ILE – Industry Analysis of Indian hypermarket/supermarket business

ESMT MBA 2010

Team Smith
Introduction

India is one of the fastest growing developing countries and becoming more and more attractive for

different industries and investments. In the following, we take a closer look at the Indian retail market,

focusing on the hypermarket and supermarket formats. We analyze the market, its conditions and

potential developments with regard to the different types of players that either are already active in the

market or consider entry.

Both Indian and international companies are considered, for the latter the most important ones are Wal

Mart, Carrefour and Tesco. The Indian FDI (Foreign Direct Investment) restrictions force international

retailers to form joint ventures with Indian companies for market entry. Based on this legislation, any

foreign company can enter the retail market only if it forms such a joint venture with the foreign firm’s

share not exceeding 51%.

Until today, the majority of the Indian retail market, about 95%, is dominated by the so-called non-

organized format. This refers to small, usually family-owned shops, ‘Kiranas’, that are wide spread and

basically around the corner for their customers. The organized format, which currently represents only

about 5% of the market, is our focus in this analysis. Within the organized sector, there are two main

categories, hypermarkets and supermarkets, which are similar but also show some differences when it

comes to the impact of the classic ‘five forces’ that we have applied to analyze the industry. Within the

five forces, the major aspects are discussed including conclusions that we draw from the point of view

of a potential international entrant into the market.

In addition to Porter’s five forces, we also look at complements. As the retail industry is more

differentiated by the shopping format than by products, we consider complementing offerings like

apparel stores and food courts or entertainment like movie theaters in malls.

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Competitive rivalry

In the hypermarket category, Big Bazaar (owned by Future Group) is currently the only established

player with ~ 6.2 million square feet of retail space and 116 stores across the country. Although other

Indian players such as Reliance Retail Limited and Trent Retail Limited are present in the market, their

activity is still minimal and none of them has more than 10 stores. However, they are signing many real

estate deals in order to expand rather rapidly. With regard to international retailers, Wal-Mart, in joint

venture with Bharti Retail Private Limited, has opened its first store and is in expansion mode.

Interestingly, each of the players entering the market is actually helping to increase the size of the pie.

Some of the international players might prefer to bolster their presence through inorganic growth,

which they can achieve by rebranding existing stores of Indian joint venture partners. Carrefour’s plans

for a tie-up with Future Group are an example of such a strategy. As more and more players enter the

market, competition will increase. Generally, hypermarkets compete also through product

differentiation, which is comparatively easy to achieve due to their large size. This provides the

hypermarket category with a distinct advantage over the supermarket category. However, the capital

requirements for hypermarkets are higher compared to supermarkets due to the larger space and

resources requirements.

Regarding supermarkets, the competition is medium to high. There are some well established formats

such as Food Bazaar (owned by Future Group), Reliance Fresh (owned by Reliance Retail Limited),

Spencer’s (owned by RPG Limited) and More (owned by Aditya Birla Limited). They are expanding

more rapidly as supermarkets require lower capital expenditures than hypermarkets. Undifferentiated

product ranges, the risk of high inventory and price competition tend to make this sector generally

competitive. However, as about 95% of the Indian consumers still do their shopping in the traditional,

small shops, there is a large untapped potential for the organized supermarket players. In the long run,

for hypermarkets as well as for supermarkets, competitiveness will intensify as the players will aim to

draw advantages from of economies of scale, one reason being the high ratio of fixed to variable costs.
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Apart from Future Group, none of the other Indian players has much experience in the retail business.

These companies have their roots in industries as diverse as oil refining (Reliance), Telecom (Bharti

Wal-Mart), Steel (Trent, originated from Tata) and fibre manufacturing (Aditya Birla). These Indian

firms are planning tie-ups with international retailers so that they can combine their Indian market

knowledge with the technological and retail expertise of international players. Especially the sourcing

skills of the international players would allow these joint ventures to tighten their cost structures,

thereby adding another element to competitive pressure. However, it is unlikely that competition will

become very intense in the short to medium term considering the size of the untapped market.

