Investing In India with Dr. Uday Lal Pai

Retail boom - India is a hot bet

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted July 24, 2006

India is witnessing a period of boom in retail trade, mainly on account of a gradual increase in the disposable incomes of the middle and upper-middle class households. The country offers vast potential in retail business.

India tops annual list of most attractive countries for international retail expansion, as increasingly saturated Chinese market continues to decline, according to A.T. Kearney's Global Retail Development Index 2006.

"The Indian retail market is gradually but surely opening up, while China's market becomes increasingly saturated," said Mike Moriarty, vice president in A.T. Kearney's Consumer Industries and Retail Practice. "India is at the peak of attractiveness for retailers right now, with a $350 billion retail market expected to grow 13 percent this year," Moriarty said. "India's top five retailers together still account for less than two percent of the modern retail market."

By the end of 2010, the organized retail business in India is expected to emerge as a $300 billion industry. In the past five years, the cumulative growth in the sector has been 133%, said a study by McKinsey and the Confederation of Indian Industry (CII).

But, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has predicted that the retail sector in India may grow at the rate of 7% by 2010-11 to enlarge its market share to $280 billion from its present estimated level of $200 billion. An analysis carried out by ASSOCHAM on Future of Retail Industry in India pointed out that the size of organized retail alone would almost triple in the next 4-5 years and touch a business of $17 billion as against its current size of approximately $6 billion.

Meanwhile a study by McKinsey points out that India's market for consumer goods could reach a whopping $400 billion by 2010 - making it one of the five largest in the world. The Economist Intelligence Unit (EIU) country briefing on India, 2005, estimates the retail market in India will grow from $394 billion in 2005 to $608.9 billion in 2009. In fact, KPMG finds that the organized retail sector in India is expected to grow at a higher rate than GDP growth in the next five years, driven by changing lifestyles, strong income growth and favorable demographic patterns. According to EIU, India currently has more than five million retails outlets, out of which 96 per cent are smaller than 500 sq. ft. But this scenario is changing fast. The structure of retailing is developing rapidly with malls becoming increasingly common in large cities, and development plans being projected at 150 new shopping malls by 2008.

The traditional markets make way for new formats such as departmental stores, hypermarkets, supermarkets and specialty stores. Western-style malls have begun appearing in metros and second-rung cities alike introducing the Indian consumer to a shopping experience like never before. There are about 12million retail outlets in India, of which a vast majority is small mom & pop outlets. Now, the entire concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retail has entered India as evident from sprawling shopping centers, multi-storied malls and huge complexes offering shopping, entertainment and food all under one roof.

Growth drivers

Rising incomes and improvements in infrastructure are enlarging consumer markets and accelerating the convergence of consumer tastes.
Liberalization of the Indian economy which has led to the opening up of the market for consumer goods has helped the MNC brands like Kellogg, Unilever, Nestle, etc. to make significant inroads into the vast consumer market by offering a wide range of choices to the Indian consumers.
Increased per capita spending.
Advent of dual income families also help in the growth of retail sector.
Shift in consumer demand to foreign brands like McDonalds, Sony, Panasonic, etc.
Consumer preference for shopping in new environs
The internet revolution is making the Indian consumer more accessible to the growing influences of domestic and foreign retail chains. Reach of satellite T.V. channels is helping in creating awareness about global products for local markets.
About 47% of India's population is under the age of 20; and this will increase to 55% by 2015. This young population, which is technology-savvy, watch more than 50 TV satellite channels, and display the highest propensity to spend, will immensely contribute to the growth of the retail sector in the country.
Availability of quality real estate and mall management practices
Foreign companies' first attraction to India is the billion-plus population.

Organized sector has huge scope

The retail industry in the country is broadly divided into the organized and unorganized sectors. The total market in 2005 stood at $225 billion, accounting for about 11% of the country's gross domestic product (GDP). Of this total market, the organized sector accounted for $ 8 billion of the total revenues. That represents only 3.5% share of this market. According to AT Kearney, the organized retailing industry is expected to cross $23 billion revenue mark by 2010.

