Retailing Sector Analysis Report 

• Currently, India is the fifth largest retail market in the world. The market size in 2008 was estimated at US$ 511 bn (Source: IBEF, CB Richard Ellis' findings). Retailing has played a major role the world over in increasing productivity across a wide range of consumer goods and services. In the developed countries, the retail industry has developed into a full-fledged industry where the organised sector accounts for almost 80% of the total retail trade. In contrast to this, in India, organised retail trade accounts for merely 5% of the total retail trade and is expected to grow at the rate of 30% to 40%. However, during the medium term, the growth rate in this sector has slowed down to 7% to 10% owing to economic slowdown.
• The per capita consumption of around US$ 400 compares poorly to US (US$ 27,643) and Asian countries such as Japan (US$ 20,337), China US$ 609, Malaysia (US$ 2,042) and Thailand (US$ 1,572). This highlights the high degree of fragmentation of the retail sector within India and also indicates tremendous scope for growth of the retail sector in India.
• Earlier, retailers largely catered to lifestyle, clothing and apparel needs of the consumers. However currently, grocery stores, speciality stores to cater to the needs of music and book lovers etc have also started mushrooming at various locations.
• The sector can be broadly divided into two segments: Value retailing, which is typically a low margin-high volume business (primarily food and groceries) and Lifestyle retailing, a high margin-low volume business (primarily apparel, footwear, etc).
• The sector is further divided into various categories, depending on the types of products serviced. Textile & apparels dominate the market followed by food & beverages. The low contribution of other categories indicates opportunity for organised retail growth in these segments. The proliferation of hypermarkets and supermarkets has led to growth in food and grocery retail; thus, value retailing is seen to be gaining ground in India. The other high growth verticals are apparel and durables. Impulse goods like books and music are also gaining a larger share in the organised retail market, with players making stores more accessible to consumers.

  Organised retail pie
  Segment	% contribution
  Textile and apparel	38.9
  Food and beverages	10.5
  Consumer durables	9.0
  Home solutions	6.7
  Jwellery and watches	6.3
  Books, music and gifts	3.2
  Pharma	2.1
  Others	23.3

  Source: IBEF
• Historically, Indians have not been the ones to splurge on luxury items. Transition from the traditional retail to organised retailing was expected to take place on the back of changing consumer mindset, lower penetration levels, changing demographic mix, media proliferation, etc. The organised retail was expected to receive investments to the tune of US$ 25 bn over the next 4 to 5 years. But the financial crisis that impacted economic growth put breaks on the retail sector growth. However, the time constraint and the convenience of shopping with multiplicity of choice under one roof are the factors appreciated by the new generation. These factors are expected to be the growth drivers of organised retailing in the country over the long run.

• Supply
• Players are now moving to Tier II and Tier II cities to increase penetration and explore untapped markets as Tier I cities have been explored enough and have reached a saturation level. They are also re-evaluating store viability and expansion plans.
• Demand
• Healthy economic growth, changing demographic profile, increasing disposable incomes, changing consumer tastes and preferences are some of the key factors that are driving and will continue to drive demand growth in the organised retail market in India.
• Barriers to entry
• Reforms by India in opening up its economy have greatly improved trade prospects, but major barriers still exist such as regulatory issues, supply chain complexities, inefficient infrastructure, automatic approval not being allowed for foreign investment in retail.
• Bargaining power of suppliers
• The bargaining power of suppliers varies depending upon the target segment, the format that they follow and the products they offer. The unorganised sector has a dominant position. There are few players who have a slight edge over others on account of being established players and enjoying brand distinction.
• Bargaining power of customers
• High, due to availability of wide choice
• Competition
• High. Competition is characterised by many factors, including assortment, format, products, advertising, price, quality, service, location, reputation, credit and availability of retail space etc. New entrants (business houses and international players if foreign participation is further liberalised) are expected to further intensify the competition.

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Financial Year '09

• The year witnessed lot of activities such as closure of stores, deferment of expansion plans, foreign players winding operations etc. For instance, Argos pulled out of the franchisee agreement with Shopper's Stop and Hypercity Retail India and discontinued its trial operations - Hypercity Agros, catalogue and internet retailing. While a few retailers struggled to carry out day to day operations and were re-evaluating expansion plans, others sought to join hands with international players for supply chain expertise to strengthen their backend activities.
• The retail players have lined up huge expansion plans. The players were not only expanding scale of operation but were also venturing into new formats and style of retailing to expand customer base and extend reach across geographies. The huge capex plans have exerted pressure on net margins on account of increased interest costs and depreciation charges. Further, the old formats have not matured enough to support their own growth. Retailers raised capital either by diluting equity or leveraging their balance sheets.
• Historically, availability of quality retail space has been a constraint for Indian retail. However, while the surge in mall development in the recent past had to a certain extent increased supply, high rents had a dampening effect apart from the usual problems of delays in store opening and high manpower attrition. However, in recent times, mall rentals have fallen up to 50% compared to their peak in FY08. This has enthused retailers to kick start their expansion plans towards the end of FY09. At the same time, they should also look to renegotiate rentals and bring down their overall costs. An alternative is the retailers adopting a revenue sharing model. In a revenue sharing model, a certain percentage of the sales are paid to the mall owner or developer. This works out as a win-win model.

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Prospects

• Retailing in India has witnessed tremendous growth in the last few years. Organised retail that touched around US$ 20 bn in size in 2007 ((Source: IBEF) is on a high growth path and is expected to continue to grow at the rate of 40% over the next few years. However, in the medium term the sector growth rate has slowed down to 7% to 10% owing to economic slowdown.
• Sector growth prospects are likely to be limited by factors such as restrictions on FDI (foreign direct investment), the lack of a uniform tax structure, increasing pressure on infrastructure in key consumer markets, a shortage of quality real estate, hardening of interest rates & tight credit controls and inflationary situation witnessed (Consumer Price Index still high) within the economy. While escalating cost of operation has puffed up the cost of operation, higher CPI restricted consumption. Moreover, slowing economy had put breaks on discretionary spending as consumers preferred to save for a rainy day. However, increase in exemption limit in personal income tax would leave higher disposable income in the hands of the consumers. Going forward, this is expected to result in increased spending especially on lifestyle products, which in turn would boost the growth of the retail sector.
• Growth in Indian retail has been driven by the country's economic fundamentals over the past few years. Going forward, we believe that healthy economic growth, accretion to income levels of the rising Indian middle class (represented by the financially independent young population) and the consequent rise in disposable incomes will fuel the growth of the retailing sector. Improved retail services, easy financing options and changing consumers' mindset regarding credit will give further fillip to organised retail.
• Basically retail is a volume game. Going forward, with the competition intensifying and the costs scaling up, the players who are able to cater to the needs of the consumers and grow volumes by ensuring footfalls, while being able to reduce costs as well as withstand a downturn or face competition will have the competitive advantage.
• Despite it being a tough year for the retail sector, India tops the rankings of A.T. Kearney's Global Retail Development Index. As compared to other emerging markets, India has a more stable and stronger economy and the penetration levels are low. Due to these reasons, India is still the most attractive destination for international retailers looking at expanding into emerging markets.

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Related Links for Retailing Sector
Quarterly Results| Sector Quote| Over The Years