economic Times in April 2010 that the company had crossed the US$100mn turnover mark in 2009 and expects to hit US$250mn in the next four to five years.
'The growth opportunities will come from smaller cities also, where we are expanding,' he said. 'These areas are already contributing about 20% to our growth. We see it increasing further since these areas are recording better growth than even the metros and 'A' class cities. Contrary to popular perception, the consumers in these cities are not too conscious about prices.'
Benetton recently reported revenues up 1.8% to EUR457mn (US$580mn), helped by a positive performance in emerging markets such as India. Growth in emerging markets more than offset a slowdown in its European markets.
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Inditex of Spain opened its first Zara store in 2010, while Polo Ralph Lauren and Diesel are also expanding. However, Swedish furniture retailer IKEA cancelled its plans to open in India because of the regulations preventing foreign companies from owning single-brand retailers. In its 2010 'How Global Is The Business Of Retail?' report, CBRE described the restrictions on foreign investment in India as still being the key barrier to penetration by international brands. Nevertheless, India attracted the most new retailers in 2010, according to CBRE's 2011 report, and the announcement in September 2012 that the Indian government would allow 51% FDI in multi-brand retail paves the way for international retailers to make inroads in the Indian retail market.
Japanese premium watch-maker Seiko plans to expand its retail network in India to 300 stores over the next two years, Fashion United reported in March 2012. Currently the company has 250 retail outlets in 61 Indian cities. Seiko, which started operations in India in June 2007, plans to launch products catering exclusively to Indian tastes.
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Industry Forecast Scenario

Consumer Outlook
The domestic demand outlook for India remains uncertain and we see downside risks to our near-term outlook. Looking longer-term, the potential of the Indian food and drink market is undeniable although foreign consumer goods investors will continue to face considerable headwinds in expanding their footprint across the sector.
Growth On The Wane India Passenger Car Sales, % chg y-o-y
Source: Bloomberg
Near-Term Risks To Outlook We highlight a key ongoing risk to Indian consumer wealth the stability of the Indian rupee. Although we remain broadly neutral towards the unit, we are not expecting a major bull run either any time soon. Indeed, the risks, from our perspective, remain highly weighted to the downside, given the still-precarious position of the country's overall balance of payments picture. Consumer Story Looking Good Long-Term As one of the most dynamic consumer markets in the Asia Pacific region, there is plenty to suggest that consumer-facing companies in India will do well over the longer horizon. Rapid income growth, a young and growing population and a continued influx of sector investments underline the potentially dynamic opportunities on offer on the consumer side.
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An Enticing Demographic Growth Element India Demographic Breakdown By Age Group
Source: BMI, World Bank
India has a young and rapidly growing population of more than 1.2bn, so a demographic growth element is clearly present (see chart). As the massive youth demographic group gradually matures and climb up the income ranks, it is opportunities provided by the mass-market that catch the eye. US-based fastmoving consumer goods giant Procter & Gamble (P&G)'s focus on expanding its mass-market product portfolio is testimony to this view. P&G plans to enter into new product categories in India such as mass skincare products, hair oils and toothpastes and aims to introduce more products at lower price points in a bid to leverage on the stronger rewards in this segment. Although India's per capita GDP of about US$1,457 suggests that consumer spending is coming from an extremely low base, this also translates into tremendous room for growth in the consumer-facing sectors. While there is clearly tremendous potential on offer in the Indian consumer sectors, the country's investment climate will continue to serve up a host of challenges to foreign consumer goods investors. Representing an embarrassing setback in India's reform history, the government has backtracked on its proposed move to allow foreign direct investment (FDI) in the country's multi-brand retail sector. In a step towards greater market liberalisation, the government announced its decision in late November to allow up to 51% FDI in multi-brand retail. However, this proposed policy was faced with vehement opposition from both inside and outside the ruling United Progressive Alliance, forcing Prime Minister Manmohan Singh's administration to put on hold its plans to open up its retail doors to foreign investors. What is worrying is that India's retail policy suspension has sent out a negative message to foreign investors about the lack of stability in the country's policy-making process. Within a span of two weeks, the government has backtracked on its decision to allow FDI in its multi-brand retail sector, fuelling uncertainty among foreign investors on the matter of policy continuity in India. As a case in point, UK
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retailer Tesco has postponed plans to invest INR5bn (US$96mn) to set up wholesale stores in India, ostensibly due to its concerns pertaining to future retail policy implementation in the country. Without assurance that the government's proposed policies will be followed through and implemented successfully, foreign investors are unlikely to commit massive sums of capital expenditure towards building their supply chain infrastructure in India. What is more, even if the bill is eventually passed, foreign firms are likely to remain wary about losing their capital assets due to the possibility of further policy backtracking down the line. This is particularly pertinent given the growing possibility of regime change in India's 2014 general elections. Clearly, then, the suspension has brought about major negative implications for the country's investment climate.
Retail Growth Outlook

Strong underlying economic growth, population expansion, the increasing wealth of individuals and the rapid construction of organised retail infrastructure are key factors behind the forecast explosive growth in India's retail sales. Economic growth should create an expanding middle- and upper-class consumer base. There will also be increasing penetration of India's tier 2 and tier 3 cities, such as Pune, Chandigarh and Hyderabad. The greater availability of personal credit and a growing vehicle population providing improved mobility will also contribute to a trend that will cause the value of the retail segment to grow from a forecast INR24.11trn (US$573.95bn) in 2013 to INR36.15trn (US$939.06bn) by 2017, a rise of 50.0%.
India's nominal GDP is forecast at US$2.14trn in 2013. Average annual GDP growth of 7.0% is predicted by BMI through to 2017. With the population expected to increase from 1.28bn in 2012 to 1.34bn by 2017, GDP per capita is forecast to rise 84.4% by the end of the forecast period, reaching US$3,096.
Based on the Market Information Survey of Households (MISH) by the National Council of Applied Economic Research (NCAER), the number of people in the income groups of 'aspirers' and the middle class with annual income ranging from INR90,000 (US$1,862) to INR1mn (US$20,574) more than doubled, from 157mn to 327mn, between 1996 and 2006. This accounts for about 30% of the population. The number of people in this group is estimated to have exceeded 500mn by the end of 2009 and can potentially reach 650mn by 2013 (almost 52% of the population).
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Table: India Retail Sales Indicators, 2010-2017
2010 Retail sales (INRbn) Retail sales (US$bn, fixed 2008 FX rate) Retail sales (US$bn, forecast FX rates) Retail sales as % GDP Retail sales per capita (INR) Retail sales per capita (US$) Total retail sales growth (INR) Per capita retail sales growth (INR) Private final consumption (INRbn) Private final consumption (US$bn) Private final consumption (INR, real growth % y-o-y) 17,376.6 374.50 377.24 24.3 14,189 306 13.9 12.4 43,384 953 17
2011 19,479.9 405.83 422.90 23.7 15,691 327 12.1 10.6 49,616 1,090 14
2012e 21,520.9 467.84 467.21 23.1 17,102 372 10.5 9.0 55,663 1,040 12
2013f 23,792.8 566.50 516.53 22.6 18,659 444 10.6 9.1 62,395 1,248 12
2014f 26,451.2 669.65 574.24 22.2 20,477 518 11.2 9.7 70,272 1,479 13
2015f 29,255.7 759.89 635.13 21.9 22,363 581 10.6 9.2 78,581 1,737 12
2016f 32,391.8 863.78 703.21 21.6 24,457 652 10.7 9.4 87,874 2,044 12
2017f 35,898.8 932.44 779.35 21.3 26,782 696 10.8 9.5 98,265 2,397 12
f = BMI forecast. Source: UN data, Household consumption of food&drink, Alcohol& narcotics, Clothng & footwear and household goods & furnishings are used
In terms of total retail sales, there is a lack of official government data. We have therefore used an aggregate of UN household consumption data as a proxy for retail sales, and forecast a figure of INR24.11trn (US$573.95bn) for 2013. We expect retail sales to grow by 50.0%.to INR36.15trn (US$939.06bn) by 2017, largely as a result of the expected increase in private final consumption.
Retail sales as a percentage of GDP are forecast to reach 22.5% in 2013, and we expect this to decrease to 21.2% by 2017.
BMI's food consumption data suggest that food and drink will have a retail market share in 2013 of 39.5%, worth US$226.58bn, rising 61.3% by 2017, when value sales will be worth US$365.49bn.
Among all retail categories, Mass Grocery Retail (MGR) will be the outperformer through to 2017 in growth terms, with sales forecast to increase by 107.9% between 2013 and 2017, from US$34.79bn to
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US$72.33bn as India's emerging middle class continues to drive demand for new goods and services, and rural retailing presents expansion opportunities. In the competitive arena, BMI sees upside potential in the removal of Foreign Direct Investment (FDI) restrictions in multi-brand retail announced in September 2012.
In terms of other retail sub-sectors, BMI forecasts consumer electronic sales at US$37.71bn in 2013, with over-the-counter (OTC) pharmaceutical sales at US$3.93bn. The former sub-sector is expected to show growth of 48.0% between 2013 and 2016, reaching US$55.81bn, with projected double-digit growth of key products such as notebooks, mobile handsets and TVs. OTC pharmaceuticals, meanwhile, should increase by 91.7% between 2013 and 2017, to reach US$7.54bn.
According to UN data, in 2010 an estimated 37.8% of the Indian population was in the 20-44 age range and is forecast to increase to more than 40% by 2015. This growing segment of the population represents an important element of future retail spending. The proportion of the population classified by the UN as economically active should exceed 65% by 2015. The UN predicts that the urban population will account for 32% of the total by 2015. Unemployment is predicted to end the forecast period at 8.0%. The latest Ma Foi Randstad Employment Trends Survey (MEtS) puts the number of employees in the trade (including consumer, retail and services) sector at 652,800, and estimates that 38,600 new jobs will have been created in 2011. A combination of wage rises, urbanisation of the population and a trend towards double-income households supports our positive view of retail sales development.
Table: Retail Sector Breakdown By Key Segment, 2013f
Market share (%) Food, drink and groceries Consumer electronics OTC pharmaceuticals 39.5 6.6 0.7
Value (US$bn) 226.58 37.71 3.93
f = forecast. Source: BMI
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Macroeconomic Outlook
Economic Growth: Down But Not Out BMI View: A modest growth print of 5.3% y-o-y in Q4 FY2011/12 (Jan-Mar) and soaring twin deficits in the fiscal and current accounts have convinced consensus to dramatically de-rate India's economic outlook, with most calling for much weaker headline expansion in the current fiscal year. While the current state of play appears dire, we still see sufficient evidence to suggest that the investment cycle has bottomed out, and that economic growth will re-accelerate within a couple of quarters. Our core view is that real GDP growth will come in at an improved 6.9% in FY2012/13, up from a nine-year low of 6.5% in the previous fiscal year.
Sentiment towards India's growth story is at a low ebb. Not long ago, the mainstream view was that plus8% growth would be the new norm on the back of the country's demographic dividend, huge infrastructure push, and consumer boom potential, a view that did not sit comfortably with us (see 'Five Risks To India's Growth Story', November 11 2010). Fast forward to today, consensus expectations have capitulated spectacularly. Following a modest real GDP growth print of 5.3% y-o-y in Q4 FY2011/12 (Jan-Mar), the slowest pace of expansion in almost a decade, forecasters have been clamouring to slash full-year growth projections, with most now calling for much weaker headline expansion in FY2012/13. A weak external environment, near-record deficits in the fiscal and current accounts, and no obvious investment spark are all cited as reasons as to why Indian growth will continue to suffer in the coming quarters.
Where Do We Stand? The current state of play appears dire. The rupee has sunk to record lows versus the dollar, rating agencies have warned of a sovereign downgrade to junk status, and the political landscape is mired by factional brinkmanship. For our part, we recently acknowledged that the Indian economy would be hard pressed to regain its pre-2008 rate of growth (see 'Failing To Recapture Its Previous Growth Form', April 20 2012). Still, we cannot help thinking that recent mainstream growth downgrades have come somewhat after the fact. By contrast, we see sufficient evidence to suggest that India's investment cycle - the key ingredient for sustainable economic growth - has not only stopped deteriorating, but should also start to pick up, albeit gradually, in H212.
Leading Indicators Provide Some Comfort: The leading indicators at our disposal point to a noticeable, if somewhat moderate, rebound in economic activity. The OECD's composite leading indicator for India posted its highest reading in eleven months in March at 98.9, and as the accompanying chart shows, this metric has provided a decent bellwether for real GDP growth in recent years. Similarly, India's manufacturing and services purchasing managers' indices remain comfortably above the expansionary 50mark. This stands in stark contrast to much of the developed world - and indeed China - where PMI figures have lingered in contractionary territory for quite some time. In terms of businesses confidence,
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the recently-released Q312 Manpower Employment Outlook Survey suggests that Indian companies, particularly in the services sector, will continue to take on new staff, with hiring sentiment remaining surprisingly positive across the board. All these leading indicators would suggest that economic activity should be in the process of carving out a bottom soon (if not already).
Yield Curve Pointing To Cyclical Trough: In terms of monetary policy, we have shifted our stance and now believe that the Reserve Bank of India (RBI) will resume monetary easing in the form of both repo rate (50bps to 7.50%) and cash reserve requirement ratio (100bps to 3.75%) cuts in FY2012/13. These expectations should see India's 2s-10s overnight indexed swap rate curve head back much further into positive territory in the coming months. Such a scenario would provide relief for India's banking system, which in turn should see credit growth and, by extension, economic activity pick up in the latter stages of 2012. As the accompanying chart shows, the OIS curve has enjoyed a decent track record in predicting peaks and troughs in India's business cycle.
Lack Of Fiscal Space A Positive: All the talk in the eurozone and China is of further stimulus and bailouts in yet another bid to re-ignite economic growth. However, a distressed public balance sheet - we estimate that the consolidated fiscal deficit came in at around 8.5% of GDP in FY2011/12 - means that such action has not been seriously entertained in India. In our view, New Delhi's most effective weapon to revive economic activity is expediting project approvals and implementation. To be sure, we would argue that many investors have not been put off by a lack of profitable opportunities in India (return on investment continues to outstrip the nominal cost of capital), but by government interference in the process of capital allocation.
According to data from the Centre for Monitoring Indian Economy, private sector investment projects for which implementation has stalled accounted for 6.2% of outstanding project value in Q112, marking a 7-year high, while stalled public sector projects have surged to the highest on record at 3.4% of total project value. If one assumes that a large proportion of these stalled projects are due to red tape roadblocks, any move by the government to expedite investment throughput would help revive capital formation growth. In early July, Prime Minister Manmohan Singh approved setting up an Investment Tracking System to ensure the speedy execution of mega projects worth over INR10bn. Of course, such a system could be self-defeating by adding yet another layer of bureaucracy to the investment process. Still, the government's strong rhetoric on this issue does provide some scope for muted optimism. Overall, we expect project execution to speed up in the coming months, providing some support to investment growth.
Policy Inertia Not A New Phenomenon: Corruption, ineffective governance and policy flip-flopping on issues such as foreign direct investment in multi-brand retail have all been blamed for holding back investment activity in India. However, policy wrangling in the country is hardly a new issue. As the accompanying chart shows, full parliamentary sessions have been few and far between since 2000, and
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major reform bills have been lying in wait of approval for many years. From this standpoint, we believe that any marginal improvements in the policy environment would be considered a positive by investors, and there have been some tentative signs of progress of late.
In late May, the government managed to hike petrol pump prices by the widest margin on record despite major opposition from within the coalition, adding weight to the finance ministry's claim that subsidies will be capped at 2.0% of GDP in FY2012/13. This was accompanied by a change of heart on the general anti-avoidance rules and retrospective taxation of foreign companies, both of which would have further eroded overseas investor confidence. Finally, the finance ministry intimated in early June that the longawaited goods and service tax and direct tax code reform bills would be put to parliament during the monsoon session of the Lok Sabha (July-August). A bullish scenario, in which the government adheres to subsidy caps and pushes through tax reform, would set the stage for significant fiscal consolidation this year and next, which we believe would relieve pressure on interest rates and thus investment. While such a scenario is far from a given, we have at least seen the government take some steps in the right direction.
Eurozone Important, But Not Critical: The eurozone remains one of India's largest trade partners, accounting for roughly one-fifth of exports, and a prolonged deflationary slump in the single currency area is looking increasingly likely. Moreover, EU banks account for a significant share of lending to corporate India, whose rising external indebtedness is a concern. That said, we believe the risks to Indian economic growth from both these channels is often overstated. We estimate that India's trade surplus with the EU came in at roughly US$5.5bn in FY2011/12, equivalent to just 0.3% of GDP. Moreover, despite the recent spike in commercial borrowings, short-term external debt remains below 5% of GDP - one of the lowest in the emerging market universe.
A Gradual Recovery We are not attempting to paint a bullish picture of Indian growth in the coming 12-24 months. To be sure, we do not expect a particularly robust rebound and are mindful that major tail risks, ranging from a eurozone break-up to a poor monsoon season, exist. As mentioned earlier, nor do we expect a return to the 8-10% growth rates seen prior to the 2008-09 global recession. That said, the structural foundations of the Indian growth story - strong demographics, low leverage, and broadening economic liberalisation - remain intact, as do investment opportunities to capture these dynamics. Any marginal improvement in India's business environment could therefore trigger a revival in investment activity. With these factors in mind, we are projecting that real GDP growth will come in at an improved 6.9% in FY2012/13, up from a nine-year low of 6.5% in the previous fiscal year.
Expenditure Breakdown Private Consumption: Household spending will represent one area of relative weakness over the coming fiscal year. Having ramped up expenditure in recent years, we believe that the current bout of rupee
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weakness will have a lingering impact on the Indian consumer. We see private consumption growth falling to 5.2% in FY2012/13 from 5.5% in the previous fiscal year.
Fixed Investment: Our thoughts on government policy, foreign investor sentiment and interest rates bode well for a gradual recovery in investment spending. We see gross fixed capital formation growth hitting 7.5% this year (with upside risks), from 5.5% in FY2011/12.
Public Consumption: After repeated warnings from ratings agencies and a loss of confidence from investors, New Delhi will be forced to tighten the purse strings in FY2012/13 even if the economic lull continues for longer than expected. Real public consumption growth is set to fall to 4.5% from 5.1% previously, contributing just 0.5 percentage points to headline expansion (the lowest contribution since 2006).
Net Exports: With import growth set to underperform exports in the coming 12 months, Indian net exports are expected to provide a tailwind for overall real GDP growth. We are pencilling in a 1.1pp contribution (following a 2.0pp drag in FY2012/13).
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Regional Retail Outlook

