Almost a year on since our last review of the Indian retail market (Namnews March, April 2007), the incredible growth in the region continues unabated, with newer players emerging almost every day and existing retailers expanding at a furious rate.

Facts and Figures:

India’s overall retail market is estimated to be worth US$280bn at present, and the organised retail market only accounts for 5%, or US$14bn. By 2010, the organised sector is expected to be worth over US$30bn, and within ten years, it is expected to account for 30% of the entire retail market.

Food and grocery sales constitute almost 54% (US$152bn) of total sales, with organised retailers accounting for a mere 1% of the market. The luxury goods and services segment stands at around US$2.0bn, and is expected to grow at 30% per year over the next five years.

Market Developments:

The Government still has curbs on foreign investment in the country, as it looks to protect the millions of small-store owners from losing their business. Currently, full Foreign Direct Investment (FDI) is only allowed for single-brand retailers and cash & carry/wholesalers. This has restricted major global retailers from directly entering the market, and has made them seek tie-ups with local players.

However, in recent months, the Indian Government has indicated that such restrictions could be eased, if a new study finds that a large organised industry would not hurt independent small retailers. The report in question by the Department of Industrial Policy and Promotion will be an in-depth study on the impact of Foreign Direct Investment in food retail. The report is expected to be available by March 2008.

Meanwhile, local retail chains have been growing at a tremendous rate, taking advantage of the small penetration of organised players in the market, lack of serious competition from international giants, and a growing demand from the consumer. Several of the country’s major conglomerates have opened a variety of formats, and existing specialised retailers have also been diversifying to cash in on the rapid expansion of the market.

This growth has not gone unnoticed, and neither has it met with universal approval. Small traders have reacted vehemently against the growth of both local and foreign companies, and have been supported by several political parties. Matters have often been violent, with several stores across north India being attacked and subsequently shut down in those states.

Growth has also been hampered by the spiralling property and rent prices, as well as lack of prime retail sites. The infrastructure and back-end logistics, while rapidly improving, are still quite a way behind similar operations in more mature international markets. The industry also loses around US$120m-130m every year in shrinkage.

However, one of the most worrying areas for the retailers is the small talent pool, with few experienced executives around to take charge of such large operations. This situation has led to a large turnover amongst higher-level executives, with CEOs and MDs being regularly poached by rival chains.

Major Local Players

The major retail chains are those owned by conglomerates such as the Future Group, ITC, Reliance, RPG, Tatas and Birlas, as well as independent companies such as Subhiksha and Piramyd.

The Future Group, founded by Kishore Biyani, has consolidated its position as the biggest retailer in India, and now operates over 1,000 outlets, covering 7 million sq.ft. of retail space. The group’s listed entity is Pantaloon Retail, and its best-known formats are still the Pantaloon Lifestyle malls, Big Bazaar discount hypermarkets, and Food Bazaar grocery chains. However, it now also operates specialist formats such as Gourmet Food Bazaar, KB’s Fair Price discount stores, Home Town, Depot, Shoe Factory, Brand Factory, eZone, Electronics Bazaar, Blue Sky, aLL, and Top 10.

The increasing spread of its formats has forced Pantaloon Retail to split up into five separate units, through the setting up of wholly-owned subsidiaries. The move will see subsidiary companies being set up to operate the divisions, and gives it the option of listing them in future at an appropriate time.

Reliance Retail, set up in 2006 by local behemoth Reliance Industries, has been one of the most aggressively expanding chains in India. It launched operations with its Reliance Fresh grocery chain, but has since diversified into ten formats, such as Reliance Mart, Digital, Timeout, Wellness, Footprint, and Home. It currently operates over 420 stores, covering over 1.5 million sq.ft. of space.

The group has been the focus of several violent demonstrations and attacks during 2007, with several of its Fresh outlets in northern and eastern India being ransacked. It had to shut down these outlets, and subsequently decided to scale back store openings in these states.

The group is also set to drastically restructure its retail business, which will see it being split up into 25 separate companies, with Reliance Retail becoming the holding company. The restructuring would enable each entity to set up its own sourcing, supply chain and distribution channels. It would also make it easier for Reliance to shut any particular business which does not perform according to expectations.

