THE GREAT INDIAN RETAIL STORY

By: Akash Saraf; Amit Karande; Ashish Misra; and Srinivasa Bhamidipati

July 26, 2014

Table of Contents

1. Sector Overview
2. Competitive Landscape
3. Regulatory Framework
4. Conclusions & Findings

July 26, 2014

Retail Sector in India: At a glance

Traditional retail is expected
to
grow at 5%, while organized
retail is expected to grow at
20 to 25%.

The overa
ll retail ma
rket in
India is like
ly to reach
Rs 47
trillion (US
$ 792.84
billion)
by FY 2017

Total retail sales

In organized retail during 2012-2020

Organized
retail, whic
h
constituted
seven per
cent of
total retail
in 201112
is
estimated
to grow at
a CAGR
of 24 % an
d attain 10
.2 %
share of to
tal retail by
2016
17

Organized Retail Sector Penetration

Index (GRDI)

India slipped to the 20th

rank from 14th rank in 2013,
due to lower GDP growth,
high inflation, currency
fluctuations & lack of clarity
around FDI policies in multibranded retail

Global Retail Development

July 26, 2014

Evolution of Retail Sector in India

Consolidation
Expansion
2010 onward
Large scale consolidation

Conceptualizati
on

Initiation
Pre 1990s
Manufactures
opened their
own outlets

199005
Pure play retailers
realised the potential of
the market
Most of them in
apparel segment

Movement to smaller cities

and rural areas
2005-10
Substantial
investment
commitments by
large Indian
corporate
Entry in food and
general merchandise
category
Pan-India
expansion to top 100
cities
Repositioning by
existing players

More than 56 players with

revenues more than USD700
million
Large scale entry of
international brands
FDI in single-brand retail up
to 100 per cent from 51 per
cent
Approval of FDI limit in
multi-brand retail of upto 51
per cent
Rise in private label brands
by retail players
Sourcing and investment
rules for supermarkets were
relaxed
July 26, 2014

Classification of the Retail Sector in India

July 26, 2014

Strong Growth in the Indian Retail Industry

The Indian retail sector has consistently contributed around 1820% of the total
GDP. Growing private income and corresponding private consumption
expenditure, rapid urbanization as well as the entry of foreign players have been
key growth enablers for the sector.
The Indian retail industry has experienced growth of 10.6% between 2010 and
2012 and is expected to increase to USD 750-850 billion by 2015.
The total retail market is expected to more than double over the next 57 years,
1400
reaching a value in excess of USD1.3 trillion.
1300
4%
8. GR
CA

11%

Food & Grocery

Appareal

3%
3%
4%

Mobile and
telecom
Food service

5%
6%
8%

Jewellery
60%

In billion USDs

1200
1000
800
600

424

Consumer
Electronics

400

Pharmacy

200

Others

.8%
18 GR
CA

2010

10.6%
CAGR

869

518

2012

2015E

2020E

Note: For the purpose of above graph currency value for $1 is taken
as INR 50 in 2010 and INR 55 in 2013 and 2015

July 26, 2014

Organized Retail in Nascent Stage

Indian retail market is in its nascent stage; unorganized players control the market
with 92% market share during 2012. There are over 15 million mom-and-pop stores.
Indias organized retail penetration is pegged at 8% compared to other countries such
as the U.S. (85 %), which indicates strong growth potential for organized retail in India.
Within the organized retail sector, Apparel is the largest segment. Food and Grocery
and Mobile and telecom are the other major contributors to this segment.
Appareal
20%

Food and Grocery

33%

92%

8%

Mobile and telecom

4%

Consumer Electronics

6%

Food service
Jewellery

7%
8%

11%
11%

Footwear
Others

Organized retail, which constitutes 8% of the total retail market, will grow much faster
than traditional retail. It is expected to gain a higher share in the growing pie of the
retail market in India. Various estimates put the share of organized retail as 20 % by
2020.
About 4050% of the demand up to 2015 will come from Tier 1 cities.
July 26, 2014

Organized Retail Penetration (ORP) has witnessed a

positive growth trend
Growth in organized retail has been consistent since 2004, and high growth has
been witnessed, mainly since the past 23 years.
Well-established chain of hypermarkets, supermarkets, department stores and
other modern retail formats contributed to such a high level of ORP. Modern
retail formats in India are gradually gaining prominence with changing consumer
lifestyle and preferences.

