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Growth of Malls in India

India: Growth of Malls Page 1 of 5

Ali Asgar Motiwala Date (June/2008) ID:# Summary India has yet again topped AT Kearney’s annual Global Retail Development Index. It is estimated that the Indian retail market will grow from US$330 billion in 2007 to US$ 427 billion by 2010 and US$ 637 billion by 2015. Organized retailing comprises just 4.6 percent of the currently estimated Indian retail market. However this segment grew nearly 40 percent in 2007 and is estimated to increase to 22 percent by 2010. The entry of major global players and larger Indian corporate houses into the arena, along with the booming services sector and the growth in disposable income is expected to provide impetus to this boom. As a direct reflection of the robust growth of organized retailing, the retail real estate market in India is also doing very well especially after the Indian government’s relaxation in the foreign direct investment (FDI) norms (100 percent FDI is allowed in construction projects) in 2006. Mall space, which was virtually nonexistent before 2000, is expected to touch 60 million square feet by end-2008 according to Jones Lang LaSalle's third annual Retailer Sentiment Survey-Asia. In another report, Images Retail has estimated that the number of operational malls will more than double to over 412 with 205 million square feet by 2010 and further to 715 malls by 2015, on the back of major retail developments even in tier II and tier III cities in India. Realizing the potential in India’s real estate market, several overseas companies including over 20 U.S. funds are raising billions of dollars to invest in the market. According to a recent report, investors are attracted to invest in India; especially in new retail properties as the yield from such investments are considerably higher than elsewhere in the world. Typically, malls in India have a yield of 10-12% compared 5-6% in more mature markets. In addition, potential also exists for U.S. companies in the field of mall design, mall management, mall entertainment as well as equipment and customer care expertise.

Market Demand With market liberalization, growing consumerism and the entry of corporate players, the Indian retail sector is currently experiencing developments at an evolutionary rate like nowhere else in the world. The Indian consumer is rapidly evolving and is now being exposed to shopping as an experience and is charmed with a host of international brands at competitive prices. Today, the Indian consumer expects a wide array of choices in the form of better quality retail outlets, product choices and brand options. He expects every benefit being offered in the developed markets. Indian retail is going all out to provide the consumers what they seek. On their part, the consumers have started spending more and more of their increasing disposable incomes. In the last few years’ Indian retail especially in the organized segment has gone from strength to strength. According to a study by Deloitte Haskins and Sells, organized retail has increased its share from 5 per cent of total retail sales in 2006 to 8 percent in 2007. The fastest growing segments have been the wholesale cash and carry stores (150 percent) followed by supermarkets (100 percent) and hypermarkets (75-80 percent). Further, it estimates the organized segment to account for 25 percent of total sales by 2011. Some of the key factors that are providing this thrust are as follows:

• • • • •

Booming service sector – bringing in a new consumer class with a greater exposure to overseas markets Rise in the disposable incomes of this class of consumers along with their aspirations Over the last year salaries have increased by approximately 15-20 percent The growth of the Indian middle class from its current share of 22 percent to 32 percent of the total population by 2010 Greater availability of quality retail space with formats such as department stores, hypermarkets, supermarkets and specialty stores finding more and more acceptance

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India: Growth of Malls Page 2 of 5 Indian retailing, however, is facing several challenges. Property and real estate issues, capital availability, legal framework, human resources, supply chain development and management, and logistics are amongst the prominent ones. The foremost challenge facing the organized retail industry in India is competition from the unorganized sector. Traditional retailing, with 12 million outlets, was established in India centuries ago. It has low cost structure, is mostly owner-operated, has negligible real estate and labor costs and little or no taxes to pay. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector. In contrast, players in the organized sector have big expenses to meet, and yet have to keep prices low enough to be able to compete with the traditional sector. High costs for the organized sector arise from: higher labor costs, social security to employees, high quality real estate, much bigger premises, comfort facilities such as airconditioning, back-up power supply, taxes etc. Organized retailing also has to cope with the middle class psychology that the bigger and brighter a sales outlet is, the more expensive it will be. Despite these difficulties, investors’ interest in this sector is growing at a frantic rate. In addition, with tariffs on imported consumer items gradually being aligned to meet prescribed WTO norms and reduction of import restrictions, the retailing sector is bound to grow manifold in the coming years. The depth of the Indian market and the variations of the consumer profile indicate a bright future for the sustained growth of the Indian retail sector.

