Research Indian retail

The Indian retail bazaarRiding on the Indian festival bandwagon.the Big Bazaar hypermart recentlyoffered a 'buy one, get one free' discountopportunity In its 29 stores around tbecounti'y The result: recoi-d-breaking saleswith customers thronging outside thestores to grab the lucrative offers.

This glimpse of frenetic commercestands testimony to tbe fact that organ-ised retail - a multi-outlet chain of storesrun by professional management - isgaining wider acceptance in a countrythat is still dominated by small andunstructured retailers symbolised by theubiquitous corner shop.

Fragmented marketOrganised retail has miles to go in India.It captures only three per cent of the$330bn (£176bn) retaii market wbicb ishighly fragmented and unorganised,comprising mostly family-owned busi-nesses that leverage their unique sellingpoint of being close to people's homes.

Modern retail chains which sprangup fewer than five years ago foreseeimmense growth potential. A vast swatheof Indian retail is yet to be tapped into.Compare this with organised retail activ-ity in Taiwan and Malaysia: organisedretail accounts for 81 % of total retail inTaiwan, whereas in Malaysia, Thailandand China, it makes up 55%, 40% and20%, respectively

With improving infrastructure facil-ities, especially in cities, and witb gov-ernment moving in the direction ofrelaxing rules for foreign brands, theIndian organised retail sector is set tobecome the new star on the commercial

Share in spending-urban households

Entertainment

Consumer services

Durables

Miscellaneousconsumer goods

Ctothlng and footwear

Food

Source; KPMG/Rocsearch

rural versus

Rural

33%

44%

50%

5 A

Urban

67%

56%

50%

43%

39%

36%

Case study: Mango - a foreign brand in IndiaForeign clothing brands made their Initial forays into the Indian market throughtheir Indian franchises. Spanish business, Mango, was one of the first labels toenter the Indian maricet. Facilitated by Major Brands (I) Pvt. Ltd, it has stucit to anexclusive retail format through franchises in each of the b)g Indian metropolises.

As a part of a government regulation that will soon come into play, it will takecontrol of its own stores in india - marking a significant step forward for globalplayers looking to entrench themselves in the indian market.

Mango has made strong inroads into the highly active clothing space in India bycashing in on the growing consumer disposable income and the accompanyingsplurge on clothing and apparel, it has close to 300 stores planned over the nextfew years.

it will be a challenge for the brand to take its proposition to the mass market.However the Spanish giant is undaunted. Autumn-winter this year will see thelaunch of Mango's first line of watches in India, the design of which is based on the'0* of the Mango logo.

horizon. The entry of the largest domes-tic business conglomerates such as theReliance Group, Aditya Birla Group andBharti Enterprises, bas upped both thecapital inflows as well as business con-fidence in tbe sector.

The largely untapped organisedretail arena is now viewed as a multi-billion dollar proposition by Indian andforeign players. It is backed by a strongeconomy wbere GDP has more than dou-bled in tbe last 10 years, a mushroom-ing middle class, and a young earningpopulation with an appetite for spendingthat is further spurred by a rapid risein the proportion of working women inIndia.

Indian middle class - the catalystA growing Indian middlt' class thut hasso far been used to buying apparel andgroceries from small and cluttei-ed neigb-borhood market shops is fast realisingthe joys of visiting swanky malls thathave redefined the freedom to sbop andentertain. Such malls are the new tem-ples of leisure and weekend entertain-ment.

India's National Council for AppliedEconomic Research estimates that thenation's middle class population cur-rently comprises about 17 million house-holds - 90 miUion people - with annualearnings ranging between $4,500 (£2,400)

and $22,000 (E1L736). An additional 287million could be termed as 'aspirers' orthose tbat hope to join the middle classin tbe near term. Rising incomes, par-ticularly in tlie lower and middle-incomehouseholds, are impacting retail growthin India as these groups tend to spendmore on upgrading and diversifying theirlifestyles, eating out and moving on toprocessed and convenience foods.