July 26, 2014

Disposable income and favourable demographics may far

outweigh barriers related to regulatory complexity and
finance availability

July 26, 2014

Rise in online grocery retailing, FDI in specialty stores,

usage of retailer loyalty programs and focus on tier 2 & 3
cities would be the key trends, going forward
Adoption of online grocery retailing

Quiet a few grocery retailers have started offering online services. These players are
particularly popular in the metros, catering to the tech-savvy customers.

Dilligrocery.com and Chennaionlinegrocery.com are two examples of companies offering

home deliveries at attractive rates, user-friendly websites, and sharp turnaround times.

Going forward, rise in internet penetration, growing 3G subscriber base, & growth of
internet enabled devices are key growth enablers for the industry.

Rising FDI in specialty stores

With liberalization in single-brand retail trade (from 51% to 100%), the sector is poised
to witness new entrants going forward.

Few examples include (Apparel and beauty - Brooks Brothers, Kenneth Cole, Sephora,
and Armani Junior, Standalone boutiques - Roberto Cavalli and Christian Louboutin,
Food -Starbucks, Dunkin' Donuts).

However, due to ambiguity concerning 51% multi-brand retail trade policy, entry of
players in this category has been limited. Tesco entered in a JV with Tata owned Trent
Hypermarkets Ltd. in March 2014.

July 26, 2014

Rise in online grocery retailing, FDI in specialty stores,

usage of retailer loyalty programs and focus on tier 2 & 3
cities would be the key trends, going forward
Adoption of online grocery retailing

Stiff competition and saturation in urban markets is expected to drive domestic retail
players to tap potential in small cities.

Retail real estate rentals are relatively cheaper in smaller cities vis--vis urban markets.
Therefore in metros and Tier1 cities, where real estate costs are relatively higher,
compact formats will gain popularity.

On the other hand, Tier2 and Tier3 cities will be attractive for the growth markets for
supermarket and hypermarkets.

Pantaloons Fashion Ltd, Future group and Shoppers Stop have recently unveiled plans
to expand their presence in Tier-2 and Tier-3 cities in India.

Rising FDI in specialty stores

Companies have started adopting innovative marketing strategies & programs in order
to retain and grow customer base.

Retailers today are working towards shifting the focus from price to value, relevance,
differentiation and competitiveness. Customer loyalty is a tool used by the retailers to
enhance customer base.

Retailers have started using business intelligence systems to analyze the customer
data, helping them improve merchandise, campaigns and targeted advertising.
July 26, 2014

Table of Contents

1. Sector Overview
2. Competitive Landscape
3. Regulatory Framework
4. Conclusions & Findings

July 26, 2014

Organized retail sector is dominated by large industrial

conglomerates, with over a decades experience in
domestic retail industry

July 26, 2014

Each of these players have expansion plans involving new

store openings or investments in the range of USD 50 USD
100m, over the next five years

LEGAL ENTITY, department or author (Click Insert | Header & Footer)

Month Day, Year

Key characteristic of the sector is high level of

consolidation; subsectors showing M&A activity are
clothing, eateries, footwear & catalogue etc.

LEGAL ENTITY, department or author (Click Insert | Header & Footer)

Month Day, Year

Table of Contents

1. Sector Overview
2. Competitive Landscape
3. Regulatory Framework
4. Conclusions & Findings

July 26, 2014

Over the past few years, government has tried to implement

regulatory policies in favor of foreign players planning to enter
the domestic retail markets
Over the past few decades, India has opened up its economy in a steady fashion to private and foreign
investment. The FDI policy regulates industries open to foreign investment and percentage stake
allowed to be owned by foreign players.