Asia Pacific Retail Outlook
From a forecast value of US$4.28trn in 2013, based on BMI's Asia Pacific retail universe of China, Hong Kong, India, Indonesia, Malaysia, the Philippines and Singapore, regional retail sales are expected to grow by 60% between 2013 and 2017 to reach US$6.85trn (based on forecast foreign exchange rates). India is projected to experience the most rapid rate of growth, followed by Indonesia.
Table: Asia Pacific Retail Sales, 2010-2017 (US$bn)
2010f China Hong Kong India Indonesia Malaysia Philippines Singapore Regional total Regional annual retail sales growth, % 2325.79 37.18 374.54 119.09 38.72 28.37 31.10 2954.78 23.8
2011f 2583.13 40.69 405.89 134.25 45.05 30.49 35.37 3274.86 10.8
2012f 2963.03 43.06 469.07 149.08 49.29 32.25 37.19 3742.96 14.3
2013f 3367.05 45.66 573.95 168.48 54.64 34.40 38.73 4282.91 14.4
2014f 3811.24 48.16 674.26 190.47 60.64 36.62 40.63 4862.01 13.5
2015f 4297.80 50.44 765.18 214.57 66.90 39.03 43.33 5477.25 12.7
2016f 4833.62 52.67 869.86 241.96 73.50 41.65 46.07 6159.32 12.5
2017f 5411.73 54.92 939.06 273.94 80.43 44.49 48.85 6853.43 11.3
e/f = estimate/forecast. Source: BMI
In growth terms, India beats China as its retail sector is forecast to grow by 63.6% between 2013 and 2017, compared with 60.7% for China. Speaking at the National Retail Federation convention in New York in January 2012, Richard Hyman, strategic advisor for accounting firm Deloitte, said global retail sales are forecast to grow by US$6.1trn over the next five years and 66% of that growth will come in developing markets such as China and India.
Indonesia is also forecast to experience strong retail sales growth, of 62.6%. The lowest forecast growth markets in BMI's retail universe are Hong Kong with 20.3% and Singapore with 26.1%. Nevertheless, it should be noted that, while these growth forecasts are small in comparison with regional peers, they still reflect considerable sector dynamism.
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Consumer confidence has picked up across Asia/Pacific markets as concerns about slow growth lessen in the region, according to the H112 MasterCard Worldwide Index of Consumer Confidence. The latest Index, conducted between April 24 2012 and June 10 2012 among 11,376 respondents aged 18-64 in 25 countries within Asia/Pacific, Middle East and Africa, revealed that consumers in the region remain most optimistic in the markets of India (82.1 Index points) and China (77.4). Hong Kong, which dropped 38.7 points in the last Index, improved by 21.9 points to lead the region, followed closely by Malaysia (up 17.1 points). Indonesia recorded the single largest deterioration in consumer confidence (down 18.7 points), followed by the Philippines (down 11.8 points).
'The latest reading of consumer confidence in Asia/Pacific reflects the increasingly complex mix of key influences affecting the region,' said Dr Yuwa Hedrick-Wong, global economic advisor, MasterCard Worldwide. 'The first is the global environment, which continues to be weak and riddled with uncertainty, especially in Europe. The second is the slowdown in China, which has been affecting many key regional markets that are China-centric in their exports. The third is the strength of the domestic markets in sustaining growth with home-grown demand. India, being the least dependent on either global or China demand, is by far the most domestic oriented among the key markets in the region. Its relative optimism reflects the perception that the economy has become more stable after growth declining for two years.'
Table: Share Of Regional Retail Sales, 2010-2017 (%)
2010f China Hong Kong India Indonesia Malaysia Philippines Singapore 78.7 1.3 12.7 4.0 1.3 1.0 1.1
2011 78.9 1.2 12.4 4.1 1.4 0.9 1.1
2012f 79.2 1.2 12.5 4.0 1.3 0.9 1.0
2013f 78.6 1.1 13.4 3.9 1.3 0.8 0.9
2014f 78.4 1.0 13.9 3.9 1.2 0.8 0.8
2015f 78.5 0.9 14.0 3.9 1.2 0.7 0.8
2016f 78.5 0.9 14.1 3.9 1.2 0.7 0.7
2017f 79.0 0.8 13.7 4.0 1.2 0.6 0.7
India and China have occupied the top three places in AT Kearney's Global Retail Development Index (GRDI), for several years, but both fell in the 2011 index, which the authors said 'may come as a surprise to our readers'. 'While these countries are large and growing, on a relative basis, several Latin American markets outshine both India and China,' the report said. 'And as retailers continue to enter India and China particularly in second-, third- and fourth-tier cities where consumers are increasingly accepting global
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brands, having rising disposable incomes and are becoming more discerning in their tastes in several instances, traffic to stores has yet to meet expectations.'
However, in the 2012 GRDI, China was back up three places as the third most attractive market to global retailers. Kearney comments that China has become the world's largest luxury goods market, with US$12bn in sales; while, in apparel, the country is now Inditex's largest market outside of Europe. Although India slipped one place from the 2011 index, to fifth, Kearney states that the country 'remains a high-potential market with accelerated retail growth of 15 to 20 percent expected over the next five years'. With organised retail penetration remaining low, at an estimated 5-6%, the report points out that there is room for growth.
India and China top the list of the leading 20 destinations with the strongest retail real estate momentum in a 2012 report from international property consultant Jones Lang LaSalle. Shopping centre stocks in the two countries are projected to grow by around 15% a year until 2020. However, India falls short of China due to weaker real estate investment momentum and a smaller international retailer presence, says the report.
According to Jones Lang LaSalle, there will be a general rebalancing in capital flows towards Asia Pacific, due to favourable demographics and the growth of the middle classes. By 2020, Asia Pacific is forecast to account for 26% of global retail investment volumes, up from 22% currently and from only 11% in the mid-2000s. A significant improvement in both operating environments and transparency levels in Asia's larger markets, such as China and India, could push the region's contribution closer to 30%, the report says.
Berjaya Retail Berhad has entered into a franchising agreement with US-based consumer electronics retailer RadioShack to open at least 1,000 new stores in south east Asian countries including the Philippines, Indonesia, Singapore, Cambodia and Vietnam within the next decade. In September 2012, Berjaya opened its first stand-alone RadioShack in Mid Valley Megamall and a second store-in-store location within a Berjaya-operated Borders bookstore franchise in The Gardens Mall, both in Kuala Lumpur.
Starbucks and India's Tata Coffee are to launch an alliance that will mark the US coffee chain's entry into Asia's third-largest economy, which remains one of the big untapped markets for Starbucks. A nonbinding memorandum of understanding was signed in January 2012 whereby Starbucks will explore setting up stores in the Tata group's retail outlets and hotels, besides sourcing and roasting coffee beans at Tata Coffee's Kodagu facility.
Retail growth outside the US is now central to the company's strategy. In an investor presentation, Starbucks International President John Culver said the company hopes to operate at least 1,500 stores in
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mainland China by 2015. He also said that the company sees exciting growth prospects in other emerging countries such as India.
Domestic and regional retailers are also anxious to take advantage of China's growing consumer base. As of June 2011, GOME Electrical Appliances Holding had 938 stores across the country, while Suning Appliance Company operates around 1,500 stores in more than 150 cities. Suning opened its first Laox store on the Chinese mainland in Nanjing, Jiangsu, in December 2011. Located in the central commercial area of Nanjing, the store has five floors and a total area of about 20,000 square metres (m2). Suning acquired a 27.36% stake in Japanese home appliances retail chain Laox for CNY57.3mn (US$9.1mn) in June 2009, and became its major shareholder. Suning says it plans to open 150 Laox stores in China in the next five years, with Beijing, Shanghai and Tianjin first in line.
In June 2011 Suning published its new 10-year development plan, which stated that it would open 200 new stores every year during the following decade. Under this plan, the number of its stores is expected to increase from the current 1,500 to 3,500. Meanwhile, the company's internet division is expected to realise sales of CNY300bn (US$47.7bn) by 2020.
Hong Kong-based Watsons recently announced that the number of its stores in mainland China has reached 1,000, and it expects to have 3,000 stores by 2016. Dominic Lai, executive president for Watsons China, told local media that the company will focus on third- and fourth-tier cities for future expansion, while developing more community stores in first-tier cities.
Table: Asia Pacific Food Consumption, 2010-2017 (US$bn)
2010f China Hong Kong India Indonesia Malaysia Philippines Singapore Regional Total 448.1 11.4 205.6 119.5 14.6 31.5 4.7 835.5
2011f 551.0 11.9 215.2 132.8 15.8 35.8 5.3 968.0
2012f 623.5 12.4 197.9 135.7 15.6 38.1 5.4 1028.6
2013f 706.3 12.8 226.6 152.5 16.4 39.7 5.8 1160.1
2014f 805.1 13.1 255.4 167.6 17.2 43.0 6.0 1307.33
2015f 914.4 13.5 286.8 182.7 18.0 47.4 6.2 1469.11
2016f 1034.2 13.9 323.9 200.5 18.6 51.1 6.5 1648.59
2017f 1162.6 14.3 365.5 221.3 19.2 54.1 6.7 1843.67
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Hong Kong-listed Chinese fashion company Bosideng reported that revenue increased from CNY7.04bn (US$1.12bn) in the year ended March 2011 to CNY8.38bn (US$1.33bn) in the year ended March 2012, with net profit rising from CNY1.28bn (US$204mn) to CNY1.44bn (US$229mn). Bosideng has nearly 11,000 speciality stores in China, more than half of them in the north of the country. The company has reportedly invested CNY300mn (US$47.66mn) in a real estate project in central London, where it will establish its European headquarters and men's clothing flagship store.
Hong Kong department store operator Lifestyle International Holdings has three Jiuguang outlets in China: Shanghai Jiuguang, Suzhou Jiuguang and Dalian Jiuguang. A fourth outlet, Shenyang Jiuguang, is scheduled to open in 2013. The group also opened its first shopping mall, Tianjin Lifestyle Plaza, in December 2010 and has acquired land in Zhabei District that will be developed into a commercial complex part of which will be established as the company's second Shanghai Jiuguang store. In its 2011 annual report, Lifestyle said this represented 'a key strategic milestone of the Group to solidify its presence in the Yangtze River Delta'.
In its Q212 Greater China Quarterly, global real estate consultancy Knight Frank reported that no new prime retail developments opened in Beijing during the period. However, Indigo Shopping Mall in the Jiuxianqiao area, developed by Swire Properties and Sino-Ocean Land, soft-launched in the second quarter and is expected to open officially in the third quarter. In Shanghai, in the second quarter, three shopping malls opened, adding a total retail space of 213,400m2. 'Fast fashion' brands accelerated their expansion in the city, with Uniqlo leasing 10,000m2 of retail space in Huaihai Middle Road to open its largest flagship store in the city.
SM Prime Holdings, the biggest mall operator in the Philippines, will end 2012 with five malls in China. The latest opening is in Chongqing, which has a population of more than 30mn. In its 2011 annual report, the company said: 'Even with 45 malls now holding 5.6mn square meters of gross floor area in the Philippines and China, SM Prime still sees much room for expansion. As such, we continue to invest heavily in both countries. Our budget for 2012 earmarks an investment of PHP14bn (US$334mn) for the Philippines and PHP7bn (US$167mn) for China.'
In 2013, SM Prime intends to open two malls: SM Zibo in the province of Shandong; and its biggest mall, SM Tianjin, in the Binhai New Area, near Beijing. The latter development will have a GLA of 530,000m2. 'Beyond 2013, the possibilities will be endless for SM Prime,' said the company. 'As [the] China malls gain popularity and patronage, greater opportunities for further expansion will likely arise. China's depth and breadth are monumentally larger than the Philippines, with consumer spending rising even more rapidly.'
The emergence of a middle class in Asia is having a significant effect on retail sales in the region. The Financial Times highlighted the changing views of Arthur Kroeber at Dragonomics, who in 2006 poured
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cold water on the 'fairytale' of a Chinese middle class on anything like an American scale. At the time, he estimated that just 20% of urban Chinese households, or 110mn people in a country of over 1bn, had significant discretionary spending power. However, Dragonomics now estimates that 300mn people, 23% of the population, have significant discretionary spending and live in cities large enough to be accessible by big companies.
Apple opened its third store in China in September 2012, with the new outlet in Shanghai the biggest in the country. The company has six standalone stores in the region, with revenue in China, Taiwan and Hong Kong increasing sixfold to US$3.8bn in Q211, Apple CEO Tim Cook said in July 2011.
Modern forms of retailing are also revolutionising the Chinese retail landscape. According to a report released by Beijing-based research firm iResearch Consulting Group, the value of online shopping in China reached nearly CNY500bn (US$77bn) in 2010. The number of online shoppers in China has reached 148mn, with a penetration rate of 30.8% among internet users. Competition in the online shopping market has shifted from customer-to-customer to business-to-customer. The total transaction value of China's online retail industry was CNY179bn (US$28bn) in Q211, up 77% from Q210, according to iResearch.
Indonesia is also emerging as a strong regional player. German wholesale giant Metro Group announced in March 2012 that it would open the first of about 20 planned retail outlets in Indonesia by the year-end. CEO Eckhard Cordes said that over the past few years Asian countries, including Indonesia, had emerged as potential targets for retailers seeking to expand their businesses. 'With a fast growing economy and strong domestic consumption, Indonesia offers abundant potential for our retail business,' he said. In the last 15 years, Metro Cash & Carry has also expanded into China and India.
Indonesian expansion is also on Malaysia-based Parkson Holdings' radar. Encouraged by the country's strong economic growth and a rising middle class, Parkson is planning to establish a foothold in the country by investing US$15mn to open five new stores in 2013, managing director Datuk Alfred Cheng told The Jakarta Post in June 2012. Parkson has a total of 108 stores spread across Malaysia, China and Vietnam. In September 2013, Parkson will open its first store in Indonesia, which will be located in the St Moritz within the Puri CBD in West Jakarta. The three-floor Parkson store, with an area of 17.101m2, has an approximate investment value of US$2.5mn, according to Cheng.
'The five stores due to open next year will comprise one or two Parkson stores and three Centro outlets,' said Parkson Retail Group's executive director, Toh Peng Koon, referring to the company's two retail store brands. He added that Parkson would target the middle- and upper-class market, while Centro would aim at the middle-class market.
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According to Koon, the company will focus the expansion of the Parkson chain in Jakarta, Surabaya and Medan in its early years. For Centro, the company is planning to focus on Sumatra, Kalimantan and Sulawesi, opening one outlet in Surakarta, Central Java, in 2012, and in Pekanbaru, Riau, early in 2013. Centro currently has eight stores spread across Greater Jakarta, Yogyakarta, Bali and Surabaya, East Java.
The Parkson Retail Group reported revenues of US$852mn in 2011, an increase from US$767mn a year earlier. According to Cheng, Parkson's retail chain in Indonesia contributed less than 3% of the company's total sales in 2011, while its stores in China contributed around 70% of the company's revenue. 'We are aiming to quadruple our sales in Indonesia over the next few years,' Cheng said in the interview. 'I think Indonesia with its 240mn inhabitants can easily accommodate Parkson and Centro stores.'
The outlook for the grocery retail industry, the largest segment of regional retail, largely follows the same pattern as the overall retail sector, with India, China and Indonesia the most dynamic markets in growth terms, and Singapore and Hong Kong bringing up the rear.
A look at regional food consumption growth by market shows that China will be the top performer between 2013 and 2017, with growth of 64.6%, ahead of India's 61.3%. India's MGR forecast of 107.9% growth between 2013 and 2017 is higher than Indonesia's 69.7% and China's 42.0% because of its relatively low starting point. The majority of grocery retail in China, for example, already takes place through formal, organised channels, whereas in India the organised sector accounts for a very small proportion of the grocery retail market, hence the immense growth levels being forecast.
Key Growth Drivers The trends driving regional retail sales growth are broadly the same across each market in the region, with the degree of influence perhaps altered depending on the maturity of the market. The main drivers of regional retail growth can generally be defined as economic growth, favourable population demographics and increased industry investment.
Economic Growth Between 2013 and 2017, BMI forecasts regional GDP per capita to increase from US$4,312 to US$6,203. Given its links to the West, Asia was initially badly hit by the global economic crisis but its recovery has been remarkable, with domestic demand and export-driven economies returning to strong growth in 2010. A positive five-year economic forecast, ignoring the threat of a renewed slowdown on the back of unwinding regional fiscal stimulus, should contribute to healthy wage growth and sustained middle class expansion, which are major contributors to retail sales growth.
Population Growth BMI does not expect regional population growth to be explosive during the forecast period. Largely due to a drag from China, which is forecast population growth of just 1.4% by 2017, regional population
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growth is forecast at just 3.4% between 2013 and 2017. But even if these numbers are not soaring, the make-up of the population is attractive. Asia has generally favourable age demographics, with a large young population that is susceptible to modern retailing and appears set to sustain sales for some time.
Urbanisation Economic growth has fuelled urbanisation across Asia as rural dwellers move to cities in search of higher-paid employment. This has been a major fillip for the urban-centric retail sector, dramatically increasing the size of its potential customer base and delaying the inevitable, enormously costly move into secondary and tertiary towns and cities. Such favourable geographic demographics have caused urban real estate prices to soar, but the benefits of a captive, high-spending urban customer base outweigh the downsides for now. Accounting for 36% of the total population in 2000, China's urban population is estimated to have accounted for 45% in 2010. The urban population is estimated to have increased from 42% to 53% of the total in Indonesia, from 62% to 68% in Malaysia and from 28% to 30% in India.
Growth In Organised Retail Most prevalent in grocery retail but affecting all sub-sectors of the industry to some extent, sales in higher value organised retail have cannibalised sales in traditional retail, pushing up the overall value of the sector. An increase in this could eventually result in higher value premium concepts cannibalising sales in mass-market retail outlets, particularly among upper income groups.
Westernisation Increased exposure to Western consumption habits has fuelled consumerism in developed and emerging Asia. As well as stimulating interest in a wider range of modern retail concepts, Western influences may also have pushed up the value of the retail goods being sold.
Multinational Investment Related to Westernisation, increased multinational involvement in the Asian retail sector has had a positive impact on sales. Not only has multinational investment meant a faster pace of store openings, it has also meant the introduction of retail best practices that support sales. Many multinational retailers have learnt the hard way in Asia about the importance of tailoring offerings to meet local consumption preferences, but they have also contributed many ideas of their own to the local market. One example is efficient distribution systems that enable individual vehicles to transport fresh and frozen food items, greatly increasing the range and value of produce a store can sell.
The announcement in September 2012 that the Indian government would allow 51% FDI in multi-brand retail paves the way for international retailers to make inroads in the Indian retail market, opening up India's retail doors to retail giants such as Walmart and Carrefour. Walmart had previously said it was ready to open hundreds of retail outlets if rules were liberalised, with international players set to bring in their logistical capabilities and aid in a potential overhaul of the country's distribution infrastructure.
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Improvements in India's supply chain infrastructure will lift production efficiencies and lower the wastage of farm output, in turn increasing consumer goods supplies and easing supply-driven inflationary pressures in the country.
Following New Delhi's move to open retail businesses to foreign ownership, IKEA has applied to the Indian government to set up its stores in the country, the Financial Times has reported. 'We know that many people are eagerly waiting for the first IKEA store to open in India,' said Mikael Ohlsson, president and chief executive. 'Once our application is approved, we will develop a solid plan for the establishment of IKEA stores for many years to come.'
IKEA announced in September 2012 that it plans to double the pace of its store openings globally to 2025 stores a year, focusing on emerging markets such as China and India. The company indicated earlier in 2012 that it could invest up to US$757mn in the first stage of its plan in India, and that its total investment in India over the next decade or two could eventually reach US$1.9bn.
Tourism Most relevant in Hong Kong, China and Singapore, but increasingly applicable to other regional markets, tourism provides a boost to regional retail sales, particularly sales of luxury items. In the top 10 list of luxury and business fashion locations in CB Richard Ellis' 2011 How Global Is The Business Of Retail? report, Hong Kong is the most popular destination for luxury retailers, attracting 84% of the luxury brands in the survey. Singapore and Beijing also feature in the top 10, confirming that Asia has become a key target for luxury brands, with many retailers opening in multiple locations and developing flagship stores to market their brand.
De Beers, soon to be majority-owned by miner Anglo American, pushed further into China in 2012, opening at least six new retail stores in the country through its joint venture with luxury conglomerate LVMH. De Beers' retail venture opened its first outlet in mainland China in 2011. The US is still the world's largest diamond jewellery consumer, but by 2015 it will be overtaken by China, India and the Gulf. 'We are looking at expanding our shops in continental China big time in 2012,' De Beers Chief Executive Philippe Mellier said at a Reuters Mining & Metals Summit. 'We are growing the business where the biggest growth is in Asia.' The Asian countries in our retail universe are popular tourist destinations among Westerners, as well as being popular stopover destinations for travellers to Australia. Tourism is particularly supportive of sales in the jewellery and apparel sectors. After being hurt by the global economic slowdown in 2009, regional tourist arrivals returned to growth in 2010, to the benefit of the retail sector.
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Table: Asia Pacific Macroeconomic Outlook, 2010-2017
2010f Regional GDP per capita, US$ Average regional GDP growth, % Population, mn 2,630.7 19.0 2,939.6
2011 3,075.4 19.1 2,967.4
2012f 3,623.6 8.8 2,995.0
2013f 3,883.8 10.3 3,022.2
2014f 4,328.8 10.1 3,048.8
2015f 4,753.4 10.4 3,074.8
2016f 5,215.2 10.6 3,100.0
2017f 5,726.5 10.7 3,124.5
Risks To Outlook A slower-than-expected economic recovery remains the biggest risk to our regional retail outlook. With China being such a dominant player in regional sales, a slower recovery there would pose the greatest risk to derailing growth. This is not our core scenario and trade data suggest that the Chinese recovery is well under way, although fears about the impact of monetary tightening and potential yuan appreciation present downside risks to our outlook.
While consumerism is well established in mature regional retail markets such as Singapore, Hong Kong and to a slightly lesser extent in China, this is not the case in most of the region's emerging markets. Any prolonged slowdown in these countries would lead consumers to turn back to cheaper traditional forms of retail where substitute products are available. A return to growth is likely to mean shoppers trade up again, but the availability of cheaper substitutes continues to pose a threat to organised retail in times of weak consumer confidence.
Although it stimulates the sector in general, the rise of discounting and its extension beyond grocery retail could be a threat to retail sales values over the forecast period, if not to volume sales. Price wars became a mainstay of the mainstream grocery retail sector during the economic downturn and the growth of this trend into homewares or apparel could undermine retailers' profit margins. This is not our core scenario, however, as Asian consumers have only recently been convinced that discount food can be better value rather than just cheap a perception that is unlikely to grow.
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Risk/Reward Ratings
Asia Pacific Risk/Reward Ratings
The attraction of the Asia Pacific retail market to potential investors is based on the region's population size and growth prospects, the relative immaturity of many of the markets in the region and the potential for the organised retail sector to enlarge its share of overall retail sales. Offsetting these factors are generally high levels of country risk in key markets.
Three of the world's most populous countries, China, India and Indonesia, are in the region and growing urbanisation is contributing to the expansion of retail markets in many Asia Pacific countries. In China, for example, urban retail sales accounted for nearly 68% of total retail sales in 2009, according to the National Bureau of Statistics.
Table: Regional Retail Business Environment Ratings
Limits of potential returns Retail market China India Malaysia Hong Kong Indonesia Singapore Philippines 71 72 51 30 53 29 34 Country structure 45 43 48 50 43 53 50 Limits 58 57 49 40 48 41 42
Risks to realisation of returns Market risks 55 60 70 70 65 75 70 Country risk 55 55 57 81 43 54 47 Risks 55 57 62 77 52 62 56
Overall rating Retail rating 57.1 57 53.1 51 48.9 47 46.0 Regional rank 1 2 3 4 5 6 7
Scores out of 100, with 100 the best. The Retail rating is the principal rating. It comprises two sub-ratings, 'limits of potential returns' and 'risks to realisation of returns', which have a 70% and 30% weighting, respectively. In turn, the 'limits' rating comprises 'retail market' and 'country structure', which have an equal weighting and are based on growth/size of the retail industry (market) and the broader economic/socio-demographic environment (country). The 'risks' rating comprises market risks and country risk, which have a 40% and 60% weighting respectively and are based on a subjective evaluation of barriers to entry and the regulatory environment (market) and the industry's broader country risk exposure (country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across all industries for which BMI provides Business Environment Ratings, and is designed to enable clients to consider each rating individually or as a composite. Source: BMI
The rapid construction of organised retail infrastructure (ie, the Western concept of chain outlets, department stores and supermarkets) is also a key factor behind regional retail growth. In India, organised retail's share of the total retail market is forecast to rise from an estimated 7% to 21% by 2021, according to a recent report by Boston Consulting Group.
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Retail sales growth for 2013-2017 ranges from 20.3% for the small, well-developed Hong Kong market to 63.6% for India, reflecting the relatively undeveloped nature of the latter's retail market and the scope for expansion.
China and the Philippines occupy the top and bottom places of the risk/reward league table respectively, with the former scoring 11 more points than the latter, reflecting the vast differences in market size and development status. India is in second place, with Malaysia some way behind in third.
Indonesia is in second place, although Hong Kong and India are both only half a point behind. The maturity of the Hong Kong market means it is unlikely to contend for a higher place in the rankings, but the enormous potential of the Indian market mean it is likely to overtake Indonesia in the short to medium term.
Malaysia is in fifth place, while the Philippines and Singapore are some way adrift, both with scores of less than 50. At the bottom of the table, Singapore will struggle to move higher due to the small size of its market and limited growth prospects.
India's Retail Risk/Reward Ratings

