retailing in india - case study

November 2012www.verdict.co.uk

Find out which global retail players are entering the fast-growing India retail market – and which are tipped to be next

Retailing in IndiaCase study: A passage to India – major retailers and potential new entrants

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Retailing in IndiaCase study: Major retailers in the country and potential new entrants

The Indian retail market growth spurt makes more room for international playersRetail is now the second largest contributor to India’s GDP. The market is growing fast, with Verdict forecasting its value to more than double in 2015 from 2006, to hit more than $764.7 billion. This, along with the recent relaxation of investment rules for multi-brand retail, and changing consumer behaviours, makes India an attractive prospect for many international players.

Traditional retailing – mostly made up of family-owned small businesses – is still the dominant force in India’s retail landscape. Modern retail is worth only between 5-7% of the total market, but a growing population of young, more affl uent consumers, a gradual shift towards shopping mall culture and the wave of international players means modern outlets are growing, and consumers increasingly want them.

Despite this, conservatism will not be completely stamped out. Consumers will shop at a mixture of traditional and modern outlets, gravitating more towards modern outlets for planned trips such as the monthly food shop. But they will still hold a candle for neighbourhood shops for more spontaneous buys, such as personal care products.

The latest reforms in foreign direct investment mean that single brand retailers can own 100% of their Indian operations (up from a maximum of 51%), and multi-brand operators such as supermarkets, which were previously restricted to cash and carry and wholesaling, are now allowed to open their own stores and own up to 51% of the business.

Retailing market in India ($bn)

Source: Verdict Research

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2006 2007 2008 2009 2010 2011 2012(f) 2013(f) 2014(f) 2015(f)

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There are still some major restrictions for multi-brand retailers:

• India’s individual state governments will decide if international retailers can come in• Retailers will only be allowed into cities with a population of more than 1 million. A state with no

city this large will be able to choose where to let a foreign retailer open its doors • Almost a third of a retailer’s goods are to be sourced from small businesses• Retailers need to invest a minimum of $100m within three years of entry.

The minimum investment rule insures only very large global retailers will make the jump, but perhaps even more diffi cult is the 30% local sourcing rule which will involve retailers having to fi nd a large number of smaller businesses (defi ned as those with investment of less than $1m in plant and machinery) to supply goods. Having become a supplier to foreign retailers, if it then wants to expand and invest more than $1m in plant and machinery, its sales will no longer count as part of its customers’ 30% quotas. This catch-22 situation does not seem to serve the longer interests of small businesses in India, or the realities of global retailer sourcing strategies. The Indian government has changed its mind many times before on FDI rules, and no doubt it will be under pressure to change this onerous rule.

India’s major cities – such as Delhi, Mumbai and Bangalore – and those close to them have been the main stomping ground for modern retailers, but this concentration means that the areas are already saturated. Emerging cities (known as tier II and tier III), such as Chandigarh, Nagpur, Kochi and Meerut, are being increasingly targeted as IT, telecoms and automotive businesses move in, and they are expected to see the highest growth levels over the next two decades.

Some established international retailers have already taken advantage. Samsung embarks on road shows to show case products in tier II cities. Meanwhile The Body Shop has branched out into cities such as Ludhiana, Jaipur and Mangalore, while L’Occitane is considering moves into tier II cities.

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Entry into India: Grocery makes up majority of retail, but many sectors can tap into India’s potential

ESTABLISHED CONSIDERING ENTRY

Food and grocery is India’s biggest segment for organised retail, with around a 65% slice of the total market. Behind that, clothing, accessories and luxury goods accounts for 13% of share.

Electricals and electronics is forecast to see an annual compound growth rate of 13.1% between 2010 and 2015, but clothing, accessories and luxuries is expected to accelerate fastest over the next four years. The sector’s international brands are moving in faster than some others, and fashion houses are also becoming widespread, while luxuries are more in demand.

Debenhams – 2 stores opened, with plans for 30 in 13 cities

Ikea – considering €1.5bn investment for 25 stores

Tesco – no physical presence but runs infrastructure for joint venture partner Trent’s Star Bazaar chain

Lush – 16 stores opened, mainly in shopping malls

L’Occitane – 3 stores in Delhi and 3 shop-in-shops (Shoppers Stop) outlets

M&S – 25th store opened in April 2012, with plans for around 60 outlets by 2014

The Body Shop – 80+ stores in malls, airports and standalone outlets

Walmart – 5 cash and carry stores with local joint venture partner Bharti Retail

Zara – 8 outlets opened with parent Inditex keen to enter with more of its brands

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Some of the UK’s national retail treasures have already made strong in-roads into the India market, and other global players are established presences.

