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India Country Overview for Retail Business

February 2013


Retail Opportunity Assessment Overview India is one of the fastest growing economies in the world, which, coupled with its demographic dividend of relatively young population and its increasing per capita income, makes it one of the best opportunities international retailers could chase. As per industry reports, India has been one of the top five destinations since 2008, further confirming the potential of the Indian market. Retail sector in India has been undergoing transformation, and organized retail is increasingly making its presence felt. New reforms that are slowly opening up the field are helping foreign retailers like Tesco, Carrefour, Wal-Mart, Metro AG, Ikea, Starbucks, etc. to further their expansion plans or chalk out entry strategies. Availability of cheap yet relatively untrained labor along with difficulty in getting real estate in prime locations at competitive rates are some of the challenges foreign and Indian retailers have to grapple with; but given the size and vibrancy of the overall opportunity presented by the Indian market, large retailers, be it Indian or foreign, are ready to take the plunge. This research paper attempts to understand some of the macroeconomic, regulatory and business aspects of ‘Retailing in lndia’ and its impact on foreign and Indian retailers.

Macroeconomic Environment GDP 12.0% 10.9%

10.3%

10.0% 10.1%

8.3%

9.6%

8.9%

8.3% 6.7%

5.9% 6.4%

6.9%

6.8%

6.9%

6.9%

4.9% 6.0%

6.4%

6.4% 5.1%

5.0%

1.15

1.26

1.27

1.63

1.83

1.95

2.12

2.31

2.55

2.84

3.17

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: IMF

GDP (USD Tn)

GDP Growth Rate (%)

Inflation (%)

India is an open-market economy, which has grown rapidly since the economic liberalization that started in the early 1990s. Additionally, other reforms like industrial deregulation, privatization, and reduced controls over foreign trade and investment have also helped accelerate the country's growth. India is estimated to have a GDP of USD 1.95 Tn as of 2012, which is forecast to reach USD 3.2 Tn by 2017. The per capita GDP in 2012 is USD 1,591.6, which is projected to grow at a CAGR of 8.8% to reach USD 2,428.5 by 2017. In 2010, India was one of the few countries across the globe to grow in the face of the global financial crisis, because of the strong domestic demand, resulting in a growth of over 10% y-o-y in real terms (Source: IMF). However, the economic growth did slow down in 2011 because of high inflation & interest rates and little progress on economic reforms. In 2012, the country’s inflation stood well over 10%, but is estimated to slow down to c. 5% by 2017 due to consistent efforts on part of the Reserve Bank as well as the country’s finance ministry.


Population 1.4% 1.4%

1.4% 1.4%

1142

1158

1174

1.4% 1191

1207

1223

1256

1239

1.3% 1.3%

2007

1306

1289

1272

2008

2009

2010

2011

2012

2013

Population (Mn)

Source: IMF

1.3%

1.3%

1.3%

1.3%

2014

2015

2016

2017

Population Growth (%)

India is the second largest populated country in the world, and is also the largest democracy. The country’s estimated population base is over 1,223.2 Mn as of 2012, growing at 1.4% annually. Approximately 31.7% of the population resides in the urban areas of the country, which is projected to increase at an average annual rate of 2.4% until 2015 (source: CIA). India is a young country, with a median age of 26.5 years. As per the 2012 estimates, 29.4% of the population is in the age bracket of 0-14 years, while 65.2% in the age bracket of 15-64 years. Only 5.6% people make the older generation of 65 years and above (Source: CIA). Overall increase in population till 2017 is projected to be relatively stable at an average annual rate of c. 1.3%. About 29.8% of the Indian population was considered poor (population below poverty line) as of 2010.

Unemployment 10.7% 8.8%

9.5%

9.2%

7.8%

2002 Source: CIA

2003

2004

10.0%

9.8%

9.9%

2010

2011

2012

8.9%

2005

2006

7.2%

2007

6.8%

2008

2009

Unemployment Rate (%)

India offers cheap and substantial labor pool of 498.4 Mn people, of which about 300 Mn are literate (people who can read and write) as of 2012. Around 53% of the country’s workforce is engaged in agriculture, followed by the services sector, which accounts for c.28% of the total workforce. India’s labor participation rate among persons aged 15 years and above is as high as 80.7% for men and c. 29% for women. The unemployment rate in India decreased moderately to 9.9% in 2012 from an all-time high of 10.7% in 2009. At an overall level, India’s unemployment rate is still on the higher side as compared to the other developing nations like Brazil at c. 6% and China at c. 4.1%.