India is in second place in BMI's retail business environment ratings for Asia, moving up from fourth place last quarter. It is aided by the sheer size of its market and forecast retail sales growth of 64% in US dollar terms between 2013 and 2017 the strongest rate of growth in BMI's Asia retail universe.
Limits To Potential Returns

Retail Market On the basis of retail data alone, India rises to first place, scoring highly for its market entry potential. This reflects the country's immature and underdeveloped retail market, as well as the absence of local and multinational competition. It also scores well for the value of retail sales and the potential for retail sales growth, a reflection of the enormous size of its population and growing affluence. These advantages are offset by a very low level of retail sales per capita.
Country Structure In the country structure sub-rating, India falls to joint bottom of the ratings table. Within this category, a high score for the size of its population is offset by low scores for its small urban population and the spending capacity of its general population and the top 10% of earners.
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Risks To Realisation Of Returns

Market Risks India has the region's second lowest score in the risks to the realisation of returns section of the ratings, with only China scoring less. India is held back to an extent by factors relating to market entry and the regulatory environment. Successful expansion into rural areas is only really possible with further infrastructure investment and potential investors will find that while there is little state interference in industry infrastructure issues, bureaucratic delays are common. Country Risks India rises to joint third place in the table for its broader country risk environment score. India scores highly in the areas of economic volatility and long-term policy continuity and is also rated well for financial risk, short-term economic rating and short-term political rating. However, it scores less well for long-term inflation, institutions, physical infrastructure, market orientation and labour infrastructure.
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Mass Grocery Retail

India Mass Grocery Retail Industry SWOT
Strengths
India's mass grocery retail sector is developing, and there is scope for considerable expansion across all formats and across all regions of the country. New and existing retailers have announced a series of expansion plans, with companies targeting growth outside their established region. This is partly in preparation for the now-inevitable arrival of foreign retailers, which will heighten competition dramatically. India has a very large domestic market, and rising domestic demand is a major driver of economic growth. Widespread poverty and the country's size and regional diversity act as impediments to the development of the mass grocery retail sector; sector growth to date has been confined to major urban areas, where salaries are higher and infrastructure is better developed. Distribution remains a major challenge to retail expansion, with retailers often having to invest heavily in the supply chain before opening new stores. India's infrastructure is notoriously inadequate. A 500km road journey can take as much as 24 hours owing to poor road conditions, congestion and tolls. Foreign investment in the retail sector remains subject to government restrictions; liberalisation has allowed for market entry but only via still-restrictive joint ventures with local firms. Investment in the discount retail sector provides a means of targeting lower-income consumers outside of major urban centres who will become a key market once the sector begins to mature. Likewise, investment in the convenience sector will enable retailers to capitalise on the increasingly busy lifestyles of consumers living in urban areas. For multinational corporations, the hypermarket sector is a good opportunity, with few hypermarkets present owing to many local operators being unable to afford the higher set-up costs of such outlets. In the long term, well beyond the current forecast period, rural retailing represents an opportunity for financially powerful firms that can afford to offer low prices. India's emerging middle class will continue to drive demand for new goods and services. Many consumers remain wary of modern retail owing to its perceived detrimental impact on the role of traditional retail in society. Low prices remain integral to luring shoppers away from traditional retail formats; elevated operating costs could undermine retailers' efforts to offer these. The government's move to backtrack on its decision to allow foreign direct investment in India's multi-brand retail sector has sent out a negative message to foreign investors about the lack of stability in the country's policymaking process and could potentially deter foreign investment in the sector.
Weaknesses
Opportunities
Threats
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Market Overview
India's MGR sector is dominated by small-scale traditional retail outlets. BMI estimates that this fragmented offering still accounts for around 91% of the country's grocery retail sales. However, this is changing fast as multinationals begin to seek opportunities to enter India and as local organised players accelerate their own expansion and business-activity efforts in preparation for greater competition. The country's economic development has allowed for the further development of MGR, as increasingly wealthy consumers in major towns and cities turn to modern formats in search of the convenience and quality that they now desire and can increasingly afford.
To date, independents and modern retailers have operated effectively side by side thanks to large-scale outlets catering for wealthier consumers only, and government FDI legislation which only allows multibrand retailers to operate in partnership with local companies keeping out aggressively expansionoriented multinationals. The announcement in late 2006, however, that US major Walmart had secured a deal with local conglomerate Bharti Enterprises has changed this, and the corresponding businessactivity levels in terms of expansion and price have meant that modern players have started to tread on the toes of independents. A precedent has now been set via which multinationals can enter the market in partnership with local players.
Representing an embarrassing setback in India's reform history, the government in late 2011 backtracked on its proposed move to allow FDI in the country's multi-brand retail sector. The government had announced its decision in late November to allow up to 51% FDI in multi-brand retail. However, this proposed policy was faced with vehement opposition from both inside and outside the ruling United Progressive Alliance, forcing the prime minister and his administration to put on hold its plans to open up its retail doors to foreign investors. According to Mamata Banerjee, the chief minister of West Bengal, the retail reform policy will be suspended until consensus on the issue has been achieved within the ruling coalition.
The government's decision to hold back its multi-brand retail liberalisation plans clearly reflects the lack of policy coherence and clarity within the Indian National Congress-led coalition, tying with our macroeconomic view that India's reform drive will continue to crawl along at a glacial pace in the near term.
What is also worrying is that India's retail policy suspension has sent out a negative message to foreign investors about the lack of stability in the country's policymaking process. Within a span of two weeks, the government backtracked on its decision to allow FDI in its multi-brand retail sector, fuelling uncertainty among foreign investors on the matter of policy continuity in India.
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Huge income inequalities remain in India regardless of economic development, and although the MGR industry is growing fast and prices are falling in line with competitive discounting, it remains the reserve of the minority. Consequently, there is still a vast consumer base for independent, traditional retail operators. However, it is gradually moving out of major urban centres and into secondary and tertiary towns and cities and more rural areas.
Within India's grocery retail sector, all four key modern formats are present. The supermarket and convenience store sectors have experienced the greatest development to date, while the hypermarket and discount sectors are still in their infancy. Once again, the arrival of multinationals can be expected to change this, with both formats likely to attract considerable investment in the early phases of market entry. At present, there are a minimal number of multi-format retailers in India, with those that do have a multi-format offering tending to be among the sector leaders, and typically being those conglomerates that have developed a retail arm in a bid to exploit this growth opportunity. Similarly, there is an absence of national operators, with most modern retailers having chosen to expand their operations within their home state in order to reduce distribution costs.
Inefficient supply chain management is viewed as one of the biggest problems facing the Indian MGR industry today; less problematic for the broader retail industry, supply chain problems have been prevalent in the grocery retail industry, where the timely distribution of perishable items is vital. Retailers have pointed the finger of blame at poor road infrastructure and complex federal and state tax laws which make cross-state transportation difficult. India's transport networks certainly need investment, although rural infrastructure and national highways have been identified, along with power, as the main beneficiaries of government spending. As the situation currently stands, India's vast size and underdeveloped infrastructure is preventing retailers from opening stores any distance from their distribution hubs.
Within this environment, retailers themselves must take responsibility for supply-chain inefficiencies rather than view them as a national problem affecting all players equally. At a company level, the primary problem is a lack of supply-chain expertise. The majority of retailers have yet to set up a separate unit for managing supply-chain issues, instead treating supplies as part of the day-to-day running of a store. This has meant a fairly unidirectional flow of information retailers simply summon stock when they need it and then wait for it and a lack of investment in storage space to support the scale of most retailer ambitions.
Leading MGR Players