Market Data As a direct reflection of the robust growth of organized retailing, retail real estate market in India is also doing quite well. Mall space, which was virtually non-existent before 2000, is expected to touch 60 million square feet by end2008 according to Jones Lang LaSalle's third annual Retailer Sentiment Survey-Asia. According to another report (Upcoming malls 2008 and beyond) by the same company, some 328 new shopping malls are expected to come up in metros and smaller cities (also known as tier 2 and tier 3 cities) over the next two years. This report further states that north India will lead the retail growth with 136 new malls coming up by 2010. While New Delhi is expected to get 15 malls, its suburbs are expected to get seven new malls each. Among individual cities, Mumbai is expected to see the largest development in this area with 30 new malls being planned in the city in the next two years. The city of Kolkata in east India, which has been a late entrant to this retail growth, is also expected to get around 18 malls. In south India, Kochi in the state of Kerala is expected to have 13 malls by 2010 while the city of Bangalore is expected to have around 12 malls developed in the city. While there is a big surge in the development of large retails spaces, intense competition is forcing developers to find innovative ways to attract stores and maintain foot traffic from shoppers. In an effort to be different, developers are trying out all possibilities. Specialized malls, designer brands and multi movie options are becoming a common feature for the shopper. For example, Gurgaon (a suburb of New Delhi) has a jewelry mall and will soon have an auto mall. Bangalore is expected to soon get an exclusive furniture mall while Kolkata will get a furnishings mall. Tourist cities like Goa and Udaipur are expected to get malls that will target tourists. Discount malls are also on the rise. Retailers are developing malls in regional hubs specifically to sell premium branded goods at prices 30-40 percent cheaper that the maximum retail price. At least 50 discount malls are expected to come up in the next two years across the country according to the report ‘Malls in India’ by Images. Developers are also making sure that the new malls have facilities that were lacking in the earlier malls. They are now giving importance to key factors such as parking, mall design and soft strategies like customer relationships to make these malls work.

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India: Growth of Malls Page 3 of 5

Best Prospects Realizing the potential in India’s real estate market several overseas companies including over 20 U.S. funds are raising billions of dollars to invest in the market. According to a recent report, investors are attracted to invest in India; especially in new retail properties as the yield from such investments are considerably higher than elsewhere in the world. Typically, malls in India have a yield of 10-12% compared 5-6% in more matured markets. Potential also exists for U.S. companies in the field of mall design and mall management. Mall developers in India are going through the learning curve and understand the benefits of growing their business with the help of global experts. As an example, an overseas company in the filed of mall development and management which entered India (though a joint venture) five years ago is doing very well. They are now currently working on 50 projects throughout India and are looking to scale up operations. Another potential area of interest to U.S. companies is in mall entertainment. While shopping still remains the main draw, entertainment options within malls are increasingly becoming important attractions. Gaming, magic shows and events today account for a considerable potion of mall revenues. According to industry estimates, mall entertainment market is roughly around US$ 240 million and growing at an average rate of 15 percent. With corporate bigwigs such as Reliance, Tata, AV Birla Group, Godrej, Bharti, Mahindra, ITC Group and the Wadia group investing billions of dollars in their retail ventures, huge opportunities exist for U.S. companies in supplying retail shop fit equipment and services including developers, designers, human resources, architecture and IT.

Prospective Buyers Rising incomes and a young population makes an amazing recipe for growth. According to recent data from India’s Marketing Whitebook by Businessworld (provided in KPMG’s report on Consumer Markets in India), India has around 208 million households. Of these, slightly more than six million are ‘affluent’ – that is, with a household income in excess of INR 215,000 (US$ 4,943) per year. Another 75 million households are ‘well off’, earning between INR 45,000 (US$ 1,034) and INR 215,000 (US$ 4,943) per year. In the past, the organized consumer goods sector concentrated almost exclusively on the ‘affluent’ category, which forms the backbone of the Indian market. However, the ‘well off’ class with their increased spending power is becoming a target audience for organized retailers, distributors and consumer goods manufacturers. In addition, organized retailing in small-town India is growing at 50-60 percent per year (as compared to 35-40 percent in the larger cities). According to recent studies conducted by the National Council of Applied Economic Research (NCAER), rural India is home to 720 million consumers across 627,000 villages. As urban markets are starting to get saturated, most companies are looking at the rural market to help in their company’s growth.

