India – a complex, confusing, colourful and bewildering country. With over 1 billion people speaking 27 major languages in around 1,600 local dialects, and practising nine major religions while divided into countless communities, it can be a daunting prospect for an outsider to understand and do business with. And yet, with a booming economy, major international retailers are straining to flood the market.

Background

After Independence in 1947, the Indian economy embraced socialism, until it was forced to accept liberalisation in 1991 due to a balance-of-payment crisis, and allow Foreign Direct Investment (FDI). Since then, the opening of the market has been a gradual process, affected by the politics of the ruling party/coalition. Any attempt to allow FDI in a new segment predictably faces vociferous opposition from small traders and industrial houses wary of losing business, as well as from political parties eager to appeal to local vote-banks.

Agriculture has been the backbone of the economy, and in 2005, it accounted for 20% of the country’s GDP and employed 60% of its workforce. However, these numbers have been gradually declining, as younger generations increasingly move towards careers in IT, Management, and Retail. Disposable incomes remain concentrated in urban areas, as the middle-class grows and with it so does the number of double-income households.

Shopping has predominantly been the job of the housewife, of whom there are a large percentage. And even in today’s working-woman generation, with joint families still the norm, there’s always a family member around to manage the household. Further, due to the large population and rampant poverty, labour is abundant and relatively cheap, and most middle-class households will have at least one house-servant and possibly a cook, quite likely on a full-time basis. These factors have traditionally allowed households freedom for regular small purchases, rather than one-time bulk shopping.

The Retail Sector

The Indian retail market is incredibly vibrant and active. Most human settlements will have a very large density of small neighbourhood shops, found on literally every street. Home-deliveries for items like milk, bread, and newspapers are not just common, but the norm. There is a traditional preference for food being cooked daily from fresh products, and

fruits and vegetables are bought at least 4-5 times a week. The percentage of vegetarians in the country is large, and fresh produce is sold in open-air areas resembling European village markets – except the ones in India run from 7am to 9pm seven days a week. There are similar enclosed markets where one can buy fresh fish, poultry, or meat. And for extra convenience, there are hawkers who walk round the city with hand-carts selling the above. Frozen food is minimally present, as most households frown upon the concept.

Most villages and cities will also have designated areas for wholesale open-air markets, where one can buy sacks of rice, spices, pulses, and the like. The concept of weekend bulk-buying is largely unheard of, as shopping is done throughout the week depending on need. Further, India works on long hours. It is unheard of any shop or mall to open later than 9.30am and shut before 8.30pm – at the very least – thus making weekday evening shopping quite convenient.

Large department stores and shopping malls have been around for quite a while, and most large cities will have established stores which sell a variety of items under one roof. However, there hasn’t been a truly concerted effort by such chains to go national, and international brands have instead found success launching their own retail outlets. Almost all retail players (especially in food) have been region-specific, and the few national chains are mostly in the apparel or books sector.

The retail sector, largely due to its fragmented structure, suffers from limited access to capital, labour and suitable real estate options. The country has around 70 million small stores, and a few major chains who have a market share of just 3%. Till January 2006, FDI in retail was not allowed, and retailers could only enter the market through the franchise model. In January, the Government decided to allow single-brand retailers to have up to a 51% stake in a local subsidiary. Multiples, however, are not allowed to put in FDI, but these rules are expected to be relaxed within a few years.

Pitfalls

The main problems facing foreign retailers are the lack of infrastructure, the large percentage of low-income groups, and the choice of format for their stores.

A convenience store format based on petrol forecourts will have a limited customer base as not many Indians have cars (penetration is less than 1%). Local shops sell tobacco and soft drinks, and liquor sales are restricted, thus affecting the main c-store purchase model. Further, in India, a service attendant fills fuel and accepts payment, so there is no incentive for drivers to get out of the car.

India also has a fixed price structure which mandates an MRP (maximum retail price), so there is no real opportunity for the price wars that differentiate international retailers.

Consumers tend to shop in groups of families/friends, and thus aisles are not suitable, with L- and U-shaped counters being preferable. The bias towards ‘wet’ markets has caused several retailers to experiment within the food and grocery segment. Some retailers have attempted to replicate outdoor markets within the supermarket, with emphasis on giving customers standard good quality at fixed prices. However, retailers still expect to get 50-60% of revenue from non-food areas.

Customer traffic volumes and hourly patterns differ substantially from one store to the next. Further, the perception of ‘value’ across product categories changes rapidly too, leading to rapid shifts in consumer preferences.

The infrastructure in many cities is poor, affected by lax governing laws, lack of rigid planning laws, and widespread corruption among the bureaucracy. Roads in particular are a far cry from motorways in Europe or America, and during summer, cities often experience electricity cuts due to power shortages.

Current Players and Recent Developments

Several Indian companies have made concerted efforts towards creating a market presence in the sector before the entry of international giants. A number of industrial houses and real estate groups have diversified their operations to this sector, after realising its potential. However, the number of ‘pure’ retailers (i.e. those with an original retail background) is still small.

Several companies are expected to attain critical mass as growth picks up momentum, driven by the abundance of quality real estate, as well as growing consumer preference for shopping in modern outlets. Western-style malls are being launched almost on a daily basis in metros and second-rung cities, and are achieving record profits.

The success of such malls is seen from the example of Mumbai’s HyperCITY, spread over 100,000 sq.ft. and launched in May. Despite being surrounded by three popular shopping malls, it saw 12,500 daily footfalls by its second week, against expectations of 3,500 footfalls a day. Set up for Rs 240m (£3m) excluding the price of land, it is expected to break even within just eighteen months. The K Raheja group, originally a construction company, operates HyperCITY and the Shoppers’ Stop chain, and plans to open 55 hypermarkets by 2015.

Pantaloon Retail, now part of the Future Group, is the biggest mover in the sector. Starting off as an apparel chain, it has quickly expanded into lifestyle shopping malls, food malls, retail estates, general merchandise and the like. For fiscal 2005, it had a turnover of US$245m, and unaudited results for nine months up to March 2006 saw turnover increase even further to US$292m.

Reliance Industries, India’s biggest industrial conglomerate, also plans to invest US$5.6bn through its subsidiary, Reliance Retail. With an equity capital of US$2.24bn, it plans to set up a mixture of convenience stores and supermarkets around the country.

Marks & Spencer has had a foothold in the country through its franchisees for several years now. Germany’s Metro Group has launched cash & carry outlets in southern Indian cities and is reported to doing well. Waitrose is the first UK supermarket to enter the market via the export of its own-label products, found at HyperCITY malls, where it is doing brisk business. Other companies such as Wal-Mart and Tesco have reportedly been in talks with local companies, and while no confirmation has been made of their plans, it is only a matter of time before the big boys come to play.

Outlook

While retailers agree to the potential in the market, everyone agrees that it will not be an easy task, given the large variances in culture and geography. Careful research of the country as a whole, and local areas in particular, is of vital importance to correctly interpret consumer needs. The most successful system seems to be of having different formats for different town classes and geographies, in the form of a flagship store in the home city, with several smaller stores in other towns. Retailers would also have to appeal to consumers as a brand, as above all things, Indians place importance on identifying with a name and image.

Organised retail is growing at a healthy 30-35% annually, and revenues from the sector are expected to triple from the current US$7.7bn to US$24bn by 2010. The retail industry as a whole is growing at a rate of 20-25% annually, and global consultancy firm AT Kearney has estimated its value at US$350bn. It is for these reasons that the country has topped AT Kearney’s 2006 Global Retail Development Index of the 30 most attractive developing countries.

Article published: July 2006, www.kamcity.com

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