The middle class is the hope for lai'geIndian retail players such as Pantaloon,the Tatas and RPG Enterprises that bavemoved beyond the urban sprawl tosmaller cities in their bid to gain the first-mover advantage. Also joining them inthe fray is Reliance Group, which isexpected to change tbe dynamics of com-petition when it becomes the country'slargest modern retailer with an invest-ment of $2.5bn (£l.33bn) in 1500 superand hypermarkets by March 2007.

Similarly, India's Aditya Birla Groupis also investing $2bn (£1.1 bn) to roll outa mix of super and hypermarkets acrossthe country by 2007. Bbarti Enterprisesis yet another player foraying into thissector with an initial investment of$100m (£53.35m) in a tie-up with UK-basedglobal retailer, Tesco.

Targeting young workersThe huge and growing young workingpopulation is a preferred customer seg-

3« brand strategy november 2006

Indian retail Research

ment for major retailers. These youngpeople are early adopters of most mod-ern product lines.

The ongoing hoom in sectors such asinformation technology and husinessprocess outsourcing has created a clien-tele with high disposable income and aincreased demand for lifestyle mer-chandise such as watches, cosmetics andperfumes. This is a much-travelled andhrand-savvy urban population.

Interestingiy, an estimated 40-50% ofthe Indian working woman's salary isspent on apparel and footwear. Eatingout, mobile phones and accessoriesmake up the other leading spendingoptions. Jewellery stores such as Kiah,Sia and Tanishq specifically targetyoung, working women who haveincome of their own and are primarydecision-makers.

Boom beyond the *big six*The Indian organised retail sector hasbeen highly concentrated in six key des-tinations: Delhi, Mumbai. Bangalore.Chennai, Kolkata and Hyderabad. Cur-rently, 80% of retail sales come fromthese six leading cities.

Tier II cities are 67 towns in Indiawith a population of more than 500.000.housing almost seven per cent of India'spopulation and contributing 13% to theGDP Real estate activity and retail tradehave only lately begun moving towardssuch Tier II cities and there is hugeuntapped potential here.

The availability of cheaper realestate options in these cities is enablingretailers to break-even much fastercompared to larger areas. These cities

are also home to a growing number ofhigh income, upwardly mobile lifestyleaspirants.

Major retail players such as Pantaloonplan to enter a large number of smallcities such as Meerut, Jalandhar, Lud-hiana and Kochi. Similarly, Westside'sfuture strategy Includes establishing thehrand in Indian townships with a popu-lation of more than 100.000. Then thereare malls coming up in the rural hinter-land such as ITC's 'Chaupal Sagar' thatoffers a diverse range of products, fromfood and cars, to electronic appliances.

In order to compete better, retailersare also exploring a variety of retail for-mats such as business-to-business whole-sale superstores, supermarkets.hypermarkets, convenience stores, healthand beauty specialty stores and discountstores. Although hypermarkets are acommon element in the expansion plansof most retailers, the specialty and super-market formats offer the strongest poten-tial in India.

Apparel rules supremeClothing and accessories rule the roost inIndian organised retail. They account forthe maximum share of 38% in organisedretail in India, followed by food or gro-ceries and consumer durahles at 11% andnine per cent, respectively

Park Avenue, Chiragh Din, Liberty,Double Bull. Proline and Snowhite areamong the leading players catering to thehranded apparel market. It took a longtime for global brands such as Allen SoUyand Van Heusen to create a respectablemarket share in the ready-to-wear seg-ment, especially in the face of fierce com-

Case study: Hidesign - an Indian brand abroadAfter tasting success in the Indian market with its leather bags and accessories

collection, Hidesign, the Pondicherry-based Indian brand, has begun charting its

course internationally. It appears to be doing well. The president of Hidesign, Dilip

Kapur, has invested $<|ni (£2ni) in joint ventures in Dubai. Malaysia, South Africa,

Russia, US, and more recently in China, Denmark and Sweden.