The modern retail sector is dominated by a handful of players, with the largest being Pantaloon, Subhiksha, Reliance, Big Bazaar, Margin Free Market and Trinethra Super Retail. The UK's Tesco is the latest foreign entrant into the market, which already includes Germany's Metro, Dutch company
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Spar and US-based Walmart. Tesco is planning to work with Tata's Star Bazaar hypermarket business on a franchise basis, providing expertise and technical support in return for a fee to the fast-expanding network. Additionally, the new wholesale outlets will also supply Star Bazaar stores, potentially meaning that Tesco-branded private-label goods could appear in consumer retail outlets in India.
In addition to the above, Tesco will also continue to expand its Indian sourcing capabilities. The retailer already sources around GBP170mn (US$323mn) of produce from India annually, while it also provides employment for some 3,000 local workers at its global service centre in Bangalore. Boosting its economic contribution in this regard will remain a primary concern for Tesco, as it may provide a useful tool in future negotiations with the government concerning FDI amendments or expansion opportunities. Meanwhile, Carrefour seems to be pursuing a similar tactic, as it has also been building up its relationship with local suppliers for its global store network.
Carrefour opened its first Indian wholesale outlet in July 2010 in the capital, Delhi. The outlet will cater to independent retailers and the hospitality trade and gives Carrefour a foothold in the market from which it can begin to establish its distribution infrastructure in preparation for a time when regulations are relaxed. Meanwhile, Bharti Walmart has opened its first cash-and-carry outlet in the state of Rajasthan and had planned to open another outlet in the Indian state of Uttar Pradesh. Bharti Walmart is a joint venture between Indian conglomerate Bharti and US-based retailer Walmart. Walmart is also considering a partnership with Indian counterpart Future Group to strengthen its presence in India, according to media reports.
After putting its expansion plans on halt for a period of two years following the global financial crisis, Indian mass grocery retail operator Reliance is now looking to aggressively expand its domestic presence. Reliance recently stressed its commitment to the Indian MGR sector by announcing that it plans to expand rapidly in the country through its value retail business, which operates its supermarket and hypermarket retail stores under the store banners of Reliance Fresh, Reliance Super and Reliance Mart.
Reliance's expansion should help position the company for anticipated liberalisation of the Indian multibrand grocery retail sector, helping it build and secure market share before other major multinationals arrive. In anticipation of the eventual liberalisation of the Indian MGR sector, Reliance and other domestic retailers are ramping up their domestic expansion plans. Aditya Birla Retail plans to open 162 hypermarkets over the coming quarters, while Shoppers Stop plans to set up four more hypermarkets and 10 departmental stores over the remaining months of 2011. Indian retailer Bharti Retail has added to its portfolio of formats with the opening of a new 'full line hypermarket' store. The company now has 154 stores, with three formats under the easyday India brand, and the new outlet in Bhandup is its first in western India.
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Interestingly, Spar does not have to deal with restrictive FDI regulations in India owing to its unique operating model. Spar links up with independent retailers in India through license agreements, allowing it to tap into the country's retail potential without having to invest financially in the multi-brand retail market. The company does, however, provide the independent retailers with the technical expertise to establish their supply chains. Recognising the immense untapped potential in India's MGR market, Japanese convenience retailer Lawson plans to employ a franchising model in the country. Lawson plans to link up with smaller mom-and-pop shops through franchise agreements in a bid to circumnavigate the FDI regulations in India and quell concerns that the entry of foreign MGR players will drive many traditional retailers out of business.
Table: Structure Of Mass Grocery Retail Market By Estimated Number Of Outlets, 2005-2011
2005 Supermarkets Hypermarkets Discount stores Convenience stores Total MGRs 4,370 160 750 3,700 6,780
2006 4,506 220 880 4,000 7,396
2007 4,820 285 1,025 4,500 8,430
2008 5,100 360 1,307 5,000 9,610
2009 5,400 409 1,350 5,050 12,209
2010 5,800 570 2,300 5,200 13,870
2011 6,000 610 1,370 5,280 13,260
Source: Official statistics, BMI
Table: Structure Of Mass Grocery Retail Market Sales By Format (US$mn), 2005-2011
2005 Supermarkets Hypermarkets Discount stores Convenience stores Total MGRs 6,606 609 1,388 1,373 9,976
2006 7,606 1,349 1,721 1,581 12,258
2007 8,697 2,966 2,119 1,808 15,589
2008 7,962 4,344 2,173 1,721 16,201
2009 7,501 4,641 2,428 1,723 16,293
2010 11,761 6,674 3,031 2,299 23,765
2011 14,029 8,166 3,418 2,570 28,183
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Table: Structure Of Mass Grocery Retail Market Sales By Format (INRmn), 2005-2011
2005 Supermarkets Hypermarkets Discount stores Convenience stores Total MGRs 291,300 26,860 61,200 60,540 439,900
2006 344,560 61,100 77,970 71,620 555,250
2007 359,550 122,600 87,620 74,730 644,500
2008 346,460 189,020 94,560 74,890 704,930
2009 363,150 224,670 117,560 83,410 788,790
2010 537,665 305,094 138,583 105,089 1,086,431
2011 654,661 381,082 159,511 119,952 1,315,206
Table: Grocery Retail Sales By Format (%) Historical Data & Forecasts
2012f Organised Nonorganised/Independent 9 91
2021f 23 77
f = BMI forecast. Source: BMI

