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The Indian Retail Sector – Business Understanding

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Case Study

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Retail the largest private industry globally, is still in its nascent stages in India

Source: CII Mckinsey, HSBC

Fortune #1 “Wal-Mart” is a Retailer

#1

50

Over 50 of the Fortune

500 companies

are retailers

25

25 of the Asian Top 200

companies, are retailers

8

Global Retail industry is of size

USD 8 TrillionUnorganize

d RetailOrganized Retail < 3%

Over 12 Million Outlets in India

Organized Retail expected to be around Rs.110,000 Cr(USD 25 b) by 2010

Set to grow to 8-10% by 2010

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Retailing formats in India

• Malls:The largest form of organized retailing today. Located mainly in metro cities, in proximity to urban outskirts. Ranges from 60,000 sq ft to 7,00,000 sq ft and above. They lend an ideal shopping experience with an amalgamation of product, service and entertainment, all under a common roof.Examples include Shoppers Stop, Piramyd, Pantaloon.

Specialty Stores:

Chains such as the Bangalore based Kids Kemp, the Mumbai books retailer Crossword, RPG's Music World and the Times Group's music chain Planet M, are focusing on specific market segments and have established themselves strongly in their sectors.

Discount Stores:

As the name suggests, discount stores or factory outlets, offer discounts on the MRP through selling in bulk reaching economies of scale or excess stock left over at the season. The product category can range from a variety of perishable/ non perishable goods

Department Stores:Large stores ranging from 20000-50000 sq. ft, catering to a variety of consumer needs. Further classified into localized departments such as clothing, toys, home, groceries, etc.

Department Stores:Departmental Stores are expected to take over the apparel business from exclusive brand showrooms. Among these, the biggest success is K Raheja's Shoppers Stop, which started in Mumbai and now has more than seven large stores (over 30,000 sq. ft) across India and even has its own in store brand for clothes called Stop!.

Hypermarts/Supermarkets:Large self service outlets, catering to varied shopper needs are termed as Supermarkets. These are located in or near residential high streets. These stores today contribute to 30% of all food & grocery organized retail sales. Super Markets can further be classified in to mini supermarkets typically 1,000 sq ft to 2,000 sq ft and large supermarkets ranging from of 3,500 sq ft to 5,000 sq ft. having a strong focus on food & grocery and personal sales.

Convenience Stores:These are relatively small stores 400-2,000 sq. feet located near residential areas. They stock a limited range of high-turnover convenience products and are usually open for extended periods during the day, seven days a week. Prices are slightly higher due to the convenience premium.

MBO’s :Multi Brand outlets, also known as Category Killers, offer several brands across a single productcategory. These usually do well in busy market places and Metros.

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Retailing formats in IndiaIndia’s number of Domestic grocery chains and Early Foreign Entrants

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Recent Trends

• Retailing in India is witnessing a huge revamping exercise as can be seen in the graph

• India is rated the fifth most attractive emerging retail market: a potential goldmine.

• Estimated to be US$ 200 billion, of which organized retailing (i.e. modern trade) makes up 3 percent or US$ 6.4 billion

• As per a report by KPMG the annual growth of department stores is estimated at 24%

• Ranked second in a Global Retail Development Index of 30 developing countries drawn up by AT Kearney.

Retail Sales in India

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Unorganized : Vast majority of the twelve million stores are small "father and son" outletsFragmented : Mostly small individually owned businesses, average size of outlet equals 50 s.q. ft. Though India has the highest number of retail outlets per capita in the world, the retail space per capita at 2 s.q. ft per person is amongst the lowest.Rural bias: Nearly two thirds of the stores are located in rural areas. Rural retail industry has typically two forms: "Haats" and “Melas". Haats are the weekly markets : serve groups of 10-50 villages and sell day-to-day necessities. Melas are larger in size and more sophisticated in terms of the goods sold (like TVs)

Unorganized : Vast majority of the twelve million stores are small "father and son" outletsFragmented : Mostly small individually owned businesses, average size of outlet equals 50 s.q. ft. Though India has the highest number of retail outlets per capita in the world, the retail space per capita at 2 s.q. ft per person is amongst the lowest.Rural bias: Nearly two thirds of the stores are located in rural areas. Rural retail industry has typically two forms: "Haats" and “Melas". Haats are the weekly markets : serve groups of 10-50 villages and sell day-to-day necessities. Melas are larger in size and more sophisticated in terms of the goods sold (like TVs)