The organized retail business in India is very small. This is despite the fact that India is one of the biggest markets. Retail business contributes around 10-11 per cent of GDP. India also has the largest number of retailers, about 12 million, though they are mostly small. Most of the organized retailing in the country has just started recently, and has been concentrated mainly in the metro cities. Organized retailing in India has a huge scope because of the vast market and the growing consciousness of the consumer about product quality and services.

ASSOCHAM president, Anil K Agarwal says:"The organized sector retailing is all set to grow at much faster speed than unorganized sector and the higher growth speed will alone be responsible for its higher market share which has been projected for $17 billion by 2010-11. Cities and metropolis in which retailing will show booming prospects include Mumbai, Delhi, Chennai, Kolkata, Bangalore and Kanpur, said Agarwal adding that the popular mode adopted for building shopping malls in these cities will be based on build, operate, lease and sell basis"

The organized retail sector is expected to grow stronger than GDP growth in the next five years driven by changing lifestyles, strong income growth and favorable demographic patterns, a KPMG report titled 'Consumer Markets in India: the next big thing' said. "The structure of retailing is developing rapidly with shopping malls becoming increasingly common in large cities, and development plans being projected at 150 new shopping malls by 2008," says the report, adding that the annual growth of department stores has been estimated at 24 per cent, which is faster than overall retail; and supermarkets have taken an increased share of general food and grocery trade over the last two decades.

Indian Retail Forum chairman Krish Iyer says, ''The organized retail industry in India is just 3 percent. This just highlight huge opportunity in the sector, which is poised to grow to $25 billion by 2010.'' However, huge investment is required to realize the potential due to which FDI in retail needs to be seriously looked into, he added. By 2010, Indian organized retail is expected to have a 9 per cent share from the present 3 per cent of the total retail industry.

A study conducted by Fitch, expects the organized retail industry to continue to grow rapidly, especially through increased levels of penetration in larger towns and metros and also as it begins to spread to smaller cities and B class towns. Fuelling this growth is the growth in development of the retail-specific properties and malls. Fitch expects organized retail to capture 15%-20% market share by 2010.

A McKinsey report on India says organized retailing would increase the efficiency and productivity of entire gamut of economic activities, and would help in achieving higher GDP growth. The sector is the second largest employer after agriculture, although it is highly fragmented and predominantly consists of small independent, owner - managed shops.

With the organized retail segment growing at the rate of 25-30 per cent per annum, revenues from the sector are expected to triple from the current US$ 7.7 billion to US$ 24 billion by 2010, says AT Kearney.

Various agencies have made different estimates of the size of organized market in 2010. The one thing in common amongst these estimates is that the Indian organized retailing industry will be very big in 2010. The status of the industry will depend a lot on external factors like Government regulations and real estate prices, besides activities of the retailers and demands of the customers.

Indian Commerce Minister Kamal Nath says that big Indian retailers are as much a threat to mom-and-pop stores as Wal-Mart and Tesco. The Commerce Ministry is looking at bringing out a policy on retail. Commerce Minister Kamal Nath says that its not just foreign retailers that could displace mom and pop stores. Big Indian retailers could have the same effect.

Investment potential

Indian retail sector will see huge investments in the next 4-5 years, say market observers. Newer chains will come in and the present players will increase their penetration. By 2005, the established players would have reached saturation levels in metropolitans and will shift the focus of their investments to other Class 1 cities. By 2010, there will be little difference between the metros and the next 20 cities (the present million plus cities).

However, the investments would largely be private investments, or at best secondary markets. This will happen because expansion will happen through investments by business houses that will not sell their stakes. If any purely retailing company exists, it will be an exception. However, if the ban on foreign players holding a controlling stake is lifted, the sector could see drastic movements. The entry of foreign players will undoubtedly result in buying and selling and some businesses might withdraw their money in anticipation.