RPG Retail, owned by the Goenka family, has expanded its Spencer’s supermarket chain to 350 stores across 50 cities. Spencer’s has four grocery formats – the Fresh, Daily, and Express supermarkets, and a hypermarket format. It also operates Music World, the country’s largest music store chain, and has recently opened the ‘Books and Beyond’ book chain. The company is investing US$750m on a brand makeover, as it moves from being known as a discount-store operator to an upmarket, premium retailer, targeting the middle and upper middle class families in urban areas.

The ITC hotels-and-tobacco conglomerate operates the Choupal Fresh grocery chain, as well as the rural Choupal Sagar hubs. It currently has nine Fresh stores, and 24 Choupal Sagar complexes. The group has also started selling fresh fruit and vegetables, and owns several branded and packaged food brands, which it also sources to other retailers. In addition, the group has also been expanding its chain of Wills Lifestyle, John Player, and Miss Player lifestyle outlets.

Aditya Birla Retail has been following a course of organic growth as well as acquisitions. Last year, it acquired the south Indian 225-store Trinethra supermarket chain, and has since being rebranding it to the 'More' banner. The company has indicated it may roll-out new formats, and introduce more own-label products. It added that it does not plan to acquire any more store chains, and will focus on organic growth.

Another chain to be acquired recently was Piramyd Retail, which operates the Piramyd Megastore lifestyle and Trumart convenience store chains. Indiabulls Wholesale Services took a 63.92% stake in Piramyd for around US$52m, and plans to make an open offer to acquire an additional 20% stake. Piramyd operates a total of 42 stores, covering over 1 million sq.ft. of retail space, largely located across western and northern India. IWS plans to expand Piramyd’s existing network to over 150 stores by end-2008. It is also launching 30 hypermarkets at an investment of US$375m.

Bharti Retail, through its joint-venture with Wal-Mart, is ready to open its first retail store by March 2008, while its wholesale cash & carry stores will be set up by the third-quarter of the year. It will have three formats – convenience stores, supermarkets and hypermarkets. It expects to open around 15 cash & carry stores in five years, as part of its venture with Wal-Mart. The joint-venture has recently opened its first distribution centre in the country.

Wadhawan Holdings owns the Spinach supermarket chain, which operates 95 grocery stores in western India. The chain has three formats – Super, Local and Express. The group has been aggressively acquiring smaller chains, such as Sangam, Maratha Co-operative, and Sabka Bazaar. In October, it also acquired the 13-strong S Mart chain in south India, and has recently expanded to the lifestyle retail format, opening its first store.

Amongst independent chains, Subhiksha is the largest of the lot, operating over 1,100 neighbourhood stores across the country. This chain has been one of the fastest growing in the country, due to its focus on small-size outlets located in urban areas. The stores sell groceries and drugs, and Subhiksha is now the largest pharma retail chain in the country. The company is privately-owned, but has indicated that it may launch a US$90m IPO this year to fund expansion.

In north India, the Big Apple chain now operates over 70 stores, and aims to have 100 stores operational by end-March. The chain, based on the 7-11 format, will then look to add another 75 company-owned stores in Delhi, and western states.

The year has also seen the growth and launch of several smaller regional players, such Godrej’s Nature Basket, Jubilant’s ‘Monday2Sunday’, Heritage Fresh, and the C3 chain.

Specialist Retailers

Apart from the specialist formats of the bigger chains detailed above, several smaller chains have also been expanding in the healthcare, department store, and consumer electronics sectors.

Healthcare manufacturer Dabur India has entered the retail field itself, and is set to invest US$30m by 2010 to open around 100 of its ‘H&B Stores’. The stores will distribute products by Dabur as well as other brands. The chain, ranging from 1,500 to 6,000 sq.ft. in size, will have its own back-end supply chain.

Another pharma manufacturer, Regenix Drugs, has also announced plans to open a chain of pharmacy and surgical stores in the state of Tamil Nadu, under the ‘Supermed’ banner. The first phase will see the opening of 50 stores, with 10 outlets expected to be opened shortly.

Consumer electronics manufacturer Videocon now operates the NEXT durables chain, as well as the Planet M entertainment stores. The company will also now enter the grocery and lifestyle retail sectors, through a cash & carry format. Some of the names being considered for the format are Bold, Next Cash & Carry and Videocon Cash & Carry. All the retail businesses will also be spun off as Videocon Retail in mid-’08.

