Introduction to retailing

1. Introduction to retailing IR – Class 3 12 December 2009

2. Industry Evolution • Traditionally retailing in India can be traced to • The emergence of the neighborhood ‘Kirana’ stores catering to the convenience of the consumers • Era of government support for rural retail: Indigenous franchise model of store chains run by Khadi & Village Industries Commission • 1980s experienced slow change as India began to open up economy. • Textiles sector with companies like Bombay Dyeing, Raymond's, S Kumar's and Grasim first saw the emergence of retail chains • Later Titan successfully created an organized retailing concept and established a series of showrooms for its premium watches

3. Industry Evolution • The latter half of the 1990s saw a fresh wave of entrants with a shift from Manufactures to Pure Retailers. • Food World, Subhiksha and Nilgiris in food and FMCG; Planet M and Music World in music; Crossword and Fountainhead in books. • Post 1995 onwards saw an emergence of shopping centers, • Mainly in urban areas, with facilities like car parking • Targeted to provide a complete destination experience for all segments of society • Emergence of hyper and super markets trying to provide customer with 3 V’s - Value, Variety and Volume • Expanding target consumer segment: The Sachet revolution - example of reaching to the bottom of the pyramid. • At year end of 2000 the size of the Indian organized retail industry is estimated at Rs. 13,000 crore.

4. Retailing formats in India • Malls: The largest form of organized retailing today. Located mainly in metro cities, in proximity to urban outskirts. They lend an ideal shopping experience with an amalgamation of product, service and entertainment, all under one roof. • Specialty Stores: Chains such as the Bangalore based Kids Kemp, Crossword, RPG's Music World, are focusing on specific market segments and have established themselves strongly in their sectors. • Discount Stores: 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, catering to a variety of consumer needs. Further classified into localized departments such as clothing, toys, home, groceries, etc.

5. Retailing formats in India • 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 several large stores across India. • Hyper marts/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 and large supermarkets having a strong focus on food & grocery and personal sales. • Convenience Stores: These are relatively small stores 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 product category. These usually do well in busy market places and Metros.

6. Retailing formats in India India’s number of Domestic grocery chains and Early Foreign Entrants

7. 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

8. Recent Trends 3 factors plaguing the retail industry: Recent Changes • Unorganized: Vast majority of the 12 million stores are small "father and son" outlets • Fragmented: Mostly small individually owned businesses. Though India has the highest number of retail outlets per capita in the world, the retail space per capita is amongst the lowest. • Rural bias: Two-thirds of the stores are located in rural areas. Rural retail industry has typically two forms: • Haats are the weekly markets : serve groups of 10-50 villages and sell day-to-day items • Melas are larger in size and more sophisticated in terms of the goods sold • Experimentation with formats: Retail sector is witnessing a series of experiments like Quasi-mall, sub-urban discount stores, Cash and carry, etc. • Store design : Biggest challenge for organized retailing to create a “customer-pull” environment that increases the amount of impulse shopping. • Emergence of discount stores: The Wal-mart model is expected to spearhead the retail revolution. • Unorganized retailing is getting organized: To meet the challenges of organized retailing, the Kirana stores are aggregating.

9. Recent Trends • Multiple drivers leading to a consumption boom: • Favorable demographics • Growth in income • Increasing population of women • Raising aspirations : Value added goods sales • Food and apparel retailing key drivers of growth • Organized retailing in India has been largely an urban phenomenon with affluent classes and growing number of double-income households. • More successful in cities in the south and west of India. Reasons range from differences in consumer buying behavior to cost of real estate and taxation laws.

10. Recent Trends • Rural markets emerging as a huge opportunity for retailers reflected in the share of the rural market across most categories of consumption • ITC is experimenting with retailing through its e-Choupal and ChoupalSagar – rural hypermarkets. • HLL is using its Project Shakti initiative – leveraging women self-help groups – to explore the rural market. • Mahamaza is leveraging technology and network marketing concepts to act as an aggregator and serve the rural markets. • IT is a tool that has been used by retailers ranging from Amazon.com to eBay to radically change buying behavior across the globe. • ‘e-tailing’ slowly making its presence felt. • Companies using their own web portal or tie-sups with horizontal players like Rediff.com and Indiatimes.com to offer products on the web.

11. 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 are likely to target metros and small cities almost doubling their current number of stores • These Wal-mart wannabes have the economy of scale to be low-medium cost retailers pocketing narrow margin

12. India vs. World • Indian retail is fragmented with over 12 million outlets operating in the country. This is in comparison to 0.9 million outlets in USA, catering to more than 13 times of the total retail market size as compared to India • India has the highest number of outlets per capita in the world - widely spread retail network but with the lowest per capita retail space (@ 2 sq. ft. per person) • Annual turnover of Wal-Mart (Sales in 2001 were $219 billion) is higher than the size of Indian retail industry. Almost 100 times more than the turnover of HUL (India's largest FMCG company). • Wal-Mart - over 4,800 stores (over 47 million square meters) where as none of India's large format store (Shoppers' Stop, Westside, Lifestyle) can compare. • The sales per hour of $22 million are incomparable to any retailer in the world. Number of employees in Wal-Mart are about 1.3 million where as the entire Indian retail industry employs about three million people.

13. India vs. World • One-day sales record at Wal-Mart (11/23/01) $1.25 billion - roughly two third of HUL's annual turnover. • Developed economies like the U.S. employ between 10 and 11 percent of their workforce in retailing (against 7 percent employed in India today). • 60% of retailers in India feel that the multiple format approach will be successful here whereas in US 34 of the fastest-growing 50 retailers have just one format • Inventory turns ratio: measures efficiency of operations. The U.S. retail sector has an average inventory turns ratio of about 18. Many Indian retailers KPMG surveyed have inventory turns levels between 4 and 10. • Global best-practice retailers can achieve more than 95 percent availability of all SKUs on the retail shelves (translating into a stock-out level of less than 5 %).The stock-out levels among Indian retailers surveyed ranged from 5 to 15 percent.

14. 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 organized retail segment growing at the rate of 25-30% per annum, revenues from the sector are expected to touch $24 billion by 2010. • The share of modern retail is likely to grow from its current 2 % to 15-20 % in 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 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.

15. 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.

16. India’s FDI Policy • Sectors prohibited for FDI • Retail trading (except in single-brand product retailing) • Atomic energy, lottery, gambling • Trading • Wholesale, cash-and-carry 100% Automatic • Trading for exports 100% Automatic • Trading of SSI items 100% FIPB • Test marketing 100% FIPB • Single-brand retail 51% FIPB