M&S marked a rite of passage to India with the opening of its 25th store in Bangalore in April 2012. M&S owns 51% of a joint venture with Indian brand Reliance Retail, and its brand, Marks & Spencer Reliance India, offers clothing, home decor, kitchenware, toiletries and toys and books. Its stores are in most major cities, with one at Indira Gandhi International Airport.

Zara’s parent company Inditex Group formed a joint venture with Trent, and now operates four Zara stores in Delhi and Mumbai. It plans to open around 8 to 10 stores a year, and introduce some of its other brands.

Lush’s agreement with owner and operator Amaltas Retail has been in place since 2004. Meanwhile competitor The Body Shop entered into the market in 2006 in partnership with India’s Planet Retail subsidiary Quest Retail. It plans to reach 150 stores by 2014, with one initiative being to reduce prices on 200 major lines permanently in the wake of the economic downturn in 2009.

Strong electrical brands have made the push into retailing. Samsung’s revenue from India was worth 3% of the company’s total in 2010, with the company expecting to reach 5% by 2013. Meanwhile Sony and Panasonic both have branded outlets in the triple digits across the country.

But the latest big development comes from Ikea, which has long yo-yoed in its plans for entry into the country amid the confusion surrounding foreign direct investment rules, but is one of the latest to have got on board. The Swedish home retailer has applied to the Indian government to set up its stores in the country, and is reported to be looking at a €1.5bn investment of 25 stores.

Clothing retailers keen to make the leap include Topshop, Uniqlo and luxury brand Max Mara.

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Retailers partnering with local presence International retailers have entered India primarily in four ways:

• Joint venture • Franchising • Strategic license agreement • Cash and carry wholesale trading.

Clothing and health and beauty retailers have been the major takers of joint ventures with a local partner. But Tesco’s partnership with Trent has meant that the UK’s biggest supermarket chain can integrate its supply chain operations with its partner’s Star Bazaar brand, which buys more than 70% of its products from Tesco’s wholesale arm.

Cash and carry trading has been a main route for supermarket chains because it allows for 100% FDI. German grocery fi rm Metro was one of the fi rst to set up in India using cash and carry stores, but Walmart, Carrefour and Tesco have followed suit. The developments around FDI means that these retailers can set up shop in their own right, assuming individual states will allow it.

Perfect partners – retail joint ventures in india

Local Partner International Partner

Reliance Retail M&S, Diesel

Planet Retail Debenhams*, The Body Shop (Through Quest Retail)

Trent Tesco, Zara

Beauty Concepts L’occitane

Bharti Retail Walmart

*Arvind Has Since Acquired Business Operations From Planet Retail

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This case study was taken from Retailing in India – a Verdict Channel Strategy Report For more information on this report please email [email protected], http://bit.ly/Prjcnd or call +44 (0)20 7551 9664

Retailing in IndiaIntroduction

The Indian retail market has grown at a double-digit compound annual growth rate over the last fi ve years and was worth an estimated $554bn in 2011. The Indian economy grew throughout the global downturn, with increasing consumer purchasing power bolstering the retail sector. Retailing is now the second highest contributor to India’s gross domestic product.

Features and benefi ts

• Uncover the main opportunities available in the Indian retail market across Clothing, Grocery, Electricals, Health and Beauty and Homewares

• Understand the size of the Indian market by sector and the growth forecasts to 2015• Understand the key fi nancial, cultural, political and logistical reasons that has so far held back

the development of modern retail in India• Discover which retailers are operating in India and with which local partners.

Highlights

Confusion reigns over India’s FDI policy. Currently international food and grocery retailers are prohibited from entering the Indian market, except through cash and carry wholesale trading, but the government announced plans to lift restrictions in 2011, but then committed an embarrassing u-turn just weeks later.

The emergence of modern retail started in the major cities of Delhi, Mumbai, and Bangalore, and the satellite towns which have developed around them due to the huge infl ux of young professionals. Modern retail is concentrated in just a few cities, and premium locations there have already become saturated.

Employing 8% of the total work force, retail is the second largest employer in the country. The majority of these workers are self-employed, as India has a huge base of traditional retail outlets which are often family-owned. At present, modern retail represents only 5–7% of total retail in India.

Your key questions answered

• Why has India’s organised retail sector taken so long to develop, and what is continuing to hold it back?

• How large is the retail opportunity in India, and which sectors are most amenable to entry by foreign retailers?

• Which international players are operating in India and who do they partner with?

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About VerdictVerdict is a retail information specialist within the Informa Group. With almost 30 years’ experience, Verdict publishes unrivalled independent analysis. We provide a complete picture of the UK and increasingly the international retail arena, helping retailers, manufacturers, service suppliers, analysts and consultants to fully exploit opportunities within the industry.

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retailing in india - case study

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