An Overview

of India’s
Consumer
and Retail
Sectors
A Recap of Events of the Past 27

A Look into the Future 31

Conclusion 32
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A Recap of Events of the Past

Impact of Slowdown on Consumer Confidence, Private Consumption &
Organised Retail
India was relatively insulated from the events in the global economy over the last two years. India’s GDP grew
by 6.1 per cent in 2008-09, as compared to 9 per cent plus growth in the previous few years. This growth
was primarily led by government spending and growth in the rural areas. While the impact of the slowdown
on overall GDP was limited, private consumption was impacted substantially. Private consumption growth,
which was largely tracking GDP growth till before the slowdown, took a significant dip on account of poor
consumer confidence. In the first few quarters of 2008-09, growth in GDP came down from 9.1 per cent
to 6.1 per cent and growth in private consumption went down from 8.5 per cent to 2.9 per cent. This dip
significantly impacted the consumer products and retail sectors. Organised retail, which was growing at
over 30 per cent year on year in 2005-06 and 2006-07, slowed down to around 16 per cent in 2008-09.

With the revival of economic growth from the second quarter of 2009-10 (GDP grew by 7.9 per cent), private
consumption growth has returned (grew by 5.6 per cent), on the back on stronger consumer confidence.
As a result, growth in organised retail has returned and we estimate the sector to have grown by 21 per
cent in 2009-10. On the basis of various projections that India’s GDP will grow at over 8 per cent in the
coming years, return in consumer confidence and growth in private consumption tracking GDP growth, we
expect organised retail to see 30 per cent plus growth in the coming years. This trend is already visible and
is substantiated by data in exhibit 1.

Exhibit 1:
Impact of Slowdown on Consumer Confidence, Private Consumption & Organised Retail

33% 31% 31%

29%
27% 27%
25% 25%
21%
16%

9.30% 9.7% 9.1% 8.5% 8.5% 9.0% 9.0%

7.9% 7.2% 8.1%
6.1% 6.1%
7.10% 8.5% 2.9% 7.5% 7.5% 7.5%
6.3% 1.6% 5.6% 7.0% 7.0%
5.2%

FY 2006 2007 2008 2009 2010 2010 2010 2011P 2012P 2013P 2014P 2015P
Q1 Q2
Organised Retail GDP Private Consumption

Source: Ministry of Finance, Technopak Analysis and Estimates Real Growth Rates

Changes in Private Consumption and Retail Growth

Private consumption in India currently adds up to about Rs 34 lakh crore and accounts for ~60 per cent
of GDP. With growth in GDP expected at over 8 per cent, inflation expected at 6-7 per cent, and private
consumption expected to stay at 60 per cent of GDP, nominal growth in private consumption is expected
to be 14-15 per cent. This means a doubling in private consumption in five years time, to reach about Rs
67 trillion by 2015. This provides a very significant opportunity for Indian and international companies to
develop and create large business in the consumer products and retail sectors in India.

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The total retail (organised and unorganised) industry in India is currently estimated to be Rs 20 lakh crore.
We project this to reach Rs 27 lakh crore by 2015. Organised retail, which is currently estimated to be Rs
1.0 lakh crore (5 per cent share), is projected to reach Rs 3.0 lakh crore (11 per cent share) by 2015. This
means a tripling of the current size and scale of organised retail in the next five years. While organised retail
will grow at a fast pace, it is important to note that a larger part of the Rs 7.0 lakh crore growth in total retail
will come from unorganised retail. We project this segment (unorganised retail) to grow by over Rs 4.5 lakh
crore in the next five years. Some key reasons for this trend are as below:
• Growth in private consumption in India is so sizable Exhibit 2:

that even with 30 per cent plus growth rates, Projections for Private Consumption and Retail
organised retail will be unable to garner a larger 93
share in absolute terms in the next 5 years.
62
• In certain consumer categories like apparel,
footwear, and consumer durables and electronics,
organised retail has established a strong value 29 27
20
proposition with the Indian consumer. However, 12
0.3 0.9 3
in some very large categories like food & grocery,
furniture and home, and pharma it is not same. Organised Retail GDP Private Consumption
So the same shopper visits organised retail for All values in Rs lakh crore
the former categories and traditional retail for the Source: Technopak Analysis and Estimates
Real Growth Rates & Values, Inflation assumed at average 7%
latter.
• Inherent strengths of traditional retail (entrepreneurial drive, relationship management with catchment,
real estate and labor costs not fully accounted for in P&Ls, flexibility to deliver very small quantities home,
and the MRP regime) coupled with the fact that many mom & pop stores have geared up for competition
from new age stores (through improved store ambience, better product mix and support from brands /
manufacturers in training, retail operations, etc.) puts them on a strong footing.

Given the large share that traditional retail will continue to occupy, especially in categories such as food &
grocery, furniture and home, and pharma, it will continue to be an important channel for consumer goods
companies, and for organised wholesalers (cash & carry).

Growth of Organised Retail: Real or Hyped?