Although the industry is growing at a healthy rate of 30-35% CAGR, it will take some years for it to

completely evolve. International players interested in entering the market should do so early if they do

not want to leave first movers’ advantages to others. In the description of the barriers to entry we

discuss more reasons why moving early would be beneficial.

Barriers to entry

The most crucial barrier for any international hypermarket and/or supermarket retailer in entering the

Indian market is the restriction imposed by the Indian government on FDI (Foreign Direct Investment).

However, there are many Indian firms willing to diversify into hypermarket/supermarket retailing and

looking for joint ventures with international players (as explained in the previous section). Hence, this

can be a win-win situation for an international retailer entering the Indian market and its Indian partner.

International players might also start retailing independently if the FDI restrictions get abolished, which

seems not unlikely as there is considerable pressure on the Indian government due to strong

international lobbying.

New entrants will not have the same cost advantages as established players. On the other hand,

international retailers can draw competitive advantages from their international experience with respect

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to cost management and best practices. In comparison, the learning curves of Indian retailers are still at

an early stage.

Other major aspects for an entrant to consider are the political environment and the bureaucracy, which

are not necessarily straightforward in India. The potential entrant has to get approvals from the federal

government as well as the provincial governments. This is even more crucial considering the resistance

against organized retailing in certain regions with strong communist influence. In addition, corruption

is also an issue and a considerable cost barrier to entry, requiring the firms to spend extra money for

bureaucratic hurdles.

Another more general entry barrier for a retail business is the capital requirement, especially the initial

expenditures on real estate (for stores and warehouses), logistics’ infrastructure and in-store

infrastructure. The available space and real estate for shopping and retail locations in central business

districts (CBDs) will not be sufficient for the estimated rate of retail expansion. Hence, the current

trend in urban India is malls in suburbs. In addition, retailers have the option to choose stand-alone

locations, which they can lease from real estate developers.

As mentioned above, hypermarkets have even higher capital requirements than supermarkets.

However, both supermarkets and hypermarkets typically break-even at a relatively fast rate of 2-3 years

in India. Moreover, Indian banks offer debt at a relatively cheap rate and the equity markets are also

well established. Hence, the capital for potential expansion can be arranged comparatively easily.

The road networks of India are still evolving and the infrastructure development will take time. This

can cause bottlenecks for the retail business in terms of logistics. This could be averted by working

with regional distribution centers. Future Group has been successful in quick response implementation

by virtue of its regional distribution hubs.

Regarding human resources, there is a deficiency of trained people for managerial roles and the

attrition rate is also relatively high. In response to this, many academic institutions have started

programs in retail management, which will help to provide qualified man power. In addition, major
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retailers such as Future Group are providing executive education for their employees. This is one

potential model also for new entrants to increase their necessary qualified workforce.

Thus, whilst there are various challenges in entering the Indian retail market, there are also several

factors reducing those barriers significantly. Overall, the barriers to entry are only of medium difficulty

and could be dealt with by applying an adequate entry strategy.

Customers

With regard to the Indian customers, there are several macroeconomic developments that play an

important role. The population growth, approximately 1.4 - 1.7% increase per year over the last 10

years, particularly in high and middle income groups, and the increasing share of young people -

average population age ca. 25 years - are overarching trends that contribute to the attractiveness of the

Indian retail market. With an average GDP per capita growth of 9% over the last 10 years and an

increase of per capita income, especially regarding disposable income of middle class households,

accompanied by falling interest rates and easier access to consumer credits, the potential customer base

for the modern way of retailing is constantly growing.

GDP and population growth 1999-

2009
199 200 200 200 200 200 200
9 0 1 2 2003 2004 2005 6 2007 8 9
GDP/capita 4,92 3,32 0,69 2,92 13,92 14,96 15,36 9,96 23,91 8,01 0,98
growth, % % % % % % % % % % % %
Population 1,77 1,74 1,71 1,67 1,64 1,60 1,56 1,52 1,50 1,47 1,44
growth, % % % % % % % % % % % %

On a first segmentation level, urban and rural customers need to be differentiated. The so-called urban

consumer is more and more exposed to international lifestyles, more inclined to spending and more

demanding. Especially the large, young part of the population tends to spend money more willingly.