The Tata Group operates Trent Ltd. and Infiniti Retail, two subsidiaries which focus on separate sectors of the market. Trent operates the Westside department store chain, which currently has 28 stores across India. Meanwhile, Infiniti operates the 14-store Croma consumer electronics chain, which has a technical and sourcing agreement with Australian retail major Woolworths Ltd. Westside has recently launched a new format exclusively catering to women, and plans to create a separate division for childrenswear.

Global Players:

Metro’s Cash & Carry venture has recently added another store, located in Mumbai, to its existing two outlets in Bangalore and Hyderabad. Spar International entered the country through a tie-up with Landmark Group’s Max Hypemarkets. It opened its first hypermarket last month in Bangalore, with short-term plans to open seven more outlets across the country. And the UK’s Home Retail Group entered India through a tie-up with HyperCity Retail, which opened its first HyperCity Argos store in Mumbai. HyperCity’s parent company Shoppers’ Stop entered into a franchise agreement with HRG to roll-out the Argos format across India.

Meanwhile, Carrefour has confirmed plans to launch cash & carry operations, and has said it is in final negotiations to pick a partner for retail stores.

Alliance Boots is reported to be in fairly advanced talks with Reliance Retail about forming a joint-venture, in which Reliance would hold a 51% stake. If signed, the deal will mark Boots’ return to the Indian market after it exited a JV with local firm Nicholas Piramal following the sale of its OTC medicines business to Reckitt Benckiser in 2005.

Results and Growth:

The Future Group is on track to achieve revenue of US$7.5bn by 2010, up from its current US$1.0bn. For the most recent half ending September 2007, Pantaloon Retail’s net profit fell 25% to US$15.5m, while net sales jumped up 70% to US$580m. By 2010, it plans to expand its Big Bazaar chain to 250 stores, add 600-800 Food Bazaar outlets, and take its KB’s Fair price chain to 2,000 outlets. It will also invest US$125m to expand its upmarket eZone chain to 75-100 stores, while its Electronics Bazaar value chain will expand to a size of 200-250 stores.

Reliance Retail is expected to generate annual revenue of US$2.5bn by 2010, and its Wellness drugstore chain is aiming for sales of US$1.6bn by 2012. The group aims to invest a total of US$625m over the next three years, which will see it expand its Reliance Fresh chain to 2,000 stores by March 2011. It also plans to open 500 more Reliance Marts by 2010, and 1,800 Wellness outlets by 2012.

Spencer’s expects to have revenue of US$750m by the end of the fiscal year 2009. The chain said it will spend US$6.0bn to open 300-400 hypermarkets by 2010. ITC plans to invest around US$150m to expand its ‘Choupal Sagar’ network to 100 complexes by 2009. Aditya Birla Retail is set to invest US$2.0-2.5bn by 2012 to open 1,000-1,500 supermarkets and 50-100 hypermarkets. The company plans to have 500 supermarkets and two hypermarkets operating by end-March 2008.

Wadhawan plans to expand its network to over 200 stores by March 2008, and to 1500 outlets by 2011, with a total investment of around US$350m. It will invest around US$125m to expand its lifestyle chain to 100 outlets in the next seven years, and its S-Mart chain to 50 stores by March 2009.

Trent will open 10 of the ‘Westside Woman’ stores in the next 18 months, while the overall chain is expected to have 65 stores operational by 2010. The company is also looking at adopting a franchise route to fuel its expansion plan. Meanwhile, Infiniti has said it plans to open over 100 Croma stores by 2010.

Dabur plans to expand its H&B chain to over 1,000 stores by the tenth year of operation. Regenix plans to open 200 stores in the next two years, at an investment of US$6.25m.

Outlook:

The high growth of the economy in recent years, a young population profile with increasing demand for goods, and the easy availability of credit at low interest rates have been the key drivers of organised retail in India in recent years. However, the varied problems facing the sector continue to pose major obstacles.

The local players have taken advantage of the restrictions on foreign retailers, and are expected to continue growing at an astounding rate. The rural market is likely to continue to be ignored for a while, as the chains focus on establishing their brand identity in the major cities and towns. However, the Government seems to be shifting towards easing these restrictions, which will be a relief for chains like Wal-Mart, Tesco, and Carrefour, who are itching to get a share of the amazing growth in the market.

But the most inviting aspect for retailers must be that, even with all the players involved, organised retail accounts for just 5% of the market – leaving more than enough to go around.

Date article published: 01/02/2008

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