Mass grocery retail 2012 sales growth (local currency) = +17.1%; CAGR to 2016 = +15.9%
Over the long term, India is one of the most exciting mass grocery retail (MGR) opportunities in the Asia Pacific region. Indian consumers are still largely familiarising themselves with the concept of modern retail, which accounts for less than 10% of overall grocery retail sales, according to BMI estimates. Nonetheless, there are going to be tremendous opportunities for growth given the underdeveloped nature of the Indian MGR sector.
India's MGR sector remains dominated by small-scale traditional retail outlets. All four key modern formats (supermarkets, hypermarkets, convenience and discount stores) are already present within India's MGR market, but these stores are largely operated by a handful of local retailers, with the dominant ones being Pantaloon Retail, Reliance Retail, Subhiksha and Big Bazaar.
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The relatively slow pace of MGR growth in India can be largely attributed to two key factors: massive income inequalities and tough foreign direct investment (FDI) regulations. India's GDP per capita is estimated to be around US$1,457 in 2011, which is somewhat peripheral when you compare it with China's GDP per capita of US$5,260. Given this low purchasing power, Indian consumers have been relatively slow to trade up to modern retailing methods.
Another factor is the restrictive business environment of India's MGR sector. The country only allows complete foreign ownership in its wholesale and single-brand retail sectors. The country does not allow FDI in its multi-brand retail sector owing to concerns of a crowding-out effect among existing independent players.
As affluence in India rises steadily over the coming years, Indian consumers are expected to increase their spending and turn to modern retail formats in search of the convenience and quality that they now desire and can increasingly afford, which in turn presents very positive implications for MGR sales.
Realistically, however, India's strict retail FDI regulations remain a major deterrent, which explains the slow pace of MGR development in the country. In a step towards greater market liberalisation, the government announced its decision in late November 2011 to allow up to 51% FDI in multi-brand retail. However, this proposed policy was faced with vehement opposition from both inside and outside the ruling United Progressive Alliance, forcing Prime Minister Manmohan Singh's administration to put on hold its plans to open up its retail doors to foreign investors.
What is particularly worrying is that India's retail policy suspension has sent out a negative message to foreign investors about the lack of stability in the country's policymaking process. Within a span of two weeks, the government backtracked on its decision to allow FDI in its multi-brand retail sector, fuelling uncertainty among foreign investors on the matter of policy continuity in India. As a case in point, UK retailer Tesco has postponed plans to invest INR5bn (US$96mn) to set up wholesale stores in India, ostensibly due to its concerns pertaining to future retail policy implementation in the country. Without assurance that the government's proposed policies will be followed through and implemented successfully, foreign investors are unlikely to commit massive sums of capital expenditure towards building their supply chain infrastructure in India. What is more, even if the bill is eventually passed, foreign firms are likely to remain wary about losing their capital assets due to the possibility of further policy backtracking down the line.
However, the gradual liberalisation of the MGR sector is likely to be an eventual consequence of growing FDI in the sector; should India give the go-ahead for foreign retail players to operate freely in the country, MGR sales growth will take off very strongly as the world's leading players commit massive sums of investment to one of the best growth opportunities worldwide.
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Should the scenario of FDI liberalisation in food retailing materialise, we are looking at an outperformance of the Indian hypermarket sub-sector. This underdeveloped segment will be the major beneficiary of investment from multinationals, with the type of capital outlay needed to establish such stores typically beyond the financial capability of many smaller existing players. The hypermarket sector also offers the strongest profitability level per store and is therefore likely to garner the strongest attention from multinationals.
Table: MGR Sales By Format Historical Data & Forecasts, 2009-2016
2009 Supermarkets (INRbn) Hypermarkets (INRbn) Discount stores (INRbn) Convenience stores (INRbn) Total mass grocery retail sector (INRbn) Total mass grocery retail sector growth, INR, (y-o-y) Supermarkets (US$bn) Hypermarkets (US$bn) Discount stores (US$bn) Convenience stores (US$bn) Total mass grocery retail sector (US$bn) 363.2 224.7 117.6 83.4 788.8 11.9 7.5 4.6 2.4 1.7 16.3
2010 515.3 293.1 136.4 102.9 1047.6 32.8 11.3 6.4 3.0 2.3 22.9
2011e 627.4 363.3 156.3 116.6 1263.7 20.6 13.4 7.8 3.3 2.5 27.1
2012f 740.4 432.6 176.2 130.2 1479.4 17.1 13.8 8.1 3.3 2.4 27.7
2013f 891.5 515.2 199.9 146.4 1753.1 18.5 17.8 10.3 4.0 2.9 35.1
2014f 1045.8 605.0 226.0 164.0 2040.7 16.4 22.0 12.7 4.8 3.5 43.0
2015f 1196.9 699.6 253.7 182.6 2332.8 14.3 26.4 15.5 5.6 4.0 51.6
2016f 1348.7 805.5 284.4 203.3 2641.9 13.2 31.4 18.7 6.6 4.7 61.4
e/f = BMI estimate/forecast. Source: Central Statistical Organisation, Company information, BMI
Table: Average Outlet Sales By Format 2011
US$mn Supermarkets Hypermarkets Discount stores Convenience stores Total MGRs 2.34 13.39 2.49 0.49 2.13
INRmn 46.67 624.72 116.43 22.72 99.19
Source: BMI
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Industry Developments
Auchan Enters India In August 2012, French retailer Auchan confirmed that it has signed a deal with the Landmark Group to enter the Indian hypermarket sector. The move will take the form of a franchising agreement, which will help Auchan circumnavigate India's restrictions on investment in multi-brand retail. Landmark's 13 existing Max Hypermarkets will be rebranded under the Auchan banner in the fourth quarter of 2012, and the two firms have set a goal of rolling out between 12 to 15 new outlets per year.
Commenting on the deal, the Managing Director of Max Hypermarket suggested that the relationship will 'further enhance the standards of hypermarket retailing in the country' combining 'Auchan's expertise in managing hypermarkets' and Max's 'understanding of the Indian market'.
As one of the last remaining retail frontiers in Asia, India holds tremendous appeal to multinational MGR operators . However, for foreign mass grocery retail (MGR) players, the potential in India is difficult to exploit. India's strict retail foreign direct investment (FDI) regulations remain a major deterrent for foreign retailers, which explains the slower pace of MGR development in the country.
The Landmark Group is controlled by Indian entrepreneur Micky Jagtiani and, despite being currently based in Dubai, it is not subject to the usual restrictions on multi-brand retail. The firm currently operates under a similar setup in India with Spar International. However, in May 2012 the two firms revealed that their partnership would come to an end after 31 December, 2012, with Spar choosing to go it alone in the market.
The firm's partnership with Spar was reported to have been ended due to Spar becoming frustrated with the slow pace of expansion, with only 13 Spar hypermarkets currently open. This is one drawback of not being in full control of investment and expansion decisions, and this is potentially a warning sign for Auchan which will surely be looking for more rapid growth from any potential partnership.
Cash-And-Carry Is A Bright Spot In Investment Picture In the first half of 2012 it was evident that expansionary investments were picking up in the Indian cashand-carry sector. Expansions from cash-and-carry players in India come amid continued demand uncertainties and can be viewed as an attempt to take advantage of this period of softened domestic demand. The acceleration in investment activity in the wholesale grocery sector also reflects the longterm commitment of cash-and-carry companies to the Indian retail growth story as they prepare for anticipated liberalisation of the sector.
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While we expect overall investment activity in India to pick up in FY2012/13, we do not envisage a forceful recovery in investment expenditure in the coming quarters. There are three key factors underpinning this view, which we will summarise below.
Monetary Policy Not Conducive Enough: Our Country Risk team does not expect businesses to get the same extent of monetary policy support they received from late 2008 to early 2009, when the central bank slashed its repo rate by 425 basis points (bps) in seven months. Moreover, while we expect the central bank to lower its repo rate by 75bps in FY2012/13, there is a risk that the central bank will be unable or unwilling to cut by our 75bps projection given the risk of reappearance in inflationary pressures.
Lack Of Policy Coherence And Clarity: Policy uncertainty in India is expected to linger among foreign investors, which could deter foreign investor appetite. As a case in point, the government's decision to backtrack on its proposed move to allow FDI in India's multi-brand retail sector has sent out a negative message to foreign investors about the lack of stability in the country's policy-making process.
Subdued Business Confidence: Lastly, we note that business confidence remains bleak from a y-o-y basis, implying a wary mood among investors in India.
Despite the aforementioned investment uncertainties, there has been a marked acceleration in investment in the Indian cash-and-carry sector. Cash-and-carry companies in India continue to embark on an expansion spree, instilling considerable dynamism to the country's wholesale retail landscape.
US retail giant Walmart, which operates cash-and-carry outlets in India through a joint venture with local conglomerate Bharti Enterprises, plans to open 12 to 15 wholesale outlets in 2012, representing an increase from 10 in 2011. Walmart currently operates 17 cash-and-carry stores in India. Metro Group and Booker India are also ramping up their expansions in the cash-and-carry sector. India features prominently on Metro's radar and the company has already opened two cash-and-carry stores in the country in the first five months of 2012. Booker India, meanwhile, reiterated its commitment to expanding its presence in the Indian cash-and-carry sector and stressed that its expansions would not be deterred by the subdued global economic climate and a dip in global investor confidence in India. Booker India has a total of four wholesale centres in the country at present and plans to open up to 20 stores over the next five years.
The sustained flurry of expansions in the Indian cash-and-carry sector can probably be linked to the competitive advantage of cash-and-carry operators over supermarket and hypermarket retailers in terms of product prices. Cash-and-carry stores in India are able to sell their products at lower prices due to their basic and no-frills store format, higher volume of sales as well as lower operating costs. Continued expansions from cash-and-carry players in India can therefore be viewed as an attempt to take advantage of the softened domestic demand environment. As consumers trade down from supermarkets and
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hypermarkets to independent retail stores, this would translate into growing sales opportunities for independent retailers, which are the core customers of cash-and-carry operators.
Expansions of cash-and-carry operators in India also bear out their long-term commitment to the Indian retail growth story. The Indian MGR sector boasts massive untapped potential and the likes of Walmart and Carrefour are clearly preparing themselves for an anticipated liberalisation of the MGR sector by strengthening their logistical capabilities.
ABRL Slows Expansion Amid Flurry Of Sector Investments Indian mass grocery retail operator Reliance Retail is looking to raise INR45bn (US$900mn) in funds from parent firm Reliance Industries for the expansion of its different formats nationwide. The retailer will use the funds to introduce various big-box stores, as well as expand aggressively in consumer durables and apparel businesses. According to reports, Reliance will increase the number of its consumer durable stores by twofold and the number of apparel stores by 30%. Reliance Retail presently owns 1,200 stores in 86 cities across the country.
Three major Indian retailers have announced that they are engaged in negotiations regarding the merger of their back-end operations, reports Kamcity. The Future Group, Next Retail and Spencer's believe that the merger will have the effect of both lowering costs and maximising efficiency.
Indian MGR operator Bharti Walmart a cash-and-carry joint venture between US MGR player Walmart and local conglomerate Bharti Enterprises is reportedly in talks with several banks such as Citigroup, JP Morgan Chase, Deutsche Bank and BNP Paribas to raise loans to finance its local expansion plans. By expanding its wholesale operations, Walmart is looking to position itself for an eventual liberalisation of the Indian multi-brand retail sector, clearly bearing out its willingness to weather the near-term operating risks in order to tap into the sector's massive untapped potential.
While the aforementioned retailers are looking to ramp up expansions in India, Indian mass grocery retailer Aditya Birla Retail (ABRL) has closed about 50 of its 'More' supermarkets nationwide, laying off approximately 225 employees. According to a new report, the closing of the stores has been attributed to continued losses faced by the retailer. Pranab Barua, the CEO of ABRL, has said that the firm will concentrate on large stores, while it will continue to operate supermarkets in the South and markets that are performing well. Approximately 15-20% of ABRL's supermarkets are not profitable, contributing to a company debt burden of INR31bn (US$612.66mn), said the retailer.
Linking Up With Local Retailers To Circumvent Expansion Hurdles Dutch MGR player Spar International is reportedly on the hunt for potential partners in India. Spar plans to make its foray into the Indian supermarket sector (it already operates hypermarkets in the country) as it looks to stretch its footprint across the western and eastern regions of the country. On this
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front, Spar's unique operating model it engages in license agreements with independent retailers in different markets, thereby allowing them to invest in opening outlets under the brand Spar should give it a competitive edge over the other retailers, especially in terms of expanding into less-developed retail territory.
For foreign MGR players, the potential in India can be difficult to exploit. India's strict retail FDI regulations remain a major deterring factor for foreign retailers, which explain the slower pace of MGR development in the country. The country only allows complete foreign ownership in its wholesale and single-brand retail sectors and does not allow FDI in its multi-brand retail sector due to concerns of a crowding-out effect among existing independent retailers.
Interestingly, Spar does not have to deal with these restrictive FDI regulations in India due to its unique operating model. Spar links up with independent retailers in India through license agreements, allowing it to tap into the country's retail potential without having to invest financially in the multi-brand retail market. The company does, however, provide the independent retailers with the technical expertise to establish their supply chains. Spar inked a license agreement with Max Hypermarkets, which is a subsidiary of Dubai-based Landmark Group, in 2007 and Max Hypermarkets currently operates 10 outlets in India.
Spar's willingness to work with local partners certainly gives it an advantage and should facilitate its ease of expansion across India, particularly in the less-developed rural areas. While Spar could circumvent the FDI restrictions in India, the retailer will also be able to better secure attractive store locations by linking up with local players, which is a common issue faced by foreign retailers. US coffee giant Starbucks, for instance, originally planned to set up its first coffee outlet in India by mid-2011 but was delayed by difficulties in acquiring real estate and the high cost of land.
Japanese convenience retailer Lawson has big regional ambitions. The retailer is reportedly looking to link up with local companies in India in an effort to hedge against its subdued domestic demand prospects, which we believe will allow it to circumnavigate the restrictive retail legislations in the country.
Recognising the immense untapped potential in India's MGR market, Lawson plans to employ a franchising model in the country. Lawson plans to link up with smaller mom-and-pop shops through franchise agreements in a bid to circumnavigate the FDI regulations in India and quell concerns that the entry of foreign MGR players will drive many traditional retailers out of business.
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Consumer Electronics
India Consumer Electronics Market SWOT
Strengths
The domestic market is entering a rapid growth phase, with projected double-digit growth of key products such as notebook computers and mobile handsets. Low rates of penetration for key products such as computers (2%) and mobile phones (64%). Rising incomes and GDP growth are increasing affordability. Low incomes and huge digital inequalities. Large 'grey' market for illegal products. Relatively low level of demand for higher end products such as LCD TV and 3G phones. Infrastructure deficiencies, with only 20% of Indian houses capable of receiving broadband. Growth in mobile subscriber penetration will drive booming mobile handset market. Big opportunity for expansion in underpenetrated semi-urban and rural areas. Hardware sector set to grow faster after a number of government measures to encourage domestic manufacturing and new investment incentives under consideration. The government's efforts to get India connected to the modern world will provide the frame for electronics market development over the next few years. The ultimate goal of government policy is for 1bn computers connected to the internet equivalent to the total number of PCs in the world today. Global economic slowdown may affect consumer spending. Moves to stimulate the hardware sector having mixed results. Falling prices.
Weaknesses
Opportunities
Threats
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India Electronics Industry SWOT
Strengths
Electronic hardware production of US$25bn in 2011, with growth set to be driven by emerging domestic market for electronics devices. Government support and incentives for hardware manufacturing, with new IT amendment bill currently under consideration by parliament. Growing foreign investment with proposed investment in manufacturing facilities in the region of INR155,000 crore. Abundant availability of skilled and technically qualified manpower. A further range of incentives, such as tax advantages and subsidies for semiconductor manufacturers, which have already attracted US$7bn in investments. Intellectual property rights problem and piracy. Consumption of hardware is currently estimated to be about double the level of domestic production. Despite the government's ambitions, India still has not emerged as a significant semiconductor manufacturing centre. Domestic consumer electronics market dominated by foreign brands, with few Indian brands competitive in most product categories. State and federal level reforms to encourage more investment into the sector and encourage domestic manufacturing. India emerging as a centre for chip design services, with the market worth about US$5bn, and embedded software. More than US$18bn invested in hardware manufacturing. Colour TV computers and mobile phones. LCD TV, with government digitalisation policy having potential to drive spending. Slowdown in global computer and consumer electronics applications markets. Moves to stimulate the hardware sector having mixed results.
Weaknesses
Opportunities
Threats
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Market Overview
India's domestic consumer electronics devices market, defined to include computing devices, mobile handsets and video, audio and gaming products, was estimated to be worth about US$32bn in 2012 and this is expected to increase to US$56bn by 2016, driven by rising incomes and growing affordability of key products.
Computers
BMI projects a year of strong growth in India market PC shipments in 2012. Computer hardware sales are expected to be up by around 10%'. Growth in shipments slumped in Q411, owing largely to the hard-disk drive shortage caused by floods in Thailand. However, expanding demand in lower-tier cities, and government procurements, will be among growth drivers.
Table: Computer Sales, 2009-2016
2009 Domestic Computer Hardware Sales (US$ mn) Domestic PC Sales (US$mn) Desktops ('000) Notebooks ('000) 6,680 5,411 5,112 2,633
2010 7,726 6,258 4,777 5,175
2011e 8,794 7,141 5,412 6,933
2012f 9,714 7,966 5,992 8,815
2013f 11,448 9,479 7,028 11,717
2014f 12,918 10,696 7,733 14,768
2015f 14,828 12,355 8,596 19,054
2016f 17,352 14,458 9,515 24,908
e/f = estimate/forecast. Source: BMI research
BMI estimates that the Indian addressable market for PCs (including notebooks and accessories) will be worth around US$8.0bn in 2012, up from US$7.1bn last year. Owing to favourable economic conditions, the addressable market in US dollar terms is expected to grow around 12%.
BMI forecasts PC unit sales of around 14.8mn units in 2012, compared with 12.3mn in 2011. Shipments grew by only a single-digit factor in the first quarter of 2012, representing a slowdown compared with double-digit growth in 2011. A number of factors are expected to weigh on the PC market in 2012, including high inflation and increased prices, which are encouraging users to defer purchase decisions. An increase in excise and import duty and negative currency trends have also constrained the market. Growth had remained robust in H211, despite some economic issues, owing to new products and promotions. In Q112, the main growth area was mobile PCs, which reported a double-digit increase, while sales of generic brand desktops and parallel imports fell sharply.
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Strong growth opportunities are expected in 2012 in smaller cities in India, where vendors are expanding their retail and distribution presence. Around 45% of new PCs sold in the Indian market are now shipping outside the top 75 cities, and tier 3 and tier 4 cities will be an important growth driver over the next five years. However, at the state level, Maharashtra is the top PC market in India, with around 17.4% of total sales in Q411, according to an estimate by Dell. In terms of regions, south India dominates, with Karnataka the highest contributor within the region.
The main opportunity will once again be strong growth in the consumer PC segment, which accounted for more than 50% of sales in 2011, although business and government demand should also strengthen. Consumer PC demand was faster to recover from the economic slowdown, with much market growth coming from the consumer notebook segment. However, sales growth of desktops, which accounted for more than 60% of PC sales, also reached double digits in some quarters.
Business demand has received a lift from improving economic circumstances and tenders previously deferred as a result of the economic situation. However, spending in some key verticals, such as telecoms, was relatively flat in 2010, indicating that some businesses remained cautious in the wake of the global economic crisis. Migrations to Microsoft's Windows 7 operating system and Intel core technology should continue to trigger new cycles of hardware upgrades.
Drivers
BMI forecasts the PC market to grow at a CAGR of 18% between 2012 and 2016, with unit sales maintaining strong growth. The market has a number of potential strong growth drivers. Only nine out of 1,000 people in India own a computer, one-fifth of the level in China. Another driver is that 45% of India's population is under 25, which should boost PC and IT usage, as living standards rise. Consumer PC sales are continuing to increase their share of total PC shipments.
Computer Demand 2009-2016
The government's ultimate goal is for 1bn internet-connected computers in India, equivalent to the total estimated number of PCs in the world today. Annual PC sales were estimated at 11.8mn units in 2011 and could rise to more than 30mn by 2016. Attention is on the lower end of the market, which is expected to power market growth over the
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next few years. The smaller cities where PC penetration has grown rapidly in recent years now offer some of the biggest growth opportunities.
Consumers have emerged in the last few years as the main driver of the Indian PC market, whereas previously the main focus for many vendors was enterprises. The average price of a PC has nearly halved over the past few years, and rising incomes and greater credit availability will continue to bring computers within the reach of lower-income demographics. In 2011, consumer sales accounted for around 50% of the market, although this share was as high as 57% in 2010, according to Indian computer hardware association MAIT. Moreover, growth in the consumer segment in that year was reported by MAIT as 32%, outstripping the general market.
Government schemes are now an important Indian market opportunity for vendors. Initiatives such as the five-year e-government and smart ID programmes will fuel long-term demand for IT hardware. The government's policy of providing tax breaks and subsidies for hardware manufacturers should help keep prices down and support growth. However, the rate of growth will depend on other government policies, such as its level of spending on computers for schools, which has been growing significantly.
In 2011, the government of Karnataka was among several local governments to announce programmes to bring ICT education to schools and provide students with net tops and laptops. The government has launched a pilot programme with Intel and Educomp that aims to bring ICT to 5,000 schools in the state.
Local government is also a growing source of PC procurement. In its 2012 state budget, the Tamil Nadu government has allocated INR22,49 crore to providing laptops and printers to around 12,500 village administration officers. The state's IT procurement agency, ELCOT, has already made a commitment to buy 912,000 laptops. Other local ICT programmes, such as that of the Kerala State Mission, were aimed at other public sector organisations such as the police, who are being provided with PDAs (personal digital assistants). Similar programmes have been launched in a number of states
The potential certainly exists for India to outdo China over the next few years in growth of PC adoption and usage. As the Indian computer hardware market has grown, vendors have increasingly sought to produce made for India models. These are now becoming a growing focus for main vendors such as HCL Infosystems, HP and Intel. Typical features suited for Indian conditions include the ability to be operated on a 2V battery, or to withstand extreme weather and dust.