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The changing spending and demand patterns are also related to greater levels of education. The adult

literacy rate rose from 52% in 1995 to 61% in 2001.

Shopping is for the young, urban segment no longer only an activity to fulfill needs, but an experience.

Customers are evolving from focusing on value for money to placing more value on time and

convenience, from traditional habits to more interest in experimenting with new possibilities.

Regarding different product types, there are also favorable developments from a food retailer’s point of

view. Considering beverages, there is an increase in coffee consumption and a greater demand for fruit

juices and bottled water. Demand for ready-to-eat food and premium and branded foods is rising. It is

probably more difficult for the unorganized, traditional retail formats, i.e. ‘Kiranas’ - the ‘Mom and

Pop shops’, to adapt their product range to more sophisticated products than it is for larger players of

the organized retail sector. Another development leading to potential advantages for the supermarket

chains is the increased tendency towards disposability and a stronger interest of consumers in design

and quality rather than pure price consideration.

Individually, customers have practically no bargaining power in retail stores that are operated in the

organized format. However, the switching costs for customers are low if there are comparable or even

better alternatives in their proximity. Whilst that might not be the case in the short term, this could

change with increasing competition.

In the un-organized sector, customers have comparatively higher bargaining power than in the

organized sector. Traditionally, bargaining is part of the way of selling in Kiranas. For these small local

cornershops, each individual customer is more important than for a big super- or hypermarket with a

large customer base.

In conclusion, the current developments within the Indian population and with regard to customer

characteristics, expectations and behavior contribute to the attractiveness of the Indian retail market for

new entrants also from abroad.

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Substitutes

The strongest substitutes for hypermarket/supermarket retailing in India are the traditional small shops

– the previously explained unorganized format. These small businesses are highly fragmented and

mostly family-run. Although these players are not technologically advanced, they have a market share

of about 95% of the Indian retail market. In smaller towns, they are still preferred since they supply

goods on credit and have close relationships with customers over many years. However, these shops

are very much transactional and do not provide a shopping experience. The modern Indian customer as

described above has evolved due to improved education and income levels. Many Indians of the young

generation travel abroad and get exposure to the international retail environment. Such consumers are

willing to pay a premium for a shopping experience. Hence, the unorganized retailers are starting to

lose their established position.

Another potential substitute is coming from farmers, who have lately started selling their produce

directly to end consumers. Traditionally, there have been two to three levels of intermediaries between

the farmers and the end consumers. These intermediaries have been a reason for higher selling prices as

the prices have to include their margins as well. The government has started encouraging farmers to

sell their produce directly so that the farmers are given a chance to demand a fair price. Despite the

good intentions of the government, this strategy has not paid off yet since farmers find it difficult to sell

the products themselves.

Overall, the future threat of substitutes for organized retail is therefore rather low, especially

considering that the market size of unorganised retailers has started to shrink.

Complements

In terms of complements, malls and multiplexes play an important role. Obviously, the location of stores is

crucial for a retailer as a matter of principle. Malls are becoming increasingly popular in India, also due to

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the exposure of the young generation to such shopping concepts in other countries. Therefore, any retailer

should evaluate mall locations carefully. They tend to be more expensive for renting or buying and the

availability of locations is limited. However, the downturn of 2008-09 has brought down the real estate

prices and it has become much more affordable. Moreover, it is estimated that 100 malls spanning a retail

space of over 30 million square feet will be opened between 2009 and 2010.

Malls might be well worth the investment as customers can do their food shopping while either taking care

of other shopping needs or while simply enjoying the shopping and entertainment experience. The latter

element is more prominent with multiplexes that include for example cinemas. Basic need shopping tends

to be less of a focus in those, however, customers might still look for both entertainment and different

shopping needs in the same location. For those decisions, more detailed market research is necessary.

Two other complementary elements play a role, credit cards or financial services and loyalty cards. While

Kiranas offer their customers the benefit of offering ‘informal’ credits, customers can get the modern

version of this service via credit cards that retailers offer in cooperation with banks.

Loyalty cards should naturally increase the frequency at which the same customer uses the same store while

providing useful information on customer preferences and behavior. With the above described increasing

competition, loyalty cards are widely introduced.

