Organised retail players who can aggressively scale-up their operations could target Rs 40,000-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 (Rs 960,000 crore). At the same time, the share of organised trade in this enormous market is currently very small. It is estimated at just USD8 billion (Rs 35,000 crore) in 2005, up from USD6.25 billion (Rs 28,000 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. (Tables 1 and 2)

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 (Rs 16,77,000 crore) in 2015. The organised retail market is expected to grow much faster, at a CAGR of 21.8 per cent to USD55 billion (Rs 246,000 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. (Table 3)

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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.

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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 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.

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. (Table 5)

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 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 Rs 40,000-crore retail business spanning multiple categories by 2015 (at current prices). Compared to this, the revenue of the largest Indian retailer, Pantaloon, grossed only Rs 1,085 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.

Uploaded on September 28, 2006