Traditionally three factors have plagued the retail industry:

Traditionally three factors have plagued the retail industry:

Experimentation with formats: Retailing in India is still evolving and the sector is witnessing a series of experiments across the country with new formats being tested out. Ex. Quasi-mall, sub-urban discount stores, Cash and carry etc.Store design : Biggest challenge for organised retailing to create a “customer-pull” environment that increases the amount of impulse shopping. Research shows that the chances of senses dictating sales are upto 10-15%. Retail chains like MusicWorld, Baristas, Piramyd and Globus are laying major emphasis & investing heavily in store design.Emergence of discount stores: They are expected to spearhead the organised retailing revolution. Stores trying to emulate the model of Wal-Mart. Ex. Big Bazaar, Bombay Bazaar, RPGs. Unorganized retailing is getting organized: To meet the challenges of organized retailing such as large cineplexes, and malls, which are backed by the corporate house such as 'Ansals' and 'PVR‘ the unorganized sector is getting organized. 25 stores in Delhi under the banner of Provision mart are joining hands to combine monthly buying. Bombay Bazaar and Efoodmart formed which are aggregations of Kiranas.

Experimentation with formats: Retailing in India is still evolving and the sector is witnessing a series of experiments across the country with new formats being tested out. Ex. Quasi-mall, sub-urban discount stores, Cash and carry etc.Store design : Biggest challenge for organised retailing to create a “customer-pull” environment that increases the amount of impulse shopping. Research shows that the chances of senses dictating sales are upto 10-15%. Retail chains like MusicWorld, Baristas, Piramyd and Globus are laying major emphasis & investing heavily in store design.Emergence of discount stores: They are expected to spearhead the organised retailing revolution. Stores trying to emulate the model of Wal-Mart. Ex. Big Bazaar, Bombay Bazaar, RPGs. Unorganized retailing is getting organized: To meet the challenges of organized retailing such as large cineplexes, and malls, which are backed by the corporate house such as 'Ansals' and 'PVR‘ the unorganized sector is getting organized. 25 stores in Delhi under the banner of Provision mart are joining hands to combine monthly buying. Bombay Bazaar and Efoodmart formed which are aggregations of Kiranas.

Recent changes:Recent changes:

Recent Trends contd.

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Major Retailers

• India’s top retailers are largely lifestyle, clothing and apparel stores

• This is followed by grocery stores • Following the past trends and

business models in the west retail giants such as Pantaloon, Shoppers’ Stop and Lifestyle are likely to target metros and small cities almost doubling their current number of stores

• These Walmart wannabes have the economy of scale to be low –medium cost retailers pocketing narrow margin

Leading Retailers

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Indian Organised Retail is set to explode with Food & Lifestyle retail as major segments

Home3%

Health & Beauty1%

Food & Grocery14%

Books, Music & Gifts3%

Watch & Jewellery17%

Footwear13%

Clothing and Textile36%

Entertainment1%

Durable10%

Pharma2%

3 SBU’s covering 88% of market segment!!

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Future direction: Positives

• AT Kearney has estimated India’s total retail market at US$ 202.6 billion which is expected to grow at a compounded 30 per cent over the next five years.

• With the organised retail segment growing at the rate of 25-30 per cent per annum, revenues from the sector are expected to triple from the current US$ 7.7 billion to US$ 24 billion by 2010.

• The share of modern retail is likely to grow from its current 2 per cent to 15-20 percent over the next decade

• Over next two years India will see several Indian retail businesses attaining a critical mass as growth in the industry picks up momentum driven by two key factors:

– Availability of quality real estate and mall management practices– Consumer preference for shopping in new environments

• Wal-Mart : huge plans for India. Moving a senior official from its headquarters in Bentonville, Arkansas, to head its market research and business development functions pertaining to its retail plans in India.

• New York-based high-end fashion retailer Saks Fifth Avenue has tied up with realty major DLF Properties to set up shop in a mall in New Delhi.

• Tommy Hilfiger, retailer of apparels, expects to open one store each in Delhi, Ahmedabad, Lucknow and Bangalore in the next four months.