Suppliers

India is an established international sourcing hub for a wide range of products, including products such

as home textiles, apparel, house wares as well as fruits and vegetables. Many suppliers in India have

relationships with foreign players, often already for a long time. Carrefour has had a trading and

sourcing office in India since the 1990s and is working with about 90 Indian suppliers and farmers.

Tesco buys over €170m worth of Indian products every year, and Walmart has also been purchasing

from Indian suppliers for more than 20 years. Some sources indicate that supplier performance, in

terms of adherence to delivery schedules and order quantities, can be an issue. Many retailers exchange

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information with their suppliers manually and are often not satisfied by their level of services. Many

suppliers work with their retailers through distributors and wholesalers. However, technological

integration through vendor portals and vendor managed inventory is starting to be used and can give

retailers a competitive advantage. Therefore, supplier relationships are a crucial topic for existing and

new players in the market not only from a supply chain perspective. A contract with a large retailer such

as Wal-Mart can make or break a small supplier. In general, retailers in India do not have long-term

agreements with suppliers, which also reduces their bargaining power.

In conclusion, suppliers have to be regarded as a critical element in the value chain despite their rather low

bargaining power. As there are many suppliers, a strategy enhancing a retailer’s competitive position can be

to develop rather close links with suppliers in form of partnerships to help them improve their performance,

which the retailer could then benefit from. For foreign players entering the market, it is crucial to emphasize

the potential benefits of organized retail for domestic suppliers and farmers. Large international retailers can

for example introduce local suppliers to their global sourcing network, which offers them opportunities to

supply stores also in other countries. Since the arrival of organized retail in India is a threat for the

traditional non-organized and still prevailing form of retail in small shops, such a strategy can help to

overcome resistance from local constituencies and help to create growth both for themselves and the local

partners. In 2009, when Carrefour announced next steps regarding its activities in India, it met with

over 600 suppliers of food and non-food. This seems to prove the necessity to prepare the ground for

good supplier relations. On the other hand, big internationals like Carrefour might also have the option

to use their existing large global supplier network, i.e. the Asian part, for India.

Conclusion

As described above, the Indian retail market is attractive despite the challenges laid out in detail. In

conclusion, the following aspects need to be highlighted for market entry in India.

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If the potential entrant is an international, non Indian player, retail expertise is crucial. As described,

several retail specific skills will play a major role especially once competition intensifies, i.e. cost

management, sourcing, incl. supplier relationships, inventory control and technological interface

management. For an Indian player, the retail skills are similarly important. However, an Indian

company could get together for example with an international retailer who would in return benefit from

the Indian market expertise of the local partner.

Considering the large potential for the organized sector in terms of market size, profitability and

growth, there are clear potential benefits for early movers. As the retail industry, especially

supermarkets and hypermarkets, is generally a very competitive and margin-squeezed business, it

would pay off to establish a position in the Indian market as one of the first players. This would allow

for economies of scale, the establishment of brand and reputation, availability of attractive locations

and good supplier relations. Hence, market entry can be recommended depending on the set up of the

subsidiary or joint venture, time of market entry and the strategy applied.

List of References

1. Annual Reports (2008 & 2009) of the following publicly listed companies:
Carrefour, Pantaloon, Tesco, Wal Mart
2. ‘Business India Intelligence’, 2009, Report on business developments in India, Economist
Intelligence Unit
3. Company overviews and reports from Amadeus Database (Bureau van Dijk), ESMT Info
Center
4. ‘Indian Food Retail – Trends & Tasks’, 2007, Anand Kumar
5. ‘Indian retail: on the fast track – Time for bridging capability gaps’, 2005, KPMG & Federation
of Indian chambers of commerce and industry
6. ‘Indian Retail: Time to change lanes’, 2009, KPMG India
7. Fitch Ratings, 'Indian Retailing - Investing for Growth'
8. http://business.mapsofindia.com/india-market/retail.html
9. http://bharti.com
10. http://www.adityabirla.com/our_companies/indian_companies/retail.htm
11. http://www.ril.com/html/aboutus/rilretail.html
12. www.jllm.co.in

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