Global management consultancy firm McKinsey & Co. on Thursday released a report on India’s modern retail business. The report, called “The Great Indian Bazaar—Organized Retail Comes of Age in India”, outlines the country’s emerging, yet competitive retail market. It talks about innovative steps retailers need to take to win in a complex country like India. Also, the report discusses the evolving Indian consumer. With an expanding economy, the country’s overall retail sector will become a $450 billion (Rs20.85 trillion) business by 2015, which is almost comparable to Italy’s current market size of $462 billion (among the world’s top 10 retail markets) and larger than Brazil’s current retail market size of $258 billion. “The game here has just begun,” says the report, referring to India’s modern retail business which currently accounts for only about 5% of the country’s annual retail business. Along the way, the modern retail business will create about 1.6 million jobs in the next five years, McKinsey says. Modern retailers will not only create employment opportunities but also would help raise India’s overall economic productivity and could also result in lowering prices of goods. Excerpts from the report:

Organized retail is a new phenomenon in India and despite the current downturn in the market, the Great Indian Bazaar report says that “the market is growing exponentially, as economic growth lifts more of India’s people into the consuming classes and organized retail lures more and more existing shoppers into its open doors”. The report adds that by 2015, more than 300 million shoppers are likely to patronize organized retail chains (60 million currently do), accounting for anywhere between 14% and 18% of the total retail business here. In terms of the characterstics of the market, the report points out that while the market size is large, basket sizes are small and shoppers are likely to embrace foreign brands but unlikely to let go of traditional categories anytime soon. The following graphics identify the potential consumer segments in the market.

Organized retail: getting the right model is the key

The report says that while Indian shoppers have some similarities to their peers in other markets, they have also been shaped by a unique context and history and, therefore, differ in ways that are important for retailers to understand. For instance: it is not wise to think in terms of averages when catering to Indian shoppers; it is better to shape rather than predict the behaviour of Indian shopper; some Indian shoppers are universal in their shopping habits, while some are similar to the shoppers in other Bric (Brazil, Russia, India, China) countries, and some are unique; and Indian shoppers are highly value and price-conscious. The following charts highlight the shopping habits of Indian consumers at large.

India has five main consumer segmentsHousehold income*

* Real per annum

Total householdsmillion, 2005

Retail spend$ per households

12,800

5,200

2,300

1,350

700

Strivers$11,000-22,000

Seekers$4,000-11,000

Aspirers$2,000-4,000

Deprived<$2,000

Globals>$22,000 1

2

11

91

101

Potential target consumer segments

Three segments have the highest potential for organized retailHousehold income bracket

Source: The Great Indian Middle Class; NCAER; MGI India Consumer Demand Model

Total households2005, million (100%=206) 2015, million (100%=244)

Strivers$11,000-22,000

Seekers$4,000-11,000

Aspirers$2,000-4,000

Deprived<$2,000

Globals>$22,000 3

6

55

106

74

1

2

11

91

101

14 milliongrowing to64 million

Marketfor nextwave ofgrowth

Distribution of household income% of households

Annual household disposable incomethousand, Rs, 2000

Annual urban household income distribution(RMB)

Change in the underlying income curve will drive growthNumber of consuming households growing at fastest rate . . .

. . . similar to the Chinese evolution

Thresholdmiddleclass

2001mean

2006mean

-5

0

5

10

15

20

25

30

35

0 100 200 300 400 500 600 700 800 900 1000 22, 000 28,000 33,000

19851995200520152025

17 million householdsin 2001

39 million households

in 2004

Fresh food, ethnic apparel and mobile electronics will bekey categories for organized retail

Emphasis on convenience favours continued growthin mom & pop stores, as seen in ChinaTotal retail sales revenue$ billion