1997
to 2012
100%

2006

FDI up
FDI up to 51%
allowed under the
allowed with prior
automatic route in
government
Cash
&
Carry
approval in single51%
FDI
in
multi-brand
retailretail
(subject to
(wholesale)
brand

following conditions)

Minimum investment cap is USD 100 m. 30%

of
the
procurement
value
of
manufactured/processed products must be
from SMEs.
Minimum 50% of total FDI must be invested in
back-end infrastructure within three years of
the first tranche of FDI.
As per 2011 Census, retail sales outlets may
be set up only in cities with a population of
more than 100,000.
To ensure the Public Distribution System (PDS)
and Food Security System (FSS), government
reserves right to procure a certain amount of
food grains.
Retail trading, in any form, through ecommerce would not be permissible for
companies with FDI engaged in multi-brand
retail trading.

2010

Government
proposed to allow
FDI in multi-brand
retail

Government approved 51
per cent FDI in multi-brand
retail and increased FDI
limit to 100 per cent (from
100% FDI in single-brand
(subject
to
51 per retail
cent) in
single brand
following conditions)retail
Minimum investment cap is USD 100 m. 30%
of
the
procurement
value
of
manufactured/processed products must be
from SMEs.
Minimum 50% of total FDI must be invested
in back-end infrastructure within three years
of the first tranche of FDI.
As per 2011 Census, retail sales outlets may
be set up only in cities with a population of
more than 100,000.
To ensure the Public Distribution System
(PDS) and Food Security System (FSS),
government reserves right to procure a
certain amount of food grains.
Retail trading, in any form, through ecommerce would not be permissible for
companies with FDI engaged in multi-brand
retail trading.
July 26, 2014

As result, the past few years have witnessed an influx of global

retail giants entering the Indian retail market
Retail Industry Major Foreign players operating
in India
Wal-Mart, the worlds largest retailer, entered into
a Joint Venture with Bharti Enterprises, a leading
conglomerate.
The 50:50 JV Bharti Wal-Mart Private Limited, is
primarily engaged in establishing wholesale cash
and carry stores and back-end supply chain
management operations in line with government
regulations.
Currently, the company has 20 stores across the
country and plans to open 50 cash & carry outlets
by 2018

The Carrefour Group announced the opening of its

first cash and carry store in New Delhi under the
name Carrefour Wholesale Cash & Carry
Carrefour SA, the world's second-largest retailer
has recently invested USD 29 million in its whollyowned cash & carry business in India, called WC&C
India Pvt Ltd.
Currently, the company operates 5 stores.

In 2014, Tesco announced a 50:50 Joint Venture

with Trent, a part of the Tata Group, by picking up
50% stake in Trent Hypermarket
On completion of the transaction, THL will operate
12 stores retailing a range of merchandise
including food and grocery, personal and homecare products, home and kitchen as well as fashion
and accessories
The stores are operated under Star Bazaar and
Star Daily, and spread across the southern and
western regions of India.
Metro AG, a Germany-based cash and carry group,
was amongst the first retailers to launch cash &
carry operations in India (Bangalore)
In 2013, the company announced that it is focused
on setting up smaller stores of about 50,000 sq. ft.
each, with fewer stock keeping units (SKUs) in the
range of 8,00010,000, from its earlier model
sized at more than twice the area (125,000 sq. ft.)
and almost 15,000 SKUs.
Metro has invested close to USD 180 million on
stores in India, with the larger model requiring an
investment of about USD 20 million each.
July 26, 2014

Despite the sector opening up, the Indian retail industry still
witnesses complexity and irregularity of regulations
Retail Industry Other regulations
Goods & Services Tax

The retail sector in India is subject to multiplicity of indirect taxes. The Government of India (GOI) is
looking to introduce Good and Service Tax (GST), which would combine service tax and other statelevel taxes into a single GST. This would allow companies to set off between various taxes.

The retail industry currently does not earn any set-off credit for service tax/local body taxes paid.
Implementation of GST would help set off these taxes and in turn aid margins.

However, GST implementation is being held back due to continuing deadlock between the Central
and State governments with regard to revenue sharing and compensation package.