The diversification is not just into geographies but also into related product

groups such as clothing. In the president's own words, the objective for Hidesign

is to feature among the top luxury brands in the world through around loo

targeted stores over the next two years. The company has also roped in Alberto

Sciaccinj, the one time chief designer of leather products at Emporio Armani, to

work on its range.

Mooring forward, Hidesign wiUoffer customised solutions enabling Its customers to

choose from an array of leather, designs and styles for making their own unique bag.

Cities by classification andcharacteristics

TienCharatteri5tirsHigh skill availability.infrastructurecapabilities and highquality of life

Tier 1-1

CharacteristicsSimilar capabilitiesas Tien cities butwith lower visibility

Tier 2

CharsrteristifiEmerging cities.attracting new andhigh-tech industries

Tier 3CharacteristicsCities focusing on ITas a key growthindustry but do nothave the requisitesof infrastructure.facilities and qualityof life geared as yet

CitiesBangalore, Mumbai,New Delhi

CitiesHyderabad,Chennai, Pune,NOtDA. Guidon

CitiesKolkata, Man galore.Ludhiana,Chandigarh/Mohali,Bhopal

CitiesMysore, Nasik,Kochi, Nagpur,laipur. Indore.Shimla, Lucknow,Kanpur. Panaii,Srinagar

Source: KPMG/Rocsearch

petition from local brands.Today, there is also a discernible

trend towards reverse globalisation inthe case of Indian apparel. Indian brandssuch as Zodiac Clothing have created aniche for themselves in competitive mar-kets such as Holland and the UK. Simi-larly. Indian leather brand, Hidesign. isbeing retailed at premium internationaloutlets in South Africa, China. Dubaiand Russia.

Players in the retail industry areadopting different strategies to competeeffectively. In keeping with their scaieand competitive advantage, certainbrands have been focusing on regionalmarkets and trying different retail for-mats. For instance, in food retail. Food-World. Nilgiris. Margin Free Market,Giant, Varkey's and Subhiksha are focus-ing on the regionai markets in SouthIndia whereas Sabka Bazaar is presentonly in and around the capital city ofDelhi.

With the Indian government stilldithering over the issue of allowingdirect access to foreign companies in theretail sector through the 100% foreigndirect investment (FDD route, domestic

brand strategy november 2006 37

Research Indian retail

players have been experimenting withinnovative retail formats and valuepropositions.

Foreign players on the fringeLarge foreign retailers such as Wal-Martand Tesco are currently watching from

the sidelines but they are hopeful thatthey can find a direct entry into theIndian retail market.

Many foreign companies have alsobeen exploring possible alternative entryroutes such as brand licensing, fran-chising, cash & carry and wholesaling,

Co-existence of muttiple formats, but modern formats with internationalshopping experience are gaining popularity

Historic/rural reach

Weekly markets

Traditionalreach

Mom and Pop/Local Kirana store

Government-supported

PDS outletsKhadi stores

Co-operatives

Modernformats/

international

Exclusive brand outlets/Supermarkets

Departmental storesShopping malls

Mela's

Source of Neighbourhood Availability/ Shoppingentertainment stores low costs experience/efficiency

Value proposition for customers at each stage

Source: ICICI/Rocsearch

Organised retaii is moving from being a 'novel' experiment to expected back-end innovation and scale build-up

New retail entrantsdriving top line

growth

Consumers demandvariety in

2002 Flrat phase

Source: HSBC/Rocsearch

Retailers strengthenbackend systemsand supply chain Gmsolidatloti

actMty

2004 Second phase 2006 Third phase 2007+ Fourth phase

Growth in income (million households)

Bo

7060

5040

JO

30

iO

O

Key: Low income Mass affluents High Income

14.3V'-''

1996 2005

Source: NISSO, AC Nielsen, NCAER and Rocsearch

How malls will alter the retaillandscape and shopping experience

$64.3

FY 2005 FY 2oio(e) FY2OJ5(e)

Source: Morgan Stan ley/RocSearch

where 100% FDI is allowed, apart fromonline retailing. Some of the foreignbrands that have successfully venturedinto the Indian marketplace includeMetro, Shoprite, Louis Vuitton Moet Hen-nessy, Marks & Spencer, Mango and Ver-sace. The recent permission granted tothe foreign players for operating exclu-sive branded stores with 51% FDI is areally positive step, both for internationalbrands and the local Indian retail sectoras whole.