Market Entry In this section we take a look at some leading retail real estate developers (source:www.ibef.org) who would be ideal clients for U.S. companies involved in mall design, management and other related areas. DLF: • Largest real estate developer in India • Developed Asia’s largest private township DLF City at Gurgaon, Haryana spread over 3000 acres • Present across all the asset classes: Residential, Commercial and Retail. • Developed more than 220 million square feet of built up area BUA • Specializes in planning Hotels, Infrastructure and SEZs 574 million sq. ft. of BUA under planned Projects • Pan-India footprint, major presence in Gurgaon & Kolkata

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India: Growth of Malls Page 4 of 5 Unitech: • Operating various asset classes in residential, commercial and retail segment • Developed more than 7 million square feet of built up area (BUA) • Specializes in planning residential, commercial, SEZ development, retail and hospitality, integrated townships • 430 million square feet of BUA under planned projects • Major presence in National Capital Region and other areas such as Kolkata, Chennai and Hyderabad Ansal Properties: • Operates primarily in Residential & Commercial asset classes • Developed over 2850 acres in Gurgaon and Delhi • Developing integrated townships, malls, hotels IT parks and SEZs • Plan to construct 157.6 million square feet of BUA • Pan-India footprint with major presence in 16 North-Indian cities across 4 states K Raheja Corp: • Present in Commercial, Retail & Residential asset classes • Developed over 5 million square feet of BUA • Developing 15 self-contained townships and 10 hotels • Planning to construct 13.2 million square feet of BUA • Major presence in Mumbai with operations in Bangalore, Ahmedabad, Goa, Pune and Hyderabad Sobha Developers: • Asset classes include Residential, Commercial, Development of plots and Contractual projects • Developed over 4.5 million square feet of BUA • Planning residential and retail projects • 101 million sq. ft. of BUA is planned under various projects • Major concentration in Bangalore with presence in other areas such as Cochin, Chennai and Pune.

Market Issues & Obstacles Retailing is one of the few sectors of the Indian economy that is closed to Foreign Direct Investment (FDI). One of the major arguments against allowing FDI is that the advent of large retailers will cause the demise of the mom and pop stores. However, those in favor of allowing FDI argue that there are obvious benefits of permitting FDI in retail, including: that it will boost a key growth sector of the economy, create employment, benefit consumers with the increase in the retailers efficiency and competitiveness, and importantly bring best management practices and access to world-class technologies. Despite the perceived benefits of permitting FDI into the retail trade sector, reticence still exists amongst policy makers. While the government of India does not allow to 100 percent FDI, it does allow single brand retailers to own up to 51 percent of their India ventures. To mitigate the effects of the investment restrictions, international retailers have adopted different strategies for operating in India. These include franchising, cash and carry wholesale operations and strategic license agreements.

Trade Events India Retail Forum (IRF) IRF (Sept 16-18, 2008) covers the entire gamut of retail segments and operations in its scope of exhibits and conference deliberations. The new sectors joining in are automobiles, tourism, airports, railways & post office, cooperatives, telecommunications, banking & insurance etc - broadening the horizon of retail. www.indiaretailforum.in

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India: Growth of Malls Page 5 of 5

Resources & Key Contacts Retailers Association of India (RAI) 112/112, Ascot Centre Next to Hotel Le Royal Meridien Sahar Road, Sahar, Andheri East, Mumbai 400 090 Phone: 91-22-28269527 Fax: 91-22-28269536 Contact: Mr. Gibson G. Vedamani, CEO Email: info@retailersassociationofindia.org Website: http://www.rai.net.in/ Images Multimedia 38 (apt. #3&4), Sadhna Enclave, Panchsheel Park, New Delhi – 110017 Phone: 91-11-26015683 Fax: 91-11-26015687 Contact: Mr. Amitabh Taneja, Editor-in-Chief (email: amitabh@imagesfashion.com) Ms. Anjali Sondhi, Director (email: anjali@imagesfashion.com) Website: www.imagesretail.com

For More Information The U.S. Commercial Service in Mumbai, India can be contacted via e-mail at: Aliasgar.Motiwala@mail.doc.gov Phone: 91-22-22652511; Fax: 91-22-22623850 or visit our website: www.buyusa.gov/india.

The U.S. Commercial Service — Your Global Business Partner With its network of offices across the United States and in more than 80 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://www.export.gov/.

Disclaimer: The information provided in this report is intended to be of assistance to U.S. exporters. While we make every effort to ensure its accuracy, neither the United States government nor any of its employees make any representation as to the accuracy or completeness of information in this or any other United States government document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. International copyright, U.S. Department of Commerce, 2007. All rights reserved outside of the United States.

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Growth of Malls