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India, the Fifth Largest Retail Destination Globally Continues to Grow at Record Pace

 


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Without a doubt, the retail sector in India is on the go. India is the fifth largest retail destination globally, and is estimated to grow from US$330 billion in 2007 to US$427 billion by 2010.

Simultaneously, organized retail is poised to increase its share in the total retail market to 22% by 2010, reaching US$30 billion. This growth is evidenced by the fact that the organized retail market occupied 14 million sq. ft.in 2007 compared to 1 million sq. ft.in 2002. Retail and real estate have traditionally developed hand-in-hand, and in India too, traditional retail formats are giving way to the ubiquitous “mall culture".

The phenomenal growth of the sector has been propelled by a young population with its hefty pay packets and rising disposable incomes, increased ease and availability of credit and the proliferation of nuclear families with women contributing equally to household incomes. Ernst & Young estimates that the number of upper middle-class and high-income households has grown from 30 million households to 81 million households in the last decade, leading to a huge demand for luxury goods. The sweet spot in this demographic - teenagers and young adults - are willing and able to spend without harboring any post-transaction guilt. However, traces of their traditional Indian mindset remain, and manifest themselves in their desire to balance spending with value for money. This makes retailers walk the tight rope while deciding pricing strategies forcing them to concentrate on supply chain management and operational efficiencies to reduce costs and increase margins.

Though many of the retail maharajas of India had humble beginnings in the late 1970, it is only in the last decade that Indian retail has gained the momentum that is seen today. The origins of Kishore Biyani's Future Group can be traced to 1987 when the company was incorporated as Manz Wear Private Limited. Its first retail outlet christened “Pantaloons" opened in 1994. Since then, the group has expanded to various niche retail segments and plans to achieve revenues of Rs30,000 crore (US$7.0 billion) by 2010.

Over the past two years, telecom majors Bharti and Reliance have also made forays into the retail sector. Bharti Enterprises, which has tied up with Wal-Mart for back-end operations, will invest US$2-2.5 billion by 2015 in its retail operations, and Mukesh Ambani lead Reliance Retail is rolling out a US$6.3 billion initiative to set up department and specialty stores for footwear, jewellery, books, music, and apparel. The Tata Group has launched its own multi brand consumer durables retail format “Croma" with global IT giant Microsoft launching its first store-in-store pilot within. Apple Inc. too has entered an exclusive marketing and distribution deal with Reliance Retail through “iStore by Reliance Digital". In the health and beauty segment, Indian major, Dabur, has set up its “New U" branded stores with an initial investment of US$35 million.

On the M&A front as well, the sector has witnessed frenetic activity. For example, Indiabulls Wholesale Services, the retail arm of Indiabulls Real Estate acquired a 64% stake in Piramyd Retail at an enterprise value of US$53 million. Since India restricts FDI in single brand retailing to no more than 51%, a number of foreign luxury brands lined up for permission to enter through Indiabulls’ single-brand retail window. Similarly, international luxury brands like French Connection, Hello Kitty, Jimmy Choo, La Pearla and Calvin Klein are finding their way into the nascent US$3.5 million luxury retail market in India.

The nascent yet robust boom in the retail sector in India is not confined to her cities. With consumption patterns changing and infrastructure improvements afoot, India Brand Equity Foundation predicts that rural retail market will transcend US$45 billion by 2010. In light of this, corporate giants are establishing their footprint in the rural markets with initiatives like ITC's (one of India's private sector conglomerates) e-Choupal establishing 6,400 kiosks covering over 400,000 farmers. This initiative provides farmers information, products and services to enhance productivity, realize prices and reduce transaction costs. Similarly, Adani Agrifresh plans to invest US$250 million in the next three years to create a supply chain from farms to retailers.

While the future of the sector remains bright, progress has come with its fair share of opposition and hurdles. The growth of organized retail has sparked a political battle between those supporting FDI in retail, and those supporting the economic system of traditional “kirana" (mom-and-pop) stores. Also, stiff competition for talent in the sector has led to ballooning compensation packages for middle and senior management, which in turn is rapidly eroding the profitability of players. Other issues faced by retailers include fragmented sourcing, unpredictable availability of products, unsorted food provisions and fluctuating prices as against consumer expectations of price stability.

Despite these obstacles, players in the sector are expanding their operations by going public or getting private equity to back them up. Following the path of the aviation sector, retail too is expected to see a phase of consolidation. Many of the stand-alone players like Subhiksha and Vishal Stores are expected to be acquired by the big names of the sector within the next 5 years.

India Research & Analysis provided by Zpryme Research & Consulting, LLC Zpryme Research & Consulting, LLC is a research-based business strategy firm with affiliates and industry contacts in major cities within North & South America, Asia, and Europe. Our clients range from Internet startups seeking venture capital to Fortune 500 companies’ expanding into foreign markets. The success of our firm is measured by our client's ability to confidently and successfully enter emerging global markets. Company Site: Visit http://www.zpryme.com

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