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July 2006 | Pankaj Gupta

Retail revolution

Organised retail players who can aggressively scale-up their operations

could target Rs40,000-crore in organised retail business in India by 2015,
says Pankaj Gupta, practice head — consumer and retail, Tata Strategic
Management Group

India, like Britain, is a nation of shopkeepers. With over 12 million retail

outlets, India probably has the highest density of retail outlets in the world,
with one for approximately every 90 persons; little wonder that the country is
the ninth-largest retail market in the world, with estimated annual retail sales
of around USD215 billion in 2005 (Rs960,000 crore). At the same time, the
shareof organised trade in this enormous market is currently very small. It is
estimated at just USD8 billion (Rs35,000 crore) in 2005, up from USD6.25
billion (Rs28,000 crore) in 2004. This accounts for less than 4 per cent of the
total retail trade in the country.

An underdeveloped retail market

Organised trade in India is very underdeveloped when compared with other
emerging markets in Asia, Latin America and eastern Europe. Figures show
that developed markets like the US are far, far ahead. (Tab les 1 and 2)

Tab le 1
China India
Parameter
1996 2003 2005
Per capita GDP (USD) 675 1,109 710

Size of retail market (USD billion) 225 400 215

Share of organised trade (per cent) 7-8 ~17 <4

Tab le 2
Country Share of organised trade (per cent) (2003)
India 4

China 17
Poland 20

Indonesia 30

Russia 33

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Brazil 35

Thailand 40

Malaysia 55

USA 85

Organised retail: India vs China

The Indian and Chinese markets are comparable in many aspects:

Both countries are not homogeneous. They comprise many markets

within a single country, with significantly varying cultures and
customer preferences across regions.
There is a significant rural population in both countries, which has
much lower purchasing power compared to the urban population.
Both countries are geographically very large and unevenly developed,
adding a significant distribution and logistics dimension to the retail
trade.
Consumers in both countries are highly value conscious.

Between 1996 and 2003, the organised retail market in China more than
doubled. We estimate that the Indian retail market is today at the same
inflection point as China was in the mid-1990s. Consequently, considering a
similar per capita GDP and roughly similar rates of economic growth, the
Indian organised retail market has the potential for exponential growth over
the next decade.

Consumerism: the new wave

Growing consumerism would be a key driver for organised retail in India.
Several demographic indicators show favourable trends for the growth of
organised trade:

Rapid income growth: consumers have a greater ability to spend.

Increasing urbanisation: larger urban populations that value
convenience, coupled with the higher propensity of the urban
consumer to spend.
Growing young population: growth of the post-liberalisation maturing
population, with the attitude and willingness to spend.
Spend now vs save earlier: consumers are willing to borrow for
present consumption.

The size of the opportunity

Research done by the Tata Strategic Management Group (TSMG) indicates
that over the next 10 years, the total retail market in India is likely to grow at a
compounded annual growth rate (CAGR) of 5.5 per cent (at constant prices)
to USD374 billion (Rs16,77,000 crore) in 2015. The organised retail market
is expected to grow much faster, at a CAGR of 21.8 per cent to USD55 billion
(Rs246,000 crore) in the same time frame, garnering around 15 per cent of
overall retail sales. Based on our projections, the top five organised retail
categories by 2015 would be food, grocery and general merchandise;
apparel; durables; food service; and home improvement. (Tab le 3)

Tab le 3: Organised retail market in India (Rs crore)

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Click on image for larger view

Where is the opportunity?

Retailers inspired by the Wal-Mart story of growth in small town America are
tempted to focus on smaller towns and villages in India. However, a careful
analysis of the town strata-wise population, population growth, migration
trends and consumer spend analysis reveals a very different picture for
India.

As per our estimates, the share of the 35 towns with a present population of
greater than 1 million in India's total population would grow much faster than
their smaller counterparts, from 10.2 per cent today to reach 14.4 per cent by
2025. Simultaneously, the share of these towns in the overall retail market
would grow from 21 per cent today to 40 per cent by 2025.

