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Retail: The key growth drivers... - Views on News from Equitymaster
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  • Jun 7, 2007

    Retail: The key growth drivers...

    India is currently the ninth largest retail market in the world. The Indian retail market is estimated at US$ 350 bn and organised retail accounts for merely 2% to 3% out of the total retail market in India. This, more than anything underlines the tremendous scope for growth in organised retailing in the years to come.

    Retailing in India has witnessed tremendous growth in the last few years. Organised retail in India is on a high growth path and is expected to grow at a CAGR of 40% over the next few years and by 2010 it is expected to grow to US$ 22 bn (Source: IBEF). In this article, we have analysed the factors that have and will continue to drive growth of the organised retail sector.

    Changes in demographics: India has the lowest median age of 24 as compared to developed countries like USA, UK, Japan etc. The composition of the Indian population is shifting towards the age group of 20-49 i.e. the working population with purchasing power. Approximately 60% of the Indian population is below 30 years of age. Thus, India has the largest 'young' population in terms of sheer size and this young segment is the major driver of consumption as they have the ability (disposable income) and willingness to spend.

    Rising income levels: India is the second fastest growing economy in the world. A larger number of households are getting added to the consuming class with growth in income levels. Increasing instances of double incomes in most families coupled with the rise in spending power is further fuelling the growth of retail sector.

    Changes in consumer needs, attitudes and behaviour: The growth of modern retail is linked to consumer needs, attitudes and behaviour. Rising income levels, education and global exposure have contributed to the evolution of the Indian middle class. As a result, purchasing and shopping habits have been inculcated and are increasing day by day. Historically, Indians have not been the ones to splurge on luxury items. Today, people are willing to try new things and look different, which has increased spending on health and beauty products apart from apparels, food and grocery items.

    Increased credit friendliness: There has been a radical change in the Indian consumers' mindset regarding credit. With the easy availability of credit and declining interest rates, personal credit has witnessed growth. The boom in financing has resulted in an increase in spends on housing and consumer durables such as two-wheelers and cars. The use of plastic money (credit and debit cards) has increased significantly in the last 3-4 years. In fact the ease of payments (ability to spend without cash) due to the use of credit and debit cards, has also led to an increase in total spending on shopping and eating out. The total number of debit and credit cards issued in India in FY06 was estimated to be around 47 m and 18 m respectively. Indians withdrew nearly US$ 50 bn using credit cards from ATMs in 2005. This includes US$ 26 bn through Visa credit cards alone. Visa saw a 36% growth in the number of cards issued, making India the third biggest card market for Visa, after Japan and Korea (Source: IBEF). With the acceptance of and the increase in the number of electronic data converter machines installed in retailing outlets, credit and debit cards will provide further fillip to organised retail.

    Increasing awareness of Indian consumers: Over the years, as a result of the increasing literacy in the country, exposure to the west, satellite television, foreign magazines and newspapers, there is a significant increase in consumer awareness among the Indians. Today more and more consumers are selective with regards to the quality of the products/services.

    Growth in Indian retail has been driven by the country's economic fundamentals over the past few years. Increasing number of nuclear families, easy financing options, increase in the population of working women and emerging opportunities in the service sector during the past few years have been the key growth drivers of the organised retail sector in India. Consumers are now showing a growing preference for organised retail, resulting in increased penetration. The retailing sector is at an inflexion point where the growth of organised retailing and growth in consumption by the population is expected to take a higher growth trajectory. Going forward, we believe that 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 growth of the retailing sector.



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