Some recent high profile failures in organised retail Exhibit 3:
have led to a belief that growth in organised retail is Evolution Curve of Various Industries
not as promising as it was believed to be. In order to
take an objective view of the organised retail market
in India, Technopak traced the growth trajectory of
Industry Size

some of the other large sectors in India. The growth

in organised retail is very similar to some of the other
large sectors however, the only difference being that
it not as consolidated as in sectors like Telecom
(where 4-5 players command majority of market
share).Hence, despite a few setbacks Technopak
expects that the organised retail would emerge TO T1 T2 T3 T4 T5 T6 T7 T8 T9 T10 T11 T12 T13 T14
much more stronger than ever before and would IT Organised Retail BPO Telecom
also see significant players emerging in the next few
Source: Technopak Analysis
years.

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Exhibit 4:
Consumer Sector in India – Effect of Recession and Recovery

Categories Description Impact of Recession Product examples

Heavy goods intended to last 3 Refrigerators, Washing

Durables Highest impact
or more years Machines, Automobiles

Goods that are neither perishable High impact (dependent on Clothing, Furnishing, Home
Semi-durables
nor lasting discretionary spends) Textiles, etc.

Goods that do not last for long,

Limited impact (due to basic
Non-durables so need be FMCG, Food Products
nature of products)
continually replaced

Services that are Limited impact (necessity based Healthcare, Education,

Services
becoming essential services) Telecom, etc.

FMCG, CDIT and Apparel categories have experienced very different growth trajectories over the last few
years. While CDIT has shown tremendous growth (primarily led by high growth in mobile handsets market),
FMCG which has been a well penetrated market has been growing a stable rate.

Given the fact that the discretionary income of the Indian population is rising at about 15 per cent every year,
one would expect the apparel sector to witness a higher growth. However, the actual growth rate has been
fairly low. We believe that, on a price performance value proposition to the consumer, players in apparel
have not offered the same value as the players in telecom or CDIT or automobiles etc. have. The cost of
laptops (which are in the CDIT category) decreased by about 25 per cent, while the volume increased by
about 76 per cent on a yearly basis. LCD’s showed a similar trend too. In the apparel and home textiles
categories, a smaller volume growth and a higher price growth translating to a low price performance value
to the consumer was observed.

Exhibit 5:
Sector Growth Rates

25%

20%

15%
Growth Rates

10%

5%

0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(P) (P) (P) (P) (P)

FMCG CDIT Apparel

Source: Technopak Analysis

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Thus, the share of wallet appears to have shifted from categories like apparel, home furnishings etc. to
CDIT, automobiles and travel as shown in exhibit 6.
Exhibit 6:
Apparent Shift in the Share of Wallet

Categories Volume CAGR (Last 4-5 years) Per Unit Price Change

Talk time 80% -24%

Laptops 76% -20%

LCD’s 40% -20%

Premium Shirts (Apparel) 6% 15%

Home Textiles 12% 25%

This hypothesis is further strengthened by the Exhibit 7:

fact that post recession, categories like consumer Financial Comparison of FMCG
durables, automobiles recovered the fastest Companies and Retailers (FY09)
whereas categories like apparel, home furnishings
1%
etc. are still to recover completely. Vishal Retaii -4%
8%
Westside 3%
Financial Performance Koutons
22%
Retailers
20%
12%
The financial performance of retail sector vis-à-vis Shoppers Stop 28%
FMCG sector is different. The EBITDA and ROC for Pantaloon Retail 10%
the retail sector is about 10-12 per cent, while for the 11%

FMCG sector, the numbers are higher. Thus ,there 8%

Britannia 25%
is an opportunity for the retail sector to get these
23%
financial metric right. ITC 35%
19%
GSK 38%
The low level of returns in retail is primarily due FMCG
12% Companies
to the high level of inefficiencies at the back end. Marico 39%
Inventory management which is an integral part of 19%
Dabur 48%
any successful retail operation is currently lacking.
32%
A significant amount of capital of an Indian retailer P&G 35%
is blocked in inventory leading to a strain on the 15%
HUL 121%
balance sheet. A comparison of Indian apparel
0 30 60 90 120 150
retailers with international retailers highlights this
point. While gross margins of apparel retailers in EBITDA/Sales ROCE
India are almost similar to any other international Source: Technopak Analysis
retailer, high inventory levels have led to significantly
lower returns.

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A Look into the Future

The last decade (2000-2009) has given India the confidence to dream big, and the next one is poised to
bring those to reality. As India enters a new decade of growth there would be significant changes at both
consumption and retail level. Some key themes expected to emerge in next few years which can have a
direct impact on retailers and consumer goods companies include:

Dramatic Changes in the Indian Consumption Basket

Around 4-5 years back, the categories with highest consumption included food, clothing and housing.
Recently, doctor and having healthcare services have become important and have overtaken clothing in
the consumption basket. The new order being “roti doctor kapda makan”.