Investment of more than US$18bn in hardware manufacturing in India (including telecoms hardware) has stoked expectations of a sectoral boom. However, a high tax regime means that around 25% of the retail price of an average computer goes to the government, and there are fears that this may delay growth.
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Moreover, it will be difficult for India to catch up with Taiwan and mainland China, given the strong lead these two territories have.
Netbooks
In 2012, demand for notebooks is again expected to be the main driver of PC sales, with volume growth of between 20 and 25% forecast. Notebooks are expected to comprise around 60% of sales in 2011, and desktops around 40%. In 2010, demand for desktops bounced back with double-digit growth, albeit considerably slower than that recorded by notebooks. Recently, desktops accounted for more than 80% of India PC market sales, a higher ratio than for many countries in the region. However, that share has dropped to below 60% in 2010 as notebooks recorded strong growth, and the decline is expected to continue.
Sectors such as education and government still have significant demand for desktops, while growing PC penetration in lower-tier cities should help to maintain demand for some time to come. The household segment's share of desktop sales also grew in 2010, and reached 50%, according to an estimate by MAIT. Desktop sales were estimated at around 6mn in 2010, although the share of total sales dipped to below 60%. Meanwhile, demand for storage hardware is growing in sectors such as oil and gas, banking and telecoms, with a growing amount of customer data to process.
In 2012, notebooks should advance rapidly, faster than desktops. Notebooks increased their share of total PC sales to around 42% by Q410; 2010 growth built on 2009, when sales of portable computers recorded double-digit y-o-y growth, while desktops recorded single-digit declines.
A focus on visual computing remains a key factor driving the popularity of notebooks in India, particularly at the mid and high-end market. Indian consumers are demanding features such as HDMI (high-definition multimedia interface) that allow them to watch movies and play 3D games on their laptops. Some vendors have launched notebooks with web cams for HD recording. Meanwhile, growing 3G mobile penetration will also be a driver, with more vendors now supplying notebooks that are mobilebroadband-ready, just requiring a 3G SIM card to be inserted.
Notebook sales grew around three times as fast as desktop sales in H210. In Q310 and Q410, notebook sales growth was around 50% as drivers included telecoms bundling schemes, new models and retailer promotions.
Desktop sales are still growing and have an important segment of the market owing to their significance in the business and education sectors. Over time, however, Indian businesses are shifting their focus towards more compact and mobile set-ups. One current trend is the popularity of 'all-in-one' computers that combine the traditional tower desktop, monitor and peripherals into one package.
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The education sector represents a significant potential segment of PC demand. It is estimated that of India's 1.3mn schools, only around 14% have access to ICT, defined as having at least one PC for each school. The government is determined to improve this ratio, and tends to purchase computers for 1,000 schools at a time, with a typical order for a public school being two or three computers. It will obviously take many years before bigger aspirations, such as one computer per student, can be achieved, but procurements by private schools are unsurprisingly more aggressive.
Business schools are also a significant segment of PC demand, with an estimated 2,000 or so such institutions, which place annual repeat orders for new intakes of students ranging from a few hundred to several thousand.
Tablets
Netbooks face competition from other factors, including smartphones from Palm, Research In Motion, Apple and other vendors, which are being offered by vendors as alternative connectivity solutions and often include a Wi-Fi option. However, much of the early hype around tablets in India has dissipated, following disappointing initial sales. In 2011, it was estimated that only around 200,000300,000 tablets were sold, with demand for tablets a factor mostly in India's largest cities.
In 2012, the tablet market should still expand, after it received a boost in 2011 from government procurements. Tablet notebooks emerged in 2010, spearheaded by Apple's iPad. Other vendors, such as Samsung with its Galaxy Tab, have followed Apple in releasing tablet devices, which have a form factor between the size of a smartphone and a netbook. By May 2011, the iPad2 had been released in India, with a delay of less than 50 days after the US launch. However, in October 2011, local company DataWind came up with a US$60 tablet (US$30 with subsidies) and future locally produced devices could be even less expensive.
Tablets are being designed to appeal to consumers who find a smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too big or heavy. The devices are currently used mainly for consumption of information rather than in a work environment. Many vendors have predicted that tablets will soon start to eclipse netbooks, because of the limited functionality of the latter.
Tablets could find a wide application in business and education sectors, as they have in other markets. Although initially seen as a consumer device, tablets have received increasing take-up in the Indian professional segments. A number of organisations in the financial services, healthcare, hospitality and other sectors have started to procure tablets for staff.
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However, with initial price points in excess of INR21,000, the devices were too expensive for many Indians. BMI estimated that prices in the range of INR15,000 would be required before tablets can truly become mass market devices. Last year saw a series of low-cost tablets, with under INR15,000 pricepoints, released by local Indian market vendors such as Best IT World.
Tablets are significantly more expensive than netbooks, with prices for devices from top-tier vendors such as Acer starting at around INR30,000-36,000 per unit, compared with around INR15,000 for a netbook. This could restrain growth in 2011, but tablets are seen as a growth area, and it is possible that sales could reach 1mn units in India in 2011. Growing fixed and particularly mobile broadband penetration in rural areas could act as a driver outside the main cities. Another area that vendors will watch is the e-reader market.
Low-Cost PCs
Despite the hype reported in previous quarters surrounding low-price PCs, there is evidence that the under INR10,000 PC market has failed to take off. After the initial rush by vendors to get involved in the initiatives to drive PC penetration more than a year ago not least because these were supported by the government it is unclear how many low-cost PCs have actually been sold. In the past year, many initiatives seemed to founder owing to vendor disinterest, with dealers making less than INR200 on average by selling an under INR10,000 PC a margin that evaporates at the time of the first service.
Table: Total Desktop Sales
April-Sept 2006 Total desktops sales CoreDuo Core2Duo Core2Quad Pentium Dualcore Pentium IV above 2 GHz Pentium IV 1.5- 2 GHz Pentium IV up to 1.5 GHz Pentium III 550 MHz and above Pentium III 450/ 500 and below Pentium II & lower Others: AMD/Cyrix etc. 2,530,700 3% 77% 3% 2% 1% 1% 13%
Oct 2006-Mar 2007 2,959,891 12% 69% 5% 4% 1% 0% 0% 9%
April-Sept 2007 2,599,832 8% 3% 1% 5% 62% 4% 2% 1% 2% 1% 8%
Source: MIT, India
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AV
India's AV devices market is projected at about US$13.4bn in 2012. The market opportunity is forecast to grow at a CAGR of 15% during 2012-2016 to a value of US$23.3bn in that year. The market will be driven by growing affordability, rising incomes and more flexible consumer financing. Video applications account for about 76% of the total market and these are expected to increase to 83% by 2016, driven particularly by digital TV sets and other products such as set-top boxes.
Table: AV Sales, 2009-2016
2009 AV and gaming sales (US$mn) Video applications (US$mn) Audio applications (US$mn) LCD TV sets ('000) Digital cameras ('000) 7,454 5,665 1,789 1,526 4,946
2010 8,939 6,847 2,092 2,442 6,051
2011e 10,559 8,236 2,323 3,633 7,356
2012f 13,447 10,623 2,824 5,737 9,458
2013f 16,556 13,410 3,146 8,971 12,087
2014f 20,115 16,696 3,420 12,695 14,941
2015f 22,128 18,366 3,762 14,452 16,372
2016f 23,336 19,369 3,967 15,897 17,148
In 2011, rupee depreciation constrained the market during the key end-of-year shopping season. With vendors also facing pressure from rising material costs, retailers were unable to offer traditional seasonal discounts to consumers. Some vendors such as Samsung, and LG were even increasing prices as they faced a margin squeeze.
AV Demand 2009-2016
Prices of AV products had already risen significantly compared with the first half of the year owing to the higher prices of imports. LG said it was increasing its prices by 5% and that it would most likely fail to achieve the sales target announced.
Strong, promotion-driven sales of flat-panel TV sets and related products during the India-hosted Cricket World Cup in 2011 provided a boost to the AV category. TV sets remain the core product for AV, with demand for colour TV sets estimated at about 23mn units in 2012. There is still room for organic TV set
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market growth driven by first-time buyers, as household TV penetration is estimated at less than 60%. TV set demand is projected to reach 34mn units by 2016, with sporting events helping to drive spending.
TV is so central to cultural life it has become a part of social policy, with free distribution of sets to lowincome families in some states. In 2007-2008, 2.5mn 14-inch colour sets were distributed by the Tamil Nadu government. Meanwhile, falling prices will help to stimulate upgrades from CRT sets to flat panel. Entry-level LCD sets are now available for as low as INR13,000 for a 19-inch screen size. Demand ranges from basic black and white models, which still sell in large numbers in India, to plasma display units, which retail for thousands of US dollars. India's flat-screen TV set market is projected at about 7.5mn units in 2012, equivalent to around 32% of the total addressable TV set market. Flat-panel TV set demand is projected to grow to 34.4mn units by 2016. Most major multinational TV set vendors in the India market had exited the standard CRT TV segment by the middle of the 1990s, although CRT sets still account for three-quarters of sales.
The addressable market for flat-panel display TV sets should continue to expand as traditional TV makers such as Japanese electronics leader Panasonic cut prices of flat-screen TV sets to reach consumers in tier2 and tier-3 cities. In 2011, another Japanese vendor, Toshiba, estimated that by 2014 some 23mn Indian consumers would be using LCD TV sets, making India the world's fastest-growing market.
LCD sets dominate the Indian flat-panel TV market, accounting for around 85% of sales in H111.Unit growth in FY2011 was projected by BMI at 49%. Meanwhile, demand for Plasma TV sets has declined y-o-y to less than 5% of the total TV set market as vendors concentrate on LCD as well as newer technologies such as LED and 3D. The narrowing price gap between LCD and Plasma TV sets has also driven the decline in Plasma TV set sales but vendors believe that Plasma will remain a niche in the market for larger sized TV sets.
Sales of flat-panel TV sets were expected to report growth of above 50% in 2011, following similar double-digit growth in 2010. The fastest growth was expected in H111, owing to a boost from the cricket season and ICC Cricket World Cup, which was won by India. Many vendors expected their sales of flatpanel TV sets to double during the cricket season compared to the same period of 2010, and for the cricket season to account for around 30% of annual TV sales. As a result, vendors and retailers were positioning themselves to take advantage with new models, special promotions and zero credit offers. In contrast to many other markets, there is still substantial demand in India for smaller sets, with LED and LCD TV sets being available in screen sizes as small as 14 inches. In 2011, however, the fastest-selling models were those in the 22-32 inch range, which resulted in the most conversion of CRT to flat-panel purchases.
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LCD TV sets dominate sales of digital TV sets due to their more affordable prices, although the differential with plasma screen TVs has decreased. Among LCD TV sets, the most popular screen size is 32 inches, which still accounted for around 40% of the market in 2010.
Analogue has close to 80% of the market, with estimated annual sales of at least 16mn sets, and the most popular analogue screen size being 21 inches. There is a sharp technology gap between urban and rural India, with 85% of Indian urban TV households having access to cable TV, compared with 70% in rural India. The Diwali festival period generally accounts for around 35% of most companies' revenue. The 2010 festive sales season beginning with Onam in Kerala and Dussera in southern and eastern states, and running until Diwali was reported to have delivered robust sales of consumer electronics goods amid promotions from vendors and retailers. In the run-up to Diwali 2010, vendors reported high levels of consumer confidence and more queries on festive promotions compared with the previous year. Vendors and retailers expected sales growth of consumer electronics products to be between 35% and 50% during Diwali, higher than in 2009. Hot-selling products were expected to include flat-panel TV sets, Blu-ray DVD recorders, digital cameras and digital photo frames. In 2009 vendor and retailer reports indicated sales of electronics and home appliances had grown 20-40% over the festive season due to improved consumer confidence, stimulus spending, and seasonal bonuses. Besides festivals, vendors typically run promotions to coincide with major sporting events such as the ICC Cricket World Cup. In recent times, events such as India Premier League (IPL) cricket and the 2010 Commonwealth Games in Delhi have provided prime opportunities for vendors to increase sales. Some vendors expected the IPL to account for as much as 20% of their sales in 2010. In 2009, the April elections were reported to have boosted sales of TV sets. There has also been growing demand for larger screen sizes, with retailers reporting interest in 40-inch screens and above during the ICC Cricket World Cup in 2011.
As sales of digital TV sets grow, a nascent market is emerging for set-top boxes and this category is expected to record strong growth in BMI's five-year forecast period. The government's decision to impose a 5% increase in customs duty on set-top boxes to help local manufacturers could add INR100150 to the price on an imported box. Set-top boxes generally retail for between INR1,000-1,500.
HD TV sets were introduced to India in 2007 and contributed about 30% of flat-panel TV set sales in 2010, up from less than 20% in 2009. According to LG India, the HD TV set segment registered volume growth of about 130% in the first two months of 2010, compared with the same period of 2009. Lower prices have been an important driver of the HD TV growth trend, with the price differential between HDready TVs and full HD TV sets down to about 7-10% by early 2010. There are four channels broadcast in HD format, but DTH service provider Sun Direct will transmit some IPL cricket matches in HD format on its channel SET Max.
Continued product innovation at the top-end of the market will help vendors maintain prices despite price pressures. In H111, LED TV sets were estimated to comprise around 13% of total flat-panel TV set sales
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and by H211 this had grown to 15-20%, according to vendor estimates. There was strong demand for LED TV sets with LED backlighting in 2010, a growth driver after accounting for about 8% of flat-panel TV set sales in 2009. Indian TV leader Onida said LED sets were on course to account for about 10% of its sales in 2010, while Samsung expected its LED sales in India to increase fivefold in 2010.The market for LED TV sets steadily increased in 2011, and in H111 comprised around 15% of flat-panel sales. Price-cutting was an important driver of LED sales growth in 2010, with vendors such as LG and Sony cutting the price of their entry-level LED TV sets by around 25%. Internet-enabled TVs are also increasingly popular and this trend will drive high-end sales for the next two to three years.
Vendors also hope that 3D-TV will boost revenue in the premium TV set category, although the market is relatively small, estimated at around 200,000 units in 2011. In 2010, leading vendors such as Samsung, LG, Sony and Panasonic hoped to leverage the interest generated by 3D films such as Avatar and by sporting events such as the Indian Premier League, helping to persuade Indian consumers to buy 3D-TV sets. Samsung said it expected to sell 300,000 3D TV sets in India in the first year, but cost remains an inhibiting factor. There are issues surrounding 3D glasses, bandwidth and recording formats that must be resolved before 3D-TV can really boom in India. However, in 2011, vendors continued to launch new 3D models in India, and Sony India said it expected 3D products to contribute 30% of its revenue by 2012.
BMI has revised its definition of the addressable digital camera market in India. Digital camera sales were estimated at more than 186,000 units a month in 2010 and the market is expected to continue to grow 240% in volume terms by 2016. 2010 saw strong double-digit growth in digital camera sales, with record quarterly sales figures in the second quarter. The analogue camera market is declining rapidly, with household penetration of less than 10%. This means a small replacement market. Moreover, the popularity of digital cameras will continue to drive demand for related products such as photo printers and digital photo frames.
Digital cameras are still expensive, but middle-income consumers are more ready to upgrade their cameras to digital or to buy a better digital camera when new features become available, especially as prices decline. Digital cameras retailing at price-points of below US$200 still account for around 80% of the market. However, the growing ubiquity of camera phones has resulted in digital camera vendors focusing more on higher megapixel models. The fastest-growing segment in 2010 was demand for highend DSLR cameras, which was on course to achieve triple-digit growth of over 500%.
Meanwhile, audio applications such as MP3 players, minidisk, CD players and radios were about 24% of demand in 2008 and this is expected to fall as a percentage of revenue owing to faster video growth. Revenue from audio devices is estimated at about US$2.8bn in 2012 and is expected to reach almost US$4.0bn within the forecast period. Audio separates such as radios, MP3 players, speakers and CD players are the biggest audio category. Radios remain the dominant electronic source of information and entertainment in rural India, with annual unit sales at still more than 5mn. Meanwhile, the popularity of
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portable devices such as MP3 players and laptops has undermined demand for home AV devices, particularly in urban areas. The popularity of mobile phones with MP3 players may mean slower growth for these high-end standalone audio devices.
The gaming industry is relatively small at around US$350mn. Intense competition limits earnings from the sector, but steady double-digit growth is expected. The main driver will be increases in disposable income among India's burgeoning consumer classes. By 2016, the sector could be worth around US$2bn.The fastest-growing audio category in recent years has been home cinema owing to growing affordability and increasing penetration of digital TV sets. This category will continue to grow as middleclass consumers seek to upgrade their audiovisual experience.
Mobile Handsets
Indian market handset sales are projected by BMI at 194mn units in 2012. This is expected to grow to 316mn units in 2016. The underlying driver is the staggering growth rate of mobile subscribers, with mobile penetration expected to expand from 78.8% in 2012 to 85.9% by 2016. In 2012, the market continued to grow despite the global economic downturn, with much of the growth coming from rural subscribers and the business segment. The handset replacement rate is expected to pass 25%.
Table: Mobile Communications: Demand, 2009-2016
2009 Domestic Handset Sales (US$bn) Domestic Handset Sales (mn) - 3G Handset Sales (mn) Mobile comms subscribers (mn) Mobile penetration (%) 6,425.1 113.4 9.1 525.1 43.5%
2010 7,710.2 141.7 21.3 752.2 61.4%
2011e 8,734.1 167.2 40.1 893.8 72.0%
2012f 9,699.9 194.0 62.4 992.2 78.8%
2013f 10,836.7 221.2 92.5 1,051.7 82.5%
2014f 12,606.0 252.1 137.0 1,093.8 84.7%
2015f 14,401.1 282.4 187.2 1,156.4 85.3%
2016f 16,445.5 316.3 255.8 1,138.0 85.9%
e/f = estimate/forecast. Source: BMI research
In H211, handset sales gathered pace with low double-digit growth in Q311, following a slowdown in H111. Handset sales in H111 slowed to a single-digit growth rate which fell below previous vendor expectations. Retailers reported that the slower growth was due in part to an inventory build-up, as well as to portfolio adjustments by some vendors. In contrast, in Q311, inventory replenishment provided a boost to sales as retailers built up stock ahead of the anticipated end-of-year peak season.
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Compared with the similarly large market of China, where a huge local manufacturing sector dominates supply of the local market, the Indian market is still largely served by imports, although the situation is changing. According to data from the Telecom Equipment & Services Export Promotion Council, around Of handsets sold in India each year, 80% are imported, although some estimates have put the share closer to 75%. The dominance of operators in the handset retail sector has fallen to below 50% over the past 10 years, with the rise of specialist outlets and chain stores. As India's relatively underpenetrated rural areas continued to emerge as the main driver of market expansion. However, Indian vendors' share is expected to grow.
Indian vendors had increasing success by producing handsets tailored to the requirements of local consumers, particularly those outside cities. In a country where more than 400mn people still do not have electricity, phones with battery lives of up to 30 days provided by industry leader Micromax proved a breakthrough for many. Phones with flashlights are also popular in rural areas. Meanwhile, in 2010 there was an explosion in the popularity of Multi-SIM phones, which allow price-sensitive mobile users to switch between networks to obtain the best available mobile service tariffs. Such phones now account for nearly 40% of sales, up from 1% in H109.
Replacement sales now account for around half of annual mobile handset sales, despite the still expanding subscriber base. The market was boosted in 2009 by the arrival of a number of GSM operators, particularly Uninor and STel, and the expanded reach of existing players such as Bharti Airtel. Meanwhile, code division multiple access (CDMA) operators such as Tata Teleservices continued upgrading wireless local loop networks with full mobility capabilities. The entry of new operators has created intense competition. As many as 14 operators may be active in any one area of the country. Mobile phone population penetration in India has been estimated at about 62%, indicating continued growth potential. It is clear market maturity has yet to be reached in rural regions.
Tier-2 and 3 cities represent a significant growth target for handset vendors in the Indian market. Meanwhile, two-thirds of India's population reside in rural parts of the country and vendors are expanding and strengthening their logistics networks and retail partnerships. The telecoms network still only connects about 4,500 towns and cities, and 65,000 villages in the country. In order to expand network coverage, India's mobile operators are extending their infrastructure to rural parts of the country. This is expected to raise penetration rates significantly over the next few years.
Such are the underlying dynamics of subscriber growth therefore that handset vendors are likely to increase their focus on semi-urban rural customers. Rural subscribers are typically price-sensitive and voice-centric and this means entry-level handsets will continue to dominate over feature phones. More than 80% of phones sold on the India market cost less than US$100. Aggressive tactics by local manufacturers mean that lower-priced phones are increasingly feature-rich, and often come with cameras, dual-SIM, extended battery life and other features.
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The focus on the rural market has placed a premium on 'made-for-India' features such as 30-day battery backup, choice of languages, solar charge capability, dust-proof lamination, and high-decibel speakers. As in other emerging markets, multi-SIM handsets have also proved popular as they allow subscribers to take advantage of service provider offers. Sub-entry level phones are available from local producers such as Micromax and Karbonnstart, with prices as low as INR1,500. However, many of these handsets are sourced from low-cost manufactures in places such as China and Taiwan. Replacement cycles will also remain longer than in many other countries and are below 10% in rural areas.
However, because of the replacement factor, BMI expects phones in the INR2,000-6,000 bracket to remain the fastest-growing category and to account for more than a third of sales. Lower prices are also a key purchase decision factor in the perceived higher-end handset segment, where local and multinational vendors are competing to provide lower-cost smartphones that are able to compete with smartphones such as Research In Motion's BlackBerry and Apple's iPhone. Indian consumers are increasingly demanding, and vendors are providing, features such as email at affordable prices. In 2010, Nokia launched an INR6,000 handset with QWERTY keyboard and access to social networking sites in response to competition across this segment from local brands such as Micromax.
Meanwhile, the huge market for low-cost handsets has opened the door for local brands that are collectively taking a progressively larger share at the expense of established ones. Copycat Chinese manufactured handsets also present to multinational smartphone brands. The increasing availability of cheaper, but morefeatured phones from smaller vendors has seen the share of the likes of Nokia and Samsung fall significantly compared with a few years ago. Among features that have had success have been Alpha keyboards, where the keys are arranged in alphabetical
18 16 14 12 10 8 6 4 2 0
Mobile Handset Demand 2009-2016