Business Environment

Market 1,300

869

518 424

2010 Source: Image Group, FICCI

2012

2015

2020

Retail Sales (USD Bn)

Retail is the second largest employer in India with 44 Mn jobs. Despite the global slowdown, the country’s retail industry has witnessed positive growth in sales between 2010 and 2012. According to Image Group, the Indian retail industry is estimated at USD 518 Bn in 2012 and is forecast to grow at a CAGR of 18.8% during 2012-15 to reach USD 869 Bn by 2015. By 2020, the Federation of Indian Chambers of Commerce and Industry ((FICCI) – one of the leading industry associations in India) estimates the Indian retail industry to reach USD 1.3 Tn. The growth in the industry is opined to be backed by growing domestic income per capita, increasing urbanization, and a rising number of attractive stores (either Indian or foreign), which will create an ‘induced’ demand for additional wares. India has the highest retail outlet density in the world, at over 15 Mn, majorly dominated by the traditional familyrun stores. As of 2012, the organized retail constitutes only 7.8% of the total retail market; but the industry is undergoing a rapid change and with every passing day there is an increment in the shops set up by organized retailers, whether Indian or foreign. Domestic conglomerates such as Reliance Industries, Tata Group and Aditya Birla Group as well as global giants like Wal-Mart, Carrefour and the Metro Group have chalked out their plans for future. Opening up of FDI in multi-brand retail has furthered foreign retailers’ interest in the Indian market, which is likely to result not only into entry of new players, but also in expansion of those already have a setup in India.

“ … India is a very complex and complicated market to enter and it has been a lot easier when we came together with the Tatas… We must earn the respect of the Indian customer and approach this market with humility, as in the long term, this could be one of the largest markets for Starbucks…” >>Howard Schultz, Chairman, President and CEO, Starbucks Coffee Company

“ … We know that many people are eagerly waiting for the first Ikea store to open in India. Once our application is approved, we will develop a solid plan for the establishment of Ikea stores for many years to come… ” >> Mikael Ohlsson, President and CEO, Ikea

“ … Walmart is able and willing to invest in India, whatever it takes to grow a business. We know it’s not a short-term investment — it’s a marathon and will take time for these >> Raj Jain, President, Wal-Mart (India)


Consumers

119

119

121

Q4 2012

123

Q3 2012

122

Q1 2012

Q2 2011

Q2 2010

Source: Trading economics

Q1 2011

Q1 2010

Q4 2010

93

Q3 2010

92

121

Q4 2011

126

Q2 2012

131

117

Q4 2009

Q3 2009

131

Q3 2011

129 120

Consumer Confidence Index

The country’s consumer confidence index has been consistently above 100 over the last two years, suggesting an overall optimism on the part of consumers. The index peaked in Q4 2010 to 131, but never grew significantly after that. There has been a consistent decline or stagnation over the last two years, but as compared to the world average of 94, the confidence is still on the higher side. The consumer confidence declined to 119 during Q2 2012 and has been more or less stable post that. The current stagnancy in the consumer confidence index indicates anxiousness among Indian consumers. A survey indicated that about 20% of the interviewed customers suggested concern with regard to their job security, while about 11% suggested that they were concerned about the state of the economy. Increased inflation and fuel prices, combined with only a moderate GDP growth and devaluation of the rupee, have troubled the consumer sentiments further. Despite the concerns however, Indian customers were considered the ‘most optimistic’ in Q4 2012, according to a survey. “ … The current score [December 2012 - 39.8 (score less than 50 denotes pessimism)] reveals that we are still in the pessimistic zone but our data suggests that the trend is improving slowly but steadily. It is interesting to note that in all big metro cities, the consumer confidence is showing signs of improvement compared to the October levels. Both spending and employment sentiments have become less pessimistic in these cities. Moreover, it's important to note that the Employment Sentiment Index in general has shown improvement for the second time in a row mostly due to improved job security outlook, which is a healthy sign. These factors could be responsible for a relatively improved outlook. However, progress in smaller cities seems to be slow where spending is still impacted by rising inflation and not so much by improving employment sentiments … ” >> Rashid Bilimoria, CEO, BluFin “ … The aspirational Indian is willing to upgrade, while more value conscious consumers are more responsive to deals and buying in bulk to keep expenditure buoyant … the fourth quarter [Q4-2012] highlights the willingness of people to spend during the holidays and festival season...The optimism, though, is tempered with a judicious controlling of household and discretionary expenses in order to balance the household budget … ”