Categories like education, personal transport, travel and leisure have been witnessing rapid growth.
Categories of apparel, home textiles and housing are expected to move below education as there are
significant changes that are expected in the education sector. As the size of these categories is dependent
upon the consumer’s wallet, it puts pressure on the categories that are not offering competitive price
performance value to the consumer.

For example, our spending on self learning and coaching amounts to about Rs 45,000 crore. The size of the
education market, containing the spending on self learning and coaching as well as tuitions is equivalent
to the size of the organised retail market in India. Thus, the spending on this category is coming from the
same share of wallet. Going ahead it is expected that emergence of new categories would put significant
pressure on some of the categories which lag on price performance matrix.

Commoditisation Trap: Bigger Threat than Before for Brands

Given the changing consumption habits of the Indian consumer and share of categories, we expect that
there would be a new way of classifying the consumption of Indian consumers. On one hand there would
be a need based consumption categories like food and groceries, footwear, textile and apparel and there
would be aspiration based categories like personal transport, health and beauty services, jewellery and
watches. Categories which are mainly need based would see low consumer involvement resulting in
commoditisation of these categories. Low-involvement, in turn, will imply:
• Consumers zeroing on just one or two attributes Exhibit 8:
for taking the consumption decision e.g. just the Commoditisation in the Mobile Phone Market
size of the LCD panel for the TV, just the capacity
Market Share of Spice Nokia Market
of the refrigerator, just the fiber composition of the Local Players Lava Share
Micromax
garment and the confidence in the retailer / brand 20% NOKIA 63% Karbonn 28 18% 64%
etc. 16% 60%
• Consumers will optimize their purchases largely 12% 56%
54% 56%
on simple attributes of price and convenience 8% No. of Players
15
(time efficiency) in order to release more resources 4% 5 52%
(money, time, mental involvement) for the aspiration 1% 3%
0% 48%
/ lifestyle based consumption categories. 2007 2008 2009
Market Share of Local Players Nokia Market Share
• Diminishing power of manufacturers’ brands
operating in such categories. Source: Technopak Analysis

Emergence of private labels and increasing retailer presence across the country would see a rapid
commoditisation across various categories. We are already witnessing a certain degree of commoditisation
in the mobile phone market with the emergence of large number of smaller brands challenging the market
leader. Consumers are also taking their decision based on one or two main factors like price, battery life
etc.

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Emergence of New Hot Spots of Consumption

Currently the top 8-10 cities contribute to disproportionate share of the markets in most of the consumer
goods categories. However, going ahead growth in India would be far more exclusive as the new hot spots
of consumption (primarily driven by investments in these regions) appear on the map.

In the near future, investments in mega projects and development of infrastructure is expected to create
“new hot spots” in India. These new centers of consumption would present an opportunity for both retail
and consumer product companies to focus on and derive growth from the consumption potential of these
new hot spots.

Focus on Financial Returns

Last year has been a steep learning curve for the organised retail. Going forward we expect an increased
focus on the financial returns by retailer rather than just the top line. This would imply focusing on
performance improvement through better inventory management, gross margins, improvement through
better sourcing and private label programme. We expect that profitable growth would be the way forward
for organised retail than top line growth.

Revival of Investor Interest

Globally, retail and consumer product industry
Performance Metric Correlation to Value
attracts a large quantum of investments through
private equity. Pre 2008 we saw a number of private ROCE 0.65
equity deals in the retail space. The industry is again Same store sales growth 0.40
emerging as a strong contender for private equity “New” growth 0.20
investments. The recent deals in Café Coffee Day,
Lilliput and successful listing of Jubilant Foodworks (Domino’s) on the stock exchanges have revived
investor interest in the sector.

As retailers look to raise fresh capital, understanding what the markets reward will be the key. Generally,
retailers tend to look at new growth as the key area that they want to take back to investors for valuation of
business.

In the international market, ROCE has the highest correlation with the performance of retail business and
other parameters. The same store sales and the new stores growth comes second. Hence, it would be
very important for retailers to focus on generating returns through better performance and working capital
management.

Conclusion
The events of the last 15-18 months have provided a steep learning for the retail and consumer product
industry. While the last decade (2000-2009) has seen significant addition to consumption and retail market,
it is expected that consumption is likely to double in India over the next 5 years, (nominal growth of Rs 33.75
lakh crore). There is going to be significant changes in the overall consumption basket hence brands in low
involvement categories would be under the increasing threat of commoditisation. Profitable growth would
be the emphasis for retailers and investors in the time to come. We expect that in the next 5-10 years, the
scale of business opportunity and pace of change would be fundamentally different from what it has been
in the past. This calls for almost every company to go back to the strategy drawing board and develop a
vision for the next decade in order to emerge as a successful player in the consumer and retail sector.

Authors
Raghav Gupta, President | raghav.gupta@technopak.com
Rohit Bhatiani, Principal Consultant| rohit.bhatiani@technopak.com
Pranay Gupta, Consultant | pranay.gupta@technopak.com

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