25% 20% 15% 10% 5% 0% 2011e 2009 2010 2012f 2013f 2014f 2015f 2016f
Mobile Handset Demand (US$bn) % Change

order, which are popular with those who are not comfortable with QWERTY keyboards.
Another key vendor target will be pockets of affluent consumers in tier-B and tier-C cities. High-end models and smartphones account for less than 10% of overall sales, but are an important driver of revenue for multinational vendors. As mobile data services ranging from train ticket reservations to mobile banking and e-commerce become increasingly popular, demand for high-end models will expand rapidly beyond these urban markets. Again, falling prices will be a key driver, with local brands such as Micromax helping to make smartphones accessible to a wider demographic. Other vendors are launching
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3G and Android phones at prices of below INR8,000. One growth segment will be touchscreen phones, with multiple product launches from major brands such as LG, Apple, Nokia and Samsung. Sales of touchscreen phones were reportedly on track to exceed 2mn in 2009, up from about 800,000 units in 2008.
The smartphone segment grew rapidly in 2011, fuelled by lower average prices. In Q311, smartphone growth reached double digits, and sales were estimated to be on course for 6.7units. The market remains relatively small, with annual sales estimated at about 13.5mn units in 2012, equivalent to only 7% of handset sales. However, a high-growth CAGR is expected.
The entry of local brands such as Micromax into the smartphone segment has been a boost for a wider tier of lower-income Indian consumer, especially given the weak rupee. Several local brands now offer smartphones at sub-INR5,000 price-points. However, in 2011 higher priced smartphones, with average val.ues of INR18,000 and above ,were also reported to be selling well, with nearly triple-digit annualised growth. By 2016, BMI forecasts that the smartphone market will expand to 66mn units. Smartphones, and smartphone/tablet hybrids, based on the Android operating system are expected to be a growth area in 2012 and drive the market. The promotion of Android-based phones is expected to raise consumer awareness about the effect of software on a phone, as opposed to simply the hardware. Meanwhile, Microsoft's Windows Phone, although a single-digit segment of the local phone operating market currently, is also expected to report a growing share.
These developments mean that Nokia's Symbian operating system, which currently comprises around 60% of the market, is expected to see a falling share. Market research firm IDC estimated that Android phones already had a 9% share of the Indian market by Q310. Meanwhile, Windows Mobile has a less than 1% share of Indian handset sales, but this is likely to grow.
Another growth factor is 3G handset sales, which are now projected to pass 255mn units in 2016, from about 40mn in 2011. 3G models comprise around 25% of the Indian addressable handset market in 2011. BMI believes 3G is set to make a greater appearance in 2012, with a number of operators announcing contracts with vendors to deploy 3G networks in an attempt to counter some of the effects that lowspending prepaid subscribers are having on ARPU.
The price of 3G handsets fell significantly in 2011, enhancing affordability. Nokia's entry-level 3G handsets now retail for around INR4,000, 9% less than the price in 2010. Meanwhile, the price of entrylevel 3G handsets from South Korean vendors Samsung and LG fell to around 20-30%. Around twothirds of Indians that start to use 3G services will upgrade their handsets, making it a major driver of replacement handset sales. Vodafone Essar and Reliance announced they would be deploying 3G services in some parts of the country by end-2010. The 3G licence issue process was finally completed in May 2010.
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Our 3G forecast is based on data supplied by the only two 3G licensed operators, state-owned BSNL and MTNL. According to BSNL, the operator had 700,000 subscribers by January 2010 and by February had added a further 156,000. MTNL, by comparison, had significantly fewer 3G subscribers considering that, unlike BSNL, it only offers services in Delhi and Mumbai. The operator reported having 348,000 3G subscribers at the end of March 2010.
Meanwhile, GSM dominates the 2G handset market, accounting for about 70% of sales, compared with 30% for CDMA. The trend away from CDMA will continue as Reliance Communications, previously the major CDMA carrier in India, continues its strategic shift to a GSM network, after making a decision to cap its CDMA subscriber base. Meanwhile, in H109 Tata DoCoMo launched GSM services in the state of Tamil Nadu.
BMI believes the rate of mobile customer growth will slow only gradually over the next five years. We forecast the 1bn mobile subscriber threshold will be reached in 2013. By the end of 2016, we forecast India's mobile penetration rate will rise to 85%.
The expansion of India's mobile market over the next few years will be driven by several factors, not least ongoing network investments by the country's numerous mobile operators. Consumer demand is expected to remain strong, with low tariffs and low penetration rates (especially in rural parts of India) driving customer growth. India's vast population provides a substantial market for operators to continue attracting large numbers of customers throughout our forecast period.
Another key factor driving customer growth, as well as the development of the market, is the intense competition that has emerged between India's largest mobile operators: Bharti Airtel, Reliance, Vodafone Essar and BSNL. However, these big four operators are expected to face increasing pressure from operators such as Tata Teleservices and Idea Cellular. Both companies have, in recent quarters, rapidly expanded their market share. Further competition will come from a number of entrants which are backed by major international operators such as Bahrain's Batelco, Norway's Telenor and Russia's Sistema.
Meanwhile, it is early days for 3G in India. BMI estimates there were about 15.9mn 3G subscribers in India at end-2011, representing a more than fivefold increase in the year from 2.7mn in 2010. However, true growth in the 3G market is not expected to occur until the remaining three 3G licences have been awarded.
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India's consumer electronics devices market, defined as the addressable market for computing devices, mobile handsets and AV products, is projected at about US$32.9bn in 2012. This is expected to increase to US$57.1bn by 2016, driven by rising incomes and growing affordability. Only nine out of 1,000 people in India own a computer, one-fifth of the level in China, while Indian handset population penetration is about 57%. Another driver is that 45% of India's population is under 25.
Consumer Electronics Demand 2009-2016
Spending on consumer electronics devices is projected to grow at an overall CAGR of 15% through to 2016, with the key segments including low-cost mobile handsets, colour TVs, set-top boxes and notebook computers. Vendors reported strong sales during the ICC Cricket World Cup 2011 season, and hoped for similar gains to be driven by the London Olympics of 2012. The booming economy and strong local stock market performance helped to account for the improved consumer sentiment, with flat-panel TV sets, Blu-ray players and digital cameras also among hot-selling items. However, PC market growth slowed in Q112, against a background of rising inflation and a weak rupee, which led many consumers to defer their purchase decisions.
Much of the growth during BMI's five-year forecast period will be driven by growing demand from India's relatively underpenetrated rural areas. Many vendors responded to growing competition across all segments from local brands by repositioning themselves to compete for lower-income demographics. However, there will also be opportunities to sell premium products. In 2011, demand for LED TV sets grew strongly and smartphones was another growth area. Meanwhile, in 2012 vendors will focus on plans to attract Indian consumers to buy products such as LED and smart and 3D TV sets.
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Table: Consumer Electronics Overview, 2009-2016
2009 Consumer Electronics Devices Total Demand (US$mn) Computers (US$mn) Video, Audio & Gaming (US$mn) Communications (US$mn) 20,559 6,680 7,454 6,425
2010 24,375 7,726 8,939 7,710
2011e 28,088 8,794 10,559 8,734
2012f 32,861 9,714 13,447 9,700
2013f 38,841 11,448 16,556 10,837
2014f 45,639 12,918 20,115 12,606
2015f 51,357 14,828 22,128 14,401
2016f 57,134 17,352 23,336 16,445
e/f = estimate/forecast. Source: BMI research;
Mobile handsets accounted for 31% of consumer electronics spending in 2011. The market will continue to grow robustly owing to a projected increase in mobile subscriber penetration from an estimated 78.1% in 2012 to 85.1% by 2016 as well as falling handset prices, as the market momentum shift to semi-urban and rural areas. The main product segment will be low-cost phones, but Indian consumers are increasingly demanding phones with features such as email at affordable prices. One development with significant implications for India's mobile sector is the issuance of 3G mobile licences, a process that was completed in 2010.Smartphone sales are estimated at around 13.6mn units in 2012 and particularly given the weak rupee, will be boosted by the availability of affordable models from local producers, as well as lower-cost Android-based models from multinationals.
Computers also accounted for about 31% of spending in 2011. Spending on computer hardware will grow at a CAGR of 15% through to 2016. Sales remained sluggish in Q112, following a sharp dip in Q412, but BMI expects demand to pick up in the second half of the year. The main drivers will be market expansion into rural areas as well as sales of notebooks and entry-level servers to SMEs.
The AV segment will account for about 42% of consumer electronics revenue over the forecast period and driven by video, which will account for 84% of revenue in this segment by 2016. TV will remain the core product in this category, with flat-panel sets now accounting for more than 30% of total TV set sales. LED TV sets were an emerging growth driver in the LCD segment owing to falling prices.
Tariff Adjustments Faced with a slump in global and domestic sales, 2009 federal budget reduced basic customs duty on LCD panels, which are imported by consumer electronics manufacturers from South Korea, China or Japan. The move was welcomed by local manufacturers, as well as leading multinational vendors such as
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Samsung and LG. However, the government also imposed a 5% customs tax hike on imports of set-top boxes, in an attempt to help domestic set-top boxes such as Videocon. The market for set-top boxes is growing strongly and Videocon aims to address this demand from its Aurangabad facility. Mobile Handsets Tariffs And Regulations In the mobile handsets segment, the finance ministry decided to waive the 4% duty on mobile handsets components and accessories for another year due to the economic slowdown. The exemption had been scheduled to end in 2011. The government hoped the extension would help device manufacturers keep their products at affordable price levels. The federal government also boosted vendors with an announcement it would ban the import of all handsets without the International Mobile Equipment Identity (IMEI) number. This should help combat piracy, as a majority of handsets sold in the grey market do not come with IMEI numbers. However, the Indian Cellular Association and other industry bodies were lobbying against a 12.5% VAT imposed by the state of Maharashtra on sales of mobile handsets. Maharashtra is the only state to impose such a high VAT on mobile phones, with the tax being below 4% in other states. The Indian Cellular Association projected the result could be to reduce handset sales in the state from more than 12mn annually to as low as 0.8mn units. Hardware Manufacturing The focus on developing a domestic computer hardware industry really started with the 2006 federal budget, when the government announced its view that the time is right to make India a preferred destination for the manufacture of semiconductors and other high-tech IT products. Budget measures favourable to the hardware sector included the reimposition of a 1% local levy of fully built computers, which will make imported computers more expensive while allowing local manufacturers to get tax credits. The 1% level was removed in 2007, but then re-instated. According to The Manufacturing Association of IT (MAIT), the measure will make locally made hardware more competitive and also encourage manufacturing of other high-end products.
The government also claimed success with an initiative launched in 2007 to promote chip manufacturing in India. The policy proposed a range of incentives such as tax advantages and subsidies for semiconductor manufacturers. According to the government, after one year India's semiconductor industry had already attracted about US$7bn in committed investments. The government also proposed a new programme of IT investment regions (ITINR) to help the hardware sector.
In 2008, the Indian cabinet approved an IT Amendment Bill, which contained a Special Incentive Package Scheme (SIPS) to encourage investments in semiconductor fabs and other technologies. According to the government, 16 proposals had been received from potential investors for the setting up
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of manufacturing facilities, with the total proposed investment in the region of INR155,000 crore. The bill still had to be approved by parliament.
Meanwhile, the IT and electronics industry have continued to press for various other state and federal level reforms to encourage investment in the sector and encourage domestic manufacturing. One reform being advocated strongly is aimed at reducing the energy costs of manufacturing firms by exempting units, running on continuous power, from electricity tax. As most manufacturing units are energy intensive, it is argued that energy rates must be competitive with other low-cost economies. Another approach to the same issue might be to make captive power plants that are jointly funded.
Connected India The government's efforts to get India connected to the modern world will provide the framework for electronics market development over the next few years. The ultimate goal of government policy is for 1bn computers connected to the internet equivalent to the total number of PCs in the world today.
The government is implementing two major ICT initiatives. Connected India is a low-cost connectivity initiative intended to drive connections towards the ultimate 1bn target. The government joined forces with several IT companies and industry organisations including Tata and Reliance as well as the WiMAX Forum. Fixed wireless technologies such as WiMAX are regarded as a promising connectivity solution for India. Intel signed a memorandum of understanding with leading telecoms company BSNL jointly to develop broadband and WiMAX.
The other major federal initiative is the National Knowledge Network, which aims to connect all institutions of higher learning and research in the country to a high-speed digital network. The target is to connect 10,000 schools across India in the next three years. The education minister called for a big increase from the current computer penetration level of just 11 PCs per 1,000 people and the programme also involves training teachers how to use IT. The programme started in 2010, with a pilot of about 100 schools.
Government Authority
Government authority Ministry of Communications and Information Technology (MCIT)
Minister
A Raja
The government's 10-point agenda for IT acted as a catalyst for a new phase of IT market development. Different vendors competed to bring out PCs in the sub-INR10,000 range, open-source computing was
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boosted, broadband made an appearance and state governments have been competing at the e-governance level.
The responsibilities of the MCIT with regard to the IT sector are the following:
Policy matters relating to IT, electronics and internet (all matters other than licensing of internet service providers);
Promotion of internet, IT and IT-enabled services;
Assistance to other departments in the promotion of e-governance, e-commerce, e-medicine and e-infrastructure;
Promotion of IT education and IT-based education;
Matters relating to cyber laws, administration of the Information Technology Act 2000 (21 of 2000) and other IT related laws;
Matters relating to promotion and manufacturing of semiconductor devices in the country including all matters relating to Semiconductor Complex Limited (SCL) Mohali; The Semiconductor Integrated Circuits Layout Design Act, 2000 (37 of 2000);
Interaction in IT related matters with international agencies and bodies e.g. Internet for Business Limited (IFB), Institute for Education in Information Society (IBI) and International Code Council on line (ICC);
Initiative on bridging the digital divide: matters relating to Media Lab Asia;
Promotion of standardisation, testing and quality in IT and standardisation of procedure for IT application and tasks;
Electronics Export and Computer Software Promotion Council (ESC);
National Informatics Centre (NIC); and
Initiatives for development of hardware/software industry including knowledge-based enterprises, measures for promoting IT exports and competitiveness of the industry.
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Automotives
India Autos Industry SWOT
Strengths
The world's major car manufacturers continue to invest in India and now the supplier segment is attracting private equity investment. Foreign JVs ensure capacity building for local partners, as overseas firms bring expertise. Local demand is still skewed heavily towards low-cost vehicles, due to low income levels. The cost of production is generally higher than some other Asian states, such as China, although these costs can vary from state-to-state, according to the level of infrastructural development and electricity costs. The premium segment is benefiting from higher levels of personal wealth, attracting investment from brands such as Audi, while Tata has expanded the Jaguar Land Rover division into India. The commercial vehicle segment stands to benefit from a number of new JVs announced recently, including Ashok Leyland and Nissan, and Isuzu and Swaraj Mazda, while the bus segment is also attracting investment. High tariffs on imports stand to restrict the potential growth of the hybrid vehicle segment, as the cost of the technology is already expensive before taxes. Fees for local testing of new models, such as those being encountered by BMW as it attempts to launch the Mini brand, could deter some manufacturers.
Weaknesses
Opportunities
Threats
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Industry Forecast
Production And Sales
Table: Autos Sales And Production
FY2009/ 10 Total production (CBUs, mn) Total sales (CBUs, mn) Motorcycle production (CBUs, mn) Motorcycle sales (CBUs, mn) 2.918 2.482 10.513 9.371
FY2010/ 11 3.743 3.186 13.349 11.767
FY2011/ 12 4.035 3.428 15.454 13.436
FY2012/ 13f 4.439 3.770 16.953 14.632
FY2013/ 14f 4.940 4.149 17.529 15.890
FY2014/ 15f 5.471 4.547 20.123 17.161
FY2015/ 16f 6.029 4.975 21.833 18.534
FY2016/ 17f 6.563 5.402 23.623 19.924
f = BMI forecast; Sources: Society of Indian Automobile Manufacturers, Murad Baig Associates, Organisation Internationale des Constructeurs d'Automobiles
BMI has previously pointed out that one of the key factors in the market's growth in the previous financial year would serve as a threat in FY2011/12, ending March 2012, as rising interest rates would threaten the credit-fuelled boom in sales. This played out as total vehicle sales registered growth of 7.5%.
A combination of several rate hikes throughout the year, which increased the cost of auto loans, coupled with soaring fuel prices after subsidies on gasoline were removed, contributed to muted growth, particularly in the passenger vehicle segment. Sales for the latter months of the financial year showed some resilience and suggest the market is returning to health, while sales in April 2012, the first month of the new year, showed all four-wheeled vehicle segment achieve positive growth. We believe that as changes in buying habits, such as switching to diesel, take hold and the cost of credit is reduced in line with our assumptions, sales momentum will build, albeit at a steady rate relative to earlier years, but will be sustainable for the remainder of the forecast period.
Our view on the outperformance of India's commercial vehicle segment relative to the rest of the fourwheeled market also played out, as sales ended the year in line with BMI's forecast for growth of 18.0% compared with 2.0% for passenger cars. Much of this has been down to the cheaper cost of diesel, as subsidies, originally aimed at supporting business fleets, were kept in place. With the Union Budget for 2012/13 holding these subsidies in place, the conditions are supportive for further growth. We believe spending on infrastructure projects will also generate demand for heavier vehicles throughout the forecast period, enabling the segment to sustain its growth trajectory.
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Production took a hit during the year owing to strikes by staff at the country's largest carmaker, Maruti Suzuki. Nevertheless, the industry finished the year ending March 2012 with output, including two- and three-wheelers, up 13.8% y-o-y. The added certainty created by the Union Budget, which has enabled manufacturers to go ahead with investment plans, particularly for diesel-powered vehicles, and this will contribute to steady production growth over the remainder of our forecast period, taking total output of four-wheeled vehicles over 6.5mn units by 2016/17. Some potential production for export will be lost over the period, however, as domestic players establish more overseas production bases.
Trade
Table: Autos Trade
FY2009/ 10 Total vehicle exports (CBUs) Total vehicle imports (CBUs) 446,146 3,828
FY2010/ 11 453,479 6,890
FY2011/ 12 507,318 8,958
FY2012/ 13f 547,903 9,853
FY2013/ 14f 595,571 11,036
FY2014/ 15f 645,600 12,360
FY2015/ 16f 699,829 13,781
FY2016/ 17f 783,809 15,159
e/f = BMI estimate/forecast. Sources: Society of Indian Automobile Manufacturers, Murad Baig Associates, Organisation Internationale des Constructeurs d'Automobiles
India will emerge as an international manufacturing hub, said Prime Minister Manmohan Singh at the launch of the government's Automotive Mission Plan (AMP) 2006-2016. The AMP stresses the importance of improving local brands' competitiveness, as well as investment in energy-efficient and ecofriendly technologies. It envisages a total investment of US$40bn over the 10-year period. By 2016, the government is targeting an annual turnover of US$145bn, representing 10% of GDP and employing a total of 25mn staff. This represents a more-than threefold increase over 2006 levels.
The downside risk to exports in the longer term, however, comes from the expansion plans of leading domestic brands, which are setting up overseas production facilities in line with our core view that brands from emerging markets will expand globally over the coming years.
BMI's long held view that suppliers will benefit from the increased use of local content in emerging markets has been compounded in India, where the weakening of the rupee has made the reduction of import costs a necessity. While major suppliers have already moved to cash in on India's growing role as a global production hub, we expect investment in the supply segment to gather pace as producers look for local alternatives.
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Local sourcing in India is not a new strategy. Carmakers entering the highly competitive small car segment have used localisation as a means of gaining an edge as it enables them to lower the end price to the consumer. For companies using India as global hub for certain models, it reduces costs on a much wider scale. However, it is now being seen as essential as rising import costs chip away at margins.
According to local reports, motorcycle manufacturer Bajaj Auto, which uses 97% local content, reported an operating margin of 19.4% in the year ending March 2012. In contrast, its rival Hero Motocorp imported 15% of its content and recorded a profit margin of 7.3%. This may change over the coming years, as Hero has now split from Japan's Honda Motor, reducing the need for imported parts, although a technology and support agreement between the two is still in place until 2014. Source: Bloomberg
Attractive Margins Hero Motocorp And Bajaj Auto On National India Index
The benefits to suppliers are clear in data from the country's Automotive Component Manufacturers Association (ACMA). In the financial year ended March 2011 (last available data), the auto components segment generated turnover of US$39.9bn, up 34% year-on-year (y-o-y). There is also evidence of the segment's development as a global hub, as turnover from component exports grew 54%, to US$5.2bn in the same year. By 2012, ACMA expects the segment to reach annual revenue of US$113bn.
With this in mind, both Denso and Robert Bosch, which are vying for the leadership of the global component segment market, have made India a priority in their Asian plans. Denso, which already has four plants in the country, allocated INR3bn (US$58.9mn) to a new facility in Gurgaon in January, as part of its goal to more than double local sales by 2015. Robert Bosch has announced plans to invest US$400mn in capacity expansion, diversification and new technology development for Bosch India in 2012-2013 and will further increase its investment to US$550mn in the coming three years.
German supplier Schaeffler has also announced investment plans for expansion in India, which the president of its local unit, Anil Shah, calls a 'high-priority market'. Schaeffler's growth plans include
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expanding its workforce by around 1,200 people over the next three to four years, with a focus on product design and research and development. BMI believes this suggests a new level of value-added business in the country, which would be suited to international carmakers.
One downside risk would be a sustained appreciation of the rupee, making imports cheaper again. However, while BMI's Asia team remains committed to its medium-term target of INR48.50/US$ (from INR55.75 on May 31), deficits in the fiscal and current accounts will prevent a major move higher. We also believe there are longer term gains for suppliers in India, as they can also take advantage of demand for replacement parts, even in times of a market slowdown.
Passenger Cars
Production And Sales
Table: Autos - Passenger Cars
FY2009/ 10 Car production (mn units) Car sales (mn units) Car exports (units) 2.351 1.950 446,146
FY2010/ 11 2.983 2.501 444,326
FY2011/ 12 3.124 2.618 507,318
FY2012/ 13f 3.455 2.856 547,903
FY2013/ 14f 3.817 3.119 595,571
FY2014/ 15f 4.199 3.394 645,600
FY2015/ 16f 4.602 3.692 699,829
FY2016/ 17f 5.000 4.000 783,809
f = BMI forecast. Sources: Society of Indian Automobile Manufacturers, Murad Baig Associates, Organisation Internationale des Constructeurs d'Automobiles
Car sales were hit by the rising cost of ownership over the financial year ending March 2012, as interest rates on credit, fuel prices and vehicle prices all increased. The passenger vehicle sector as a whole, including utility vehicles, ended the year up 4.6%, with passenger car sales up 2%, in line with our revised forecast for much lower growth.
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After the first quarter of the current financial year ending March 2013, passenger vehicle sales in India are largely in line with BMI's full-year forecast for 9.1% growth, finishing the April to June period up 9.7%. While car sales growth is somewhat lower at 5.2% for the quarter, sales are being driven by a surge toward MUVs, which outsold their sedan counterparts in every price bracket for the first time ever in the three-month period.
Stable Rates Will Aid Growth