This year's decision to allow foreign direct investment of up to 51% in single-brand retailers has triggered market-entry announcements from retailers including Gap, Zara, UCB and Timex, among others. Wal-Mart has announced it will open an Indian office for market research, and Tesco has entered the market through a partnership with Home Care Retail Mart Pvt. Ltd., launching a hypermarket format called Magnet.

The world's largest retailer Wal-Mart has huge plans for India. It is moving a senior official from its headquarters in Bentonville, Arkansas, to head its market research and business development functions pertaining to its retail plans in India.

Leading global retailer Tesco is keen to enter the Indian retailing industry. The Chicago-based Sara Lee Corporation is planning to enter the Indian apparel market. Dior, the well known watch brand from the Louis Vuitton Moet Hennessy (LVMH) group, is planning to include India among its top 12 world markets. The Rosy Blue Group, the world's largest diamond manufacturer, is planning to invest in India.

New York-based high-end fashion retailer Saks Fifth Avenue has tied up with realty major DLF Properties to set up shop in a mall in New Delhi. Tommy Hilfiger, retailer of apparels, expects to open one store each in Delhi, Ahmedabad, Lucknow and Bangalore in the next four months.

Domestic giants to retail biz

More and more corporate houses including large real estate companies are coming into the retail business, directly or indirectly, in the form of mall and shopping center builders and managers. New formats like super markets and large discount and department stores have started influencing the traditional looks of bookstores, furnishing stores and chemist shops.

As the corporates - the Piramals, the Tatas, the Rahejas, ITC, HLL, S.Kumar's, RPG Enterprises, and mega retailers- Crosswords, Shopper's Stop, and Pantaloons race to revolutionize the retailing sector, retail as an industry in India is coming alive. Over the last five years, these groups have set up a number of chain stores. For instance, West Side by Tatas, Foodworld by RPG, Shoppers' Stop (Rahejas), and so on.

Not to be outdone, local retail conglomerates are rising to the challenge and racing to capture the best locations. Indian heavyweight like the Reliance group is planning to do a Wal-Mart in India.

Reliance Industries has announced a $3.4 billion investment to develop about 1,575 stores between December 2006 and March 2007.

Conclusion

Currently, there is no policy for this sector. This comes at a time when companies like Reliance Industries and Bharti are drawing up big retail plans. For foreign retailers, the ministry is looking at a model, which would ensure that there is little displacement and adequate investments. A few months ago, the government opened up single brand retail. Commerce Minister Kamal Nath says that while proposals have been received from high end brands, none have been cleared so far. Nath says that FDI in single brand retail would ensure that sourcing and manufacturing would increase substantially. Nath says that he expects investments to the tune of $112 million. India hasn't offered opening up retail in its initial services offer to the WTO. But Nath says that it could be used as a bargaining chip.

"There will be more and more players entering the retail sector - we will see the global players joining up with local big business houses to start offering their services. This will happen at two levels - high-end exclusive stores and mass value-for-money stores. In fact, in the coming 5-10 years, we will witness a `retail revolution' in India at a scale which would be bigger than many developed countries put together," says Anang Dev Jena, Research Director at Synovate.

India is a rising star at the beginning of a growth cycle, with consumer spending increasing at a strong rate, and people seeking and demanding a better quality of life. Organized retailing is witnessing a wave of players entering the industry. These players are experimenting with various retail formats. The entry of foreign players will not only affect ownership, but also change the basics of business. Huge investments in stores and their supply chains can transform the entire scenario.

India's vast middle class and its almost untapped retail industry are key attractions for global retail giants wanting to enter newer markets. As India continues to get strongly integrated with the world economy riding the waves of globalization, the retail sector is bound to take big leaps in the years to come. Investors would have to watch for these developments.

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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