FDI in multi-brand retail

GOI has allowed 51% FDI in multi-brand retail, subject to compliance of certain conditions. However,
since retail falls under the jurisdiction of the state, each state needs to ratify this law to allow 51%
FDI in multi-brand retail.

Furthermore, the existing law requires companies to follow additional conditions, the key being 1)
sourcing of at least 30% of goods by value from SSI (small scale industries); 2) minimum investment
of USD 100 million, of which 50% must be in the back-end chain; and 3) setting up retail stores only
in cities with population size exceeding 1 million.

Currently, some states have rules dissuading direct sourcing. For example, the APMC (Agriculture
Produce Market Committee) Act in Maharashtra compels organized retail players to take assistance of
intermediaries to source fruits and vegetables. This puts additional cost pressure on retailers.
July 26, 2014

Table of Contents

1. Sector Overview
2. Competitive Landscape
3. Regulatory Framework
4. Conclusions & Findings

July 26, 2014

ORP in India is relatively low; 14th most favorable destination for

Attractive Opportunities
international retailers
Growing apparel retail
market: Current
penetration of apparel segment in the
organized retail market is 10%. This is expected
to increase to 3035% by 2015 and continue
being the largest organized retail sector in
India.
Growth of foreign brands: Apparels ales have
been rising steadily in recent years, supported
by a large market of young consumers and an
increasing interest in western fashion. Apparel
companies are using marketing strategies to
build their brand, increase awareness and
create a fashionable, lifestyle-oriented image
Real estate development: Mall space supply
across metro cities is expected to increase 40
50% during 201217. Tier1 cities will continue
to be key retail hubs.
Single-brand retail: Single-brand retail is
typically dominated by categories such as
luxury goods, apparel and accessories, and
footwear. For categories such as jewellery and
watches, personal care, and travel goods,
leading players largely focus on department
stores. However, driven by the width of
merchandise and the pull of brand, leading
players are increasingly setting July
up 26,exclusive
2014

Road Ahead.
India remains a largely untapped and unorganized retail market, with several
international retail companies yet to commence operations in the country. India
holds a substantial advantage over other emerging retail destinations owing to
its strong domestic consumption and low rate of market penetration by overseas
retailers.
India's new middle class is increasingly becoming brand conscious and willing to
spend on quality goods, a trend which is creating numerous business
opportunities for mid-range international brands. With political and economic
sentiments already showing signs of improvement, this is the right time for
international retailers to look at India for expansion into the region.
E-commerce is also expected to be the next major area for retail growth in India.
E-commerce companies are increasingly going beyond digital marketing and
targeting offline customers as well. With this growth in the e-commerce industry,
online retail is estimated to reach US$ 70 billion by 2020 from US$ 0.6 billion in
2011.
The opportunities in food and grocery retail are immense, given that it
constitutes about 69 per cent of the countrys total retail market, according to
panel members at the seventh Food and Grocery Forum India.

July 26, 2014

Road Ahead.
Lastly, the future prospects of Indian retail market are likely to have some
macro-economic impact too. Expected positive impact of new policy on backend infrastructure and better prospects of an efficient supply chain (linking
farmers and small manufacturers directly with retailers) will minimize
agricultural wastages (especially of fresh foods and vegetables).
In agricultural sector, it can be expected that there will be higher use of
technology in farming, packaging and storing. This would lead to a reduction in
supply chain impediments, thereby, reducing supply side inflationary pressures.
Another important macro-economic impact that is expected from expected
expansion of modern retail is increasing opportunities of nonagricultural
employment for rural youth and a better quality of living for the existing
agricultural society. Once individuals become absorbed in retailer operations,
they can access more equitable wages and benefits. These changes may make
economic growth more inclusive.
Further, modern participants in trade are tax-compliant and are large taxpayers. The organized retail sector would facilitates the generation of significant
tax revenues through the building of a sophisticated supply chain. This impacts
the logistics, transportation, warehousing, freight forwarding and other similar
service sectors, all of which contribute to the exchequer through payment of
indirect taxes, primarily the service tax.
July 26, 2014