Within these top 35 towns, an estimated 70 to 80 per cent of retail trade

could be in the organised sector. This is similar to the experience in China,
where in cities like Shanghai and Beijing, the organised sector accounts for
70 to 80 per cent of overall retail trade in certain categories. Retailers should
therefore focus on the top 37 towns in the next decade, as the opportunity in
smaller towns and rural India would be smaller and more fragmented,
compared to the larger towns.

Table 3: Organised retail market in India

Click on image for larger view

There are a few key trends that one observes in international markets that
have a bearing on India.

Trend 1: consolidation — the big get bigger

In the early stages of development in retail markets, there is a proliferation of
players. For example, in China in 2003, the top 100 players accounted for

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only 8 per cent of the total retail market with the top 10 accounting for 3.2 per
cent of the market. However, when retail markets develop, there is a
consolidation of players with fewer large players dominating the market. This
trend is starkly visible in the developed economies of the US and Europe.

Tab le 4
Number of retailers accounting for 20 per cent of market
Region /
share
country
1990 2005
US 30 8

Europe 37 10

As per data from M+M Planet Retail, 30 retailers accounted for a 20 per cent
share of the US retail market in 1990. By 2005, only 8 retailers accounted for
the same 20 per cent share of the market. Similarly, 37 retailers accounted
for a 20 per cent share of the European retail market in 1990. But by 2005,
only 10 retailers accounted for the same share of the market. (Tab le 4)

Trend 2: convenience stores and hypermarkets are gaining prominence

These are driven by a consumer need for convenience and lower prices /
higher value in mass categories, while the big box category killer stores are
gaining importance in the specialty retail categories. While supermarkets
may emerge at the initial stages of retail market development, in the long
term they are unable to match the consumer value proposition of
convenience stores and hypermarkets.

Trend 3: private label products become increasingly important

Private labels today account for 17 per cent of global retail sales, with the
highest share of 23 per cent in Europe and the lowest share of 4 per cent in
Asia. M+M Planet Retail data shows that private label penetration varies from
25 per cent to 95 per cent among some of the largest retailers in the world.
(Tab le 5)

Tab le 5
Estimated share of private labels in 2004
Rank Company
(per cent)
1 Aldi 95

2 Schwarz Group (Lidl) 63

3 Target 46

4 Tesco 45

5 Casino 40

6 Wal-Mart 37

7 ITM (Intermarché) 35

8 Carrefour 32

9 Seven & I 27

10 Rewe 25

Growing acceptance among consumers, increasing price competition, the

need for differentiation among retailers and the ability to offer higher margins
are the key factors contributing to the growth of private labels. Private labels
provide the retailer an ability to offer a significant price advantage to
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consumers, their prices being 16 to 32 per cent lower than manufacturers'
brands.

Implications for Indian retailers

Global trends have important implications for Indian retailers. The Indian
consumer is very value conscious; willing to spend money in most cases,
but constantly cost conscious, evaluating every rupee spent. It is therefore
imperative for retailers to offer a price advantage through sourcing and
operational efficiency, as well as a strong private label programme to attract
customers. Existing and new entrants need to achieve scale quickly to drive
efficiencies in procurement, supply chain and marketing. Else, they risk
being marginalised by larger players.

Real estate and human resources will be the critical drivers to build scale.
While there are a few hundred malls under various stages of development
across the country at present, retailers will also need to think out of the box to
ensure the availability of real estate. This may include acquiring and
developing the real estate themselves, rather than wait for mall
development. Given the rising demand for retail real estate, retailers will
need to take a long-term view on rentals and look at alternative options like
ownership or very long leases. Retailers that invest in training will be able to
ensure the availability of quality manpower in a rapidly growing market.

In conclusion, the retail market in India offers an opportunity for a large player
to build a Rs40,000 crore retail business spanning multiple categories by
2015 (at current prices). Compared to this, the revenue of the largest Indian
retailer, Pantaloon, grossed only Rs1,085 crore in 2005. Little wonder that
large domestic business houses and international retailers have expressed
a keen interest to enter the retail sector in India. To capitalise on the
opportunity, however, players need to be aggressive in outlook and build
scale quickly.

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