CAGRIn %

2001

2005

21% growth intraditionalretail over

4 years42%58%

58%

300

50042%

Mom & pop Organized

23%5%

Openness to credit versus usage% agree/strongly agree

The young are even more open to credit% agree/strongly agree

OpennessUsage

Highly open to credit but constrained by availability

…although mode of 15-min travel differs

Surveyed shoppers are extremely open to credit but find it hard to come by

Brazil

US

France

China

Russia

India31

7

189

5865

3025

1860

2040

45

30

28

Less than 25

Age groups

25-34

35 and above

Health careEducation and recreationCommunicationsTransportationPersonal products and servicesHousehold productsHousing and utilitiesApparelFood, beverages and tobacco

FMCG& foods

Children and infants

Menswear

Women’s ethnic wear

Fruits,vegetables &

perishables

Share of average household consumption%, thousand, Rs, 2000

Food spendNon-food spending

Share of wallet in India is shifting from food to more discretionary spending

By 2015, organized retail will have a 14-18% shareof total retail

7

65-80Size of organized retail in India$ billion

Share oforganised retailin %

2007 2015

CAGR30-35%

14-18

4-5

Organized retailers will need to be “famous for” something

• Price promotions and discounts• Lowest prices every day

• Convenient location in high street/mall• Convenient in-store layout

• Mix of private label and high-end brands across categories and price points• Distinctive fashion to drive footfall

• Fun family experience• Comfortable and safe environment

• Attentive and knowledgeable staff• Products available when required

Price

Experience Service

Convenience Authority/Range

% of people travelling less than 15 minutesConvenience is a must globally…

Most shoppers surveyed follow the 15-minute rule

Brazil

• Bicycling • Driving

US France China Russia India

BrazilChina• Auto rickshaw• Walking

India

100%=$252 bn 100%=$40 bn 100%=$20-25 bn

78 74 70 69 69 64

1995 2005 2015 2025

Even within the top income segments, there is a fivefold difference in per capita spending on apparelRs per capita per year, apparel spend$ billion

Globals

Strivers

Seekers

Deprived

Aspirers

2008 2013

5X

300

780

22,250

9,200

4,400

350

950

24,750

10,500

5,000

Uniquely Indian shopping habitsIndian shoppers are very different in many ways from their counterparts elsewhere in the world. First, loyalty is not a virtue with the Indian shopper. Around 60% of the consumers surveyed bought from more than one retailer compared with 10% in Brazil and 24% in China. Indian consumers associate packaged food with lack of freshness and it is not surprising that almost 65% of respondents indicated they will never buy packed fruits or vegetables compared to 24% in China and 6% in the US. Also, shoppers in India place a lot of importance on convenience. Around 64% buyers surveyed said they do not mind paying extra for conveniently located stores, compared with 31% in China.

According to the survey, women in India prefer ethnic apparel and jewellery. More than 75% women’s clothing and 85% jewellery sold in India are traditional in style and design. Around 38% shoppers in India said they buy clothes mostly for special occasions; only 6% Chinese and 3% Russians are driven by occasions for most of their apparel purchase. Indian shoppers are willing to compromise a bit on food and grocery, the survey says. For instance, 57% respondents said buying a well-known brand of shampoo is important, while as many as 49% indicated that they were willing to buy lesser-known brands. When it comes to electronic goods, almost 85% shoppers said they would only go with a reputed brand.

56

4234

5

6

5

12

12

8

93

3

31142

14

1 3

3

460 82 140 248

17

19

6

752

9

25

5

10

11

20

6

9

13

A new phenomenonEmerging, accessible but surprisingly competitive

What consumers wantEvolving in step with the world

Food, 2015% share of consumption

Apparel, 2015% share of consumption

Electronics, 2015% share of consumption

• ~30% share of fresh fruits, vegetables and perishables

• One of the only markets where men’s apparel is much larger than women’s• Women’s ethnic wear is 3X non-ethnic

• Disproportionate share of telecom/mobile phones

Staples

Women’s non-ethnic

Personal electronics

Consumer durables

Home electronics

383825 20

926

45 4038

15 Telecom3

Market for modern retail

Market for modern retail

Note: Figures are rounded to the nearest integer and may not add up to 100%.

Graphics by SANDEEP BHATNAGAR/MINT