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Future direction: Concerns

• 68 million square feet of mall space is expected to be available by end of 2007, which might lead to over-capacity of malls

• Lack of differentiation among the malls that are coming up. One option may be to look at specialization.• Poor inventory turns and stock availability measures - retailers clearly need to augment their operations.• Operations of retailers and suppliers are not integrated. Efficient replenishment practices practiced in the

Indian auto and auto-component industry can be leveraged to implement efficient supply chain management techniques.

• Supplier maturity, in terms of adherence to delivery schedules and delivering the quantity ordered, is an issue

• Sales tax laws - lead to retailers having state-level procurement and storage leads to Indian retailers having higher inventories. VAT has helped alleviate this a bit.

• Increased adoption of IT and shrinkage management will be a critical area.• Supply chain and customer relations followed by merchandising, facilities management and vendor

development are areas which have significant gaps and proactive training is a key imperative for overcoming these.

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Our Business Model

Global National Regional Local LowerMiddle

Middle UpperMiddle

UpperClass

Markets Customers

Fo

rmat

sP

rod

uct

s

Food

Electronics

Home Solution

Department Stores

Supermarkets

Convenience Stores

Hypermarket

Apparel & Accessorie

s

20 Stores 2008-09

+40 Stores 2009 – 10 = 60 Stores

+100 Store 2010 – 11 = 140 Stores

Four Axis of Retail Growth (Indicative)

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Various Retail Formats

• Department store: Large retail store offering a variety of services and merchandise, organised in separate departments. Occupy prominent positions in the heart of town or as anchor stores in out-of-town malls eg. Shopper’s Stop.

• Supermarket: A store that sells a wide variety of goods including food, medicine and household products. Often part of a chain that owns or controls other supermarkets in the same or other towns; thus going for economies of scale. The chains are often supplied from the distribution centres of a larger business eg. FoodWorld.

• Hypermarket (from the French term hypermarche) : A store that combines a supermarket and a department store. A gigantic retail facility that carries a big range of products under one roof, including fresh groceries and apparel. When planned, constructed and executed correctly, hypermart caters to all routine weekly shopping needs in one trip eg. Big Bazaar.

• Category killers: Large format stores that specialise in a narrow line of merchandise eg. Vivek, Vijay Sales.

• Convenios: 24X7 convenience stores situated close to homes to generate high footprints. Convenios carry a limited stock of daily use goods with a special focus on food products eg. In & Out petrol pump outlets.

• Specialty malls: Consortium of retailers that carry a certain category of products. They are usually situated some distance from the city centre. Consumers have to make a special visit to pick up the goods. eg, Gold, Wedding Souk.

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…CONTD.

• Seamless malls: Consortium of retailers without walls separating the individual stores. Oneenormous shop, with hundreds of popular brands sharing space with each other. Eg. Pantaloon’sCentral Mall.

• Outlet mall: Shopping centre with national brand-name retailers selling discountedmerchandise. Eg. Huma Mall.

• Lifestyle centres: Shopping centres or malls whose array of retail outlets are designed to appeal to a particular segment of the population. Typically, lifestyle centres feature upscale specialty stores, services, and restaurants. Eg. Centrestage Mall.

• Anchor clients: The most important elements in a large format mall. An anchor is among the first clients to enter a mall, and occupies at least 25-30% floor space. Eg. Big Bazaar in Sahara Mall Gurgaon.

• Draw tenant: A store that attracts a large number of potential customers to a shopping centre, often an anchor store.

• Food court: Separate area of a shopping centre containing fast-food outlets and a common, seating area.

• Gross leaseable area (GLA): Total floor space available for retail sales, usually in square feet.• Irregulars: Saleable merchandise with minor imperfections sold at discount.

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Our Business Model

Franchise Model

Company Owned •Brands in apparel•Watches•Accessories•Cosmetics and other `lifestyle' segments

•Food•Groceries•Household items •Personal-care products

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Key Challenges

Key Challenges to

overcome

Key Challenges to

overcome

• Attracting & retaining qualified manpower

• Implementing SOP’s & best practices

• Focus on improving operational efficiency

• Cost control• CRM & Service levels

InternalInternal• High real estate cost• Anarchic laws• Shortage of qualified manpower• Poor infrastructure• Unorganized & poor supply chain

ExternalExternal

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Sources

• AT Kearny• Forrester Research 2006 • KPMG-FICCI Report• http://www.indiainbusiness.nic.in/

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Thank You !

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M: +91 - 98106 – 53330SAURABH GUPTA