“ … There are signs of down trading in discretionary items in India. Fewer people are buying smartphones and more now want to buy an entrylevel car … More and more consumers are postponing big-ticket purchases… This situation will take more than a couple of quarters to improve … ”

>> Arnab Mitra, Research Analyst, Credit Suisse

>> Arnab Mitra, Research Analyst, Credit Suisse


Regulatory Environment FDI

" …The government is committed to play a constructive role in encouraging foreign direct investment, especially in areas which create jobs and provide technological advancement. Ikea has a business model which integrates small- and medium-sized enterprises and the domestic industry…” >> Anand Sharma, Commerce Minister,

Government of India Until 2011, the Indian government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets. Single-brand retail was limited to 51% ownership and accompanied by an approval process which was considered fairly bureaucratic Reforms were announced in November 2011 to allow foreign groups to own up to 51% in multi-brand retail (supermarkets) and single brand retailers (like Apple stores) to own 100% of their Indian stores. While these reforms were opposed initially, as of September 2012, they have been approved as an ‘enabling policy’ – which means that the states within the Indian sovereign would be free to take their own decisions with regard to the implementation of the policy. Several other conditions were also laid out, a partial list of which includes:

o Fresh produce to be unbranded o Minimum FDI to be brought in to be USD 100 Mn. At least 50% of total FDI brought in to be invested in 'backend infrastructure (processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, etc.) within 3 years of the first tranche of receipt

o At least 30% of the value of procurement of manufactured / processed products purchased to be sourced from Indian 'small industries‘ (plant and machinery < USD 1 Mn) o Retail sales outlets to be set up only in cities with a population of more than 1 Mn as per 2011 Census and could cover an area of 10 km around the municipal / urban agglomeration limits of such cities

Real Estate 

Foreign retailers are allowed to procure land in India, as long as they build their own stores on it. They are not allowed to buy and sell undeveloped land, and they face other regulations on development set by the Department of Industrial Policy and Promotion of the Ministry of Commerce and Industry. Most retailers, therefore, prefer to lease properties long term than to acquire them. There are additional conditions with regard to investment cap, development area cap and lock-in period cap

Major Indian cities with some level of penetration for organized retail have seen a considerable increase in rentals post 2009, because of which cost of rent could be as high as 40% of revenues. In addition, the quality and the scale of real estate infrastructure that many of the foreign retailers seek may not be available in many of the Indian cities. Such constraints suggest a possibility of joint venture or jointdevelopment kind of model with developers or land owners. Retailers are also increasingly looking for distressed assets to keep the rental or ownership costs to bare minimum

Labor 

There are several legislations (like Bombay Shops & Establishment Act, 1948; The Payment of Gratuity Act, 1972; The Employees Provident Fund and Miscellaneous Provisions Act, 1952, etc.) that govern the labor laws in India for the Retail sector. Apart from legislations from the Central government, different state governments are also empowered to enact additional legislations that make the environment of labor laws quite complex in India. These laws cater to different aspects of labor, like working hours, occupational health, safety, review and revision of minimum wages, health insurance, contract labor, gratuity, bonus, etc. According to E&Y’s 2012 India Attractiveness Survey, around 45% of the international investors have found India as a highly attractive destination for low-cost and skilled labor. However, finding personnel trained in retail technologies remains a challenge. Retailing in India is also plagued by high employee turnover, and quarterly or biannual incentive-based payments are gaining increased acceptance

3. AG_E_Retail_CountryOverview_India_20130206