Indian Passenger Vehicle Sales Growth (% chg y-o-y)
The MUV charge has been led by domestic manufacturer Mahindra and Mahindra with the launch of its XUV500 in late 2011. With sales of 9,000 units in Q1, it sold 50% more than all other cars in the Executive segment, spanning INR1.1mn1.5mn (US$20,000-27,300), according to press reports. The higher end premium segment, with a price tag of INR2mn-2.5mn (US$36,300-45,500), is witnessing the same trend, with the combined SUVs, including the Toyota Fortuner and Ford Endeavour, outselling the sedans of the segment, such as the Toyota Camry, by a combined 5,580 units to 1,244 units.
f = BMI forecast; Notes: 1Fiscal Year, Prime Lending Rate 1 "SIAM/BMI calculation" 2 "Reserve Bank of India/BMI"
We believe the move toward MUVs is a combination of both the premiumisation trend, which BMI has highlighted as a core view for key emerging markets where existing car owners are looking for an opportunity to upgrade, combined with a better choice of products. According to Maruti Suzuki's Executive Director of Marketing, Shashank Srivastava, in the MUV/SUV segment, 'the market was always there, but there were not many options available'. Maruti Suzuki's own Ertiga, launched in April, has been achieving sales of around 6,000 a month in the mid-size segment.
As a result of the slew of new model launches, the MUV segment has increased its share of total passenger vehicles sales from 13% in the first quarter of the last financial year to 18% for April to June 2012. BMI believes that more new model launches, spread across a range of price brackets, will create the potential for this share to expand further as the year goes on. The launch of the Dacia Duster in the sub-INR1mn segment will create opportunities for upsizing at the lower budget end, while Audi has added the A3 compact SUV at a price of INR2.6-3.2mn (US$47,350-56,880).
Finding growth opportunities in the passenger vehicle segment, which was hit by a number of factors to drag growth down to 4.6% in the last financial year ending March 2012, compared with 29% growth in
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the year ending March 2011, is a positive development. High interest rates on auto loans, rising raw material costs and soaring fuel prices combined to make vehicle ownership too expensive for many.
On the positive side, for the current financial year, carmakers are addressing fuel costs by bringing out more diesel-powered models and further rate cuts are expected. BMI is pencilling in 50 basis points of cuts in the benchmark repo rate by end-FY2012/13 (April-March), and further loosening of the cash reserve requirement ratio, which would take the policy rate to 7.50% by end-FY2012/13.
Company Developments
French carmaker Renault is looking to a new small car to increase its presence in the Indian market, which BMI believes will be a key factor in its diversification away from a heavy reliance on Europe. To increase its chances of success, Renault is bringing in the team responsible for the Logan from its Dacia budget brand, to design a global model, aimed specifically at emerging markets (EMs).
So far, Renault has had limited success in India. Its current small car offering - the Pulse - which is based on the Nissan Micra and sold only in India, is achieving average monthly sales of just 500-600 units, according to the Economic Times, compared with 15,000-18,000 units of the Suzuki Swift, sold by the country's leading carmaker Maruti Suzuki.
The Dacia Duster compact SUV, on the other hand, has been much better received and Renault is targeting sales of 30,000 units in the country in 2012, compared with just 1,500 units in 2011. The Dacia brand has undoubtedly contributed significantly to the Renault group in terms of EM sales and it is not surprising that the company has turned to Gerard Detourbet, who was behind the Logan and other successful entry-level models.
Good Timing?
Indian Passenger Car Sales And Annual Growth
However, BMI warns that while the

f = BMI forecast; Source: SIAM
Dacia brand has clearly proven successful, the warm reception for the Duster could have as much to do with current consumer preferences in terms of vehicle segment as with the brand itself. In the first quarter of the current financial
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year (April to June 2012), the multi-utility vehicle (MUV) segment outsold its sedan counterparts in every price bracket for the first time.
We believe the move toward MUVs is a combination of both the premiumisation trend, which BMI has highlighted as a core view for key EMs where existing car owners are looking for an opportunity to upgrade, combined with a better choice of products. As a result of the slew of new model launches, the MUV segment has increased its share of total passenger vehicles sales from 13% in the first quarter of the last financial year to 18% for April to June 2012.
That is not to say Renault's new model, codenamed 'A Entry' will not be successful in a segment that accounts for almost 50% of total car sales. Much will depend on how much can be done to ease cost pressures on car owners by the time the model enters production within the next three years, however. Interest rates, fuel prices and input costs have all combined to make owning even the smallest of cars prohibitively expensive for some consumers. One route adopted by several carmakers is to increase the number of diesel-powered models in their portfolio.
Renault announced on June 27 that it plans to sell more than 50% of its vehicles outside of Europe by 2013, and cracking the Indian market - where BMI expects average annual growth of 8-9% in the passenger car market over the next five years - should be a priority in this respect. Renault has previously stated that it wishes to expand its presence in EMs in an attempt to decrease its reliance on Europe and this strategy has already seen the company withstand the slowdown in Europe relatively better than its compatriot PSA Peugeot Citroen (see our online service, July 27, 'Renault Resilient To European Headwinds').
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Demographic Outlook
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements.
The accompanying charts detail India's population pyramid for 2011, the change in the structure of the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split.
Source: World Bank, UN, BMI
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Table: India's Population By Age Group, 1990-2020 ('000)
1990 Total 0-4 years 5-9 years 10-14 years 15-19 years 20-24 years 25-29 years 30-34 years 35-39 years 40-44 years 45-49 years 50-54 years 55-59 years 60-64 years 65-69 years 70-74 years 75+ years 873,785 121,433 110,203 100,022 88,522 79,490 70,099 62,463 55,037 41,480 35,055 31,111 25,747 20,043 14,429 9,513 9,139
1995 964,486 125,596 118,019 109,012 99,103 87,387 78,294 68,942 61,282 53,730 40,107 33,310 28,776 22,785 16,608 10,917 10,620
2000
1,053,898
2005
1,140,043
2010
1,224,614
2012
1,258,351
2015
1,308,221
2020
1,386,909
126,280 122,588 116,916 108,070 97,881 86,094 77,012 67,651 59,871 52,046 38,247 30,972 25,687 19,149 12,799 12,633
126,239 123,663 121,502 115,850 106,636 96,306 84,574 75,496 66,080 58,066 49,786 35,738 27,858 21,868 15,027 15,354
127,979 123,985 122,622 120,369 114,273 104,865 94,561 82,875 73,759 64,181 55,727 46,753 32,385 23,992 17,451 18,834
128,484 124,619 122,644 121,090 116,568 108,186 98,203 86,742 76,598 67,124 57,934 49,468 36,362 25,135 18,240 20,955
127,253 126,017 123,103 121,728 119,172 112,869 103,381 93,046 81,313 71,973 61,948 52,728 42,791 28,298 19,528 23,073
125,206 125,601 125,310 122,397 120,762 117,972 111,548 101,980 91,529 79,566 69,701 58,863 48,529 37,606 23,198 27,142
f = BMI forecast. Source: World Bank, UN, BMI
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Table: India's Population By Age Group, 1990-2020 (% of total)
1990 0-4 years 5-9 years 10-14 years 15-19 years 20-24 years 25-29 years 30-34 years 35-39 years 40-44 years 45-49 years 50-54 years 55-59 years 60-64 years 65-69 years 70-74 years 75+ years 13.90 12.61 11.45 10.13 9.10 8.02 7.15 6.30 4.75 4.01 3.56 2.95 2.29 1.65 1.09 1.05
1995 13.02 12.24 11.30 10.28 9.06 8.12 7.15 6.35 5.57 4.16 3.45 2.98 2.36 1.72 1.13 1.10
2000 11.98 11.63 11.09 10.25 9.29 8.17 7.31 6.42 5.68 4.94 3.63 2.94 2.44 1.82 1.21 1.20
2005 11.07 10.85 10.66 10.16 9.35 8.45 7.42 6.62 5.80 5.09 4.37 3.13 2.44 1.92 1.32 1.35
2010 10.45 10.12 10.01 9.83 9.33 8.56 7.72 6.77 6.02 5.24 4.55 3.82 2.64 1.96 1.43 1.54
2012f 10.21 9.90 9.75 9.62 9.26 8.60 7.80 6.89 6.09 5.33 4.60 3.93 2.89 2.00 1.45 1.67
2015f 9.73 9.63 9.41 9.30 9.11 8.63 7.90 7.11 6.22 5.50 4.74 4.03 3.27 2.16 1.49 1.76
2020f 9.03 9.06 9.04 8.83 8.71 8.51 8.04 7.35 6.60 5.74 5.03 4.24 3.50 2.71 1.67 1.96
f = BMI forecast. Source: World Bank, UN, BMI
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Table: India's Key Population Ratios, 1990-2020
1990 Dependent ratio, % of 1 total working age Dependent population, 2 total, '000 Active population, % of 3 total Active population, total, 4 '000 Youth population, % of 5 total working age Youth population, total, 6 '000 Pensionable population, 7 % of total working age Pensionable population, 8 '000
1
1995 68.1 390,771 59.5 573,715 61.5 352,627 6.6 38,144
2000 63.8 410,366 61.1 643,532 56.8 365,785 6.9 44,581
2005 59.1 423,652 62.8 716,391 51.8 371,404 7.3 52,249

2
2010 55.1 434,865 64.5 789,750 47.4 374,587 7.6 60,278
2012f 53.8 440,077 65.0 818,274 45.9 375,747 7.9 64,331

3
2015f 52.0 447,272 65.8 860,948 43.7 376,374 8.2 70,899
2020f 50.3 464,063 66.5 922,846 40.8 376,116 9.5 87,947
71.7 364,739 58.3 509,046 65.2 331,659 6.5 33,080
f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total 4 5 6 7 8 population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 65+. Source: World Bank, UN, BMI
Table: India's Rural And Urban Population, 1990-2020
1990 Urban population, % of total Rural population, % of total Urban population, '000 Rural population, '000 25.5 74.5
216,626.3
632,888.7
1995 26.6 73.4

247,959.9
684,220.1
2000 27.7 72.3

281,410.7
734,512.3
2005 28.7 71.3

314,145.3
780,437.7
2010 30.0 70.0

367,384.3
857,230.0
2012 30.6 69.4

385,558.7
872,792.2
2015 31.6 68.4

413,397.7
894,823.0
2020 33.5 66.5

464,614.5
922,294.5
Source: World Bank, UN, BMI
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BMI Methodology
How We Generate Our Industry Forecasts
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example a deep industry recession, dummy variables are used to determine the level of impact.
Effective forecasting depends on appropriately-selected regression models. BMI selects the best model according to various different criteria and tests, including, but not exclusive to:
R tests explanatory power; Adjusted R takes degree of freedom into account
Testing the directional movement and magnitude of coefficients
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)
All results are assessed to alleviate issues related to autocorrelation and multicollinearity
BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.
Within the retail industry such interventions may include, but is not exclusive to; significant company expansion plans, new product developments, change in production that may influence pricing levels, product taxation, changes in lifestyle and general social trends, the formation of bilateral or multilateral trade agreements and development in industry in neighbouring markets.
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An Example Of Retail Sales Model (Retail Sales) = 0 + 1 (Private Final Consumption) + 3 (Inflation) + 4 (Lending Rate) + 5 (Government Expenditure) + u
Private Final Consumption should have a positive effect on Retail Sales. As consumption goes up, retail sales also increase.
Inflation should have a negative effect. As prices go up consumption will go down.
Lending Rates should have a negative effect on retail sales. As lending rates go up spending increases.
Government Expenditure should have a positive effect on retail sales. Firstly Government will affect retail sales directly; secondly an increase in Government Expenditure will lead to a general increase in expenditure.
Sources
Retail Sales is the key indicator in this database. BMI has decided on the following procedure for sourcing retail sales data: If available, we use retail sales data published by national sources (statistics offices, retail associations etc). In some instances there may not be any specific retail sales data available but other indicators that deal with retail, such as Turnover of Retail Enterprises are published. In this case we use these as a proxy for retail sales.
In cases where no retail data is available from local sources, BMI uses an aggregate of UN household consumption data as a proxy for retail sales. This data gives the Individual consumption expenditure of households, non profit organisations serving households (NPISHs) and general government at current prices. Out of this data BMI aggregates four different categories to generate a proxy for retail sales:
Food and non-alcoholic drinks.
Alcoholic drinks, tobacco and narcotics.
Clothing and footwear.
Household equipment and routine maintenance of the house.
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In rare instances no local or UN data is available. On these occasions, we use a percentage of private final consumption as a proxy for retail sales. In order to decide what percentage of private final consumption to use BMI looks at the ratio of retail sales to private final consumption in a country for which we have data and which has similar properties to the country for which we are missing data. In doing this we assume that countries with similar macroeconomic characteristics have similar consumption patterns.
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INDIA RETAIL REPORT Q1 2013

Part of BMI's Industry Report & Forecasts Series

India Retail Report Q1 2013

Market Overview ............................................................................................................................................... 9

Industry Forecast Scenario ........................................................................................................................... 19

Regional Retail Outlook ................................................................................................................................. 28

Mass Grocery Retail ....................................................................................................................................... 41

Consumer Electronics ................................................................................................................................... 53

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India Retail Report Q1 2013

Demographic Outlook .................................................................................................................................... 83

BMI Methodology ........................................................................................................................................... 87

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

India Political SWOT

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India Economic SWOT

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

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India Retail Report Q1 2013

Industry Forecast Scenario

Growth On The Wane India Passenger Car Sales, % chg y-o-y

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India Retail Report Q1 2013

An Enticing Demographic Growth Element India Demographic Breakdown By Age Group

Source: BMI, World Bank

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India Retail Report Q1 2013

Retail Growth Outlook

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India Retail Report Q1 2013

Table: India Retail Sales Indicators, 2010-2017

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India Retail Report Q1 2013

Table: Retail Sector Breakdown By Key Segment, 2013f

Value (US$bn) 226.58 37.71 3.93

f = forecast. Source: BMI

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