Foreign brands that currently oper-ate through various routes generallyposition themselves to cater to therequirements of a niche category of buy-ers. For instance, Spanish womenswearretailers such as Mango prefer stand-alone stores and are positioned at high-street locations with upmarketenvironments such as shopping malls.Similarly, the Canadian lingerie brand.La Senza, and the French womenswearline, Promod, are targeting women whohave travelled internationally and wantto look like their counterparts in foreigncountries.

The level of competition between thedomestic players as well as between localand foreign brands has started gettingintense. But the foreign players do not asyet enjoy as much leeway as their Indiancounterparts.

The future of Indian retailFrom its current $10bn (£5.3bn), theIndian organised retail sector is expectedto grow into a $64bn {£34.2bn) enterpriseby 2015. Witb tbe retail pie continuing toexpand on the back of rising disposableincomes and spending power, bothdomestic retailers as well as foreign

brand strategy november aoo6

indian retail Research

Shopper type by gender

Male Female

79

Source: NISSO, AC Nielsen. NCAER and Rocsearch

Organised retail: segment share 2005

Apparet and accessories 38%Food & groceryConsumer durablesFootwear

Furniture ^ ng

Catering

Mobile phones

Books, music and giftsJewellery

Entertainment

1 1 %

9%9%8%7%

3%3%3%

2 '•:•2%

Health & beauty care services 1%

Source: HSBC, India Retail Report 2005 - KSA Technopak, E&Y and Rocsearch

Comparative penetration of organised retail

Traditional Organised

100

60

3%

> ' ^ ^ '" -^^^ y y ^^Source: HSBC, India Retail Report 2005 - KSA Technopak, E&Y and Rocsearch

Changing demographics in India

% population 199S 3003 1008

0-14 years 344 32.3 30.0

15-64 years 61.0 63.1 64.9

over 65 years 4.6 4.8 s>i

• India is increasingly being acknowledgedas a Voung" nation, with about 35% of itspopulation Less than 14 years of age

• Strong demographic growth is predictedin the main consumer age (15-64)

• The proportion of the Indian population inthe consuming age class (15-64) will increasethe most over the next few years

• The median age of India's population is24 years

• Youth are early adopters of most modemproducts and are emerging as the targetmarket for consumer goods

Source: ElU, August 2004 and Rocsearch

players Eire expected to capitalise on thelatent potential in the Indian marketplace.

While new entrants are drivingtopline growth, the Indian retail indus-try is still in its preliminary phase. As ofnow. minor instances of strategicalliances have heen reported in a bid toexpand product range. For instance,Future Group (owners of Pantaloon andBig Bazaar) has formed alliances withhrands such as Liberty Shoes. UnitechEnterprises and Planet Sports to expandits ranges of footwear and home prod-ucts. Industry watchers expect consoli-dation to happen only after 2012 whenthe players should have bolstered theirlogistics and supply chains.

Still in its nascent stage, the Indianretail sector offers strong growth poten-tial. Jeffrey H. Cohen, global head of retailinvestment banking at UBS, noted that:"Lack of consolidation and strong eco-nomic fundamentals promise huge poten-tial for the Indian retail sector". Perhapshe'll be queuing up for Big Bazaar's nextdiscount offer with everyone else. •

Matloob Hasan Li senior research analyst,Aneesh Issar is associate manager. Gaya-tri Ojha. senior associate and BhanuPratap Singh is research editor at Roc-search India, a knowledge services out-sourcing firm hased in the UK and India.For information about the full report'Indian Retail Industry - An Analysis'contact: gayatrLojhaiairocsearch.com

brand strategy november 3006