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technopak

Arvind SinghalTiE – Delhi

22nd July 2006

Indian Retail Sector

Trends & Opportunities

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Contents

Overview of Indian retail opportunity

The emerging Indian consumer

Changes in the retail sector

Impact Areas

Conclusion

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Overview Of Indian Retail Opportunity

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Size of the economy

Fiscal Year GDP at current prices (US$ Billion)

2005-6 804

2009-10 1133

2014-15 1721

Sources• 2006 GDP :Central Statistical Organization (CS0) • Growth Rates :Goldman Sach’s BRIC report (For details please refer to the appendix of this presentation)

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GDP US$ 804 Bn

Private Consumption

US $482 Bn (60%)

RetailUS $300 Bn (62%)

Non-RetailUS $182 Bn (38%)

UrbanUS $135 Bn (45%)

RuralUS $165 Bn (55%)

..With high Private Consumption

India is a consumption led economy : Private Final Consumption Expenditure (PFCE) is 60% of the economy (as against 42% of China and 55% of Japan)

Source :Central Statistical Organization (CS0) and Technopak Analysis

Public Spending and Gross Capital Formation 40%

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Growing Retail Market

300

427

637

0

100

200

300

400

500

600

700

US $ Billion

2006 2010 2015

Source :Technopak Analysis

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Retail Market : Rural/Urban Split

Almost half of retail market in 2006 is in rural India; although share of urban market is increasing by almost 5% every 8-10 years

Source :National Account Statistics; Monthly per capita Expenditure and Technopak Analysis

% Split

Urban 45%

Rural 55%

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Retail Market : Urban Split

Source :RK Swami BBDO

City Type 

% of Population

 

% of Urban Market

(Cumulative)

% of Total Market

(Cumulative)

Cumulative Market

US $ Billion

Top 4 16% 20% 9% 27

Top 9 24% 30% 13% 40

Top 62 43% 50% 22% 67

Top 141 53% 60% 27% 80

Top 338 63% 70% 31% 94

Top 530 69% 75% 33% 100

Top 784 74% 78% 35% 104

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Retail Market : Rural Split

Rural India consists of 720 Million consumers across 627,000 villages

17% of these villages account for 50% of the rural population and 60% of the rural wealth implying reaching out to almost 100,000+ villages to address even 50% of this rural opportunity

Source: Census; National Council of Applied Economic Research (NCAER)

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Retail :Share of categories   Market

Size $billion

2006

% Share 2006

Growth Rate b/w 2010-05

Market Size

$billion 2010

% Share 2010

Growth Rate b/w 2015-10

Market Size US $billion

2015

% Share 2015

Food, Beverages and Tobacco 195 65% 7.0% 256 60% 6% 342 54%

Personal Care 15 5% 11% 23 5% 9% 35 5%

Apparel 21 7% 11% 33 8% 9% 50 8%

Footwear 5 2% 11% 7 2% 9% 11 2%

Furnishings 4 1% 15% 7 2% 12% 12 2%

Consumer Durables & IT 14 5% 15% 24 6% 12% 43 7%

Furniture 9 3% 15% 16 4% 12% 28 4%

Jewellery & Watches 15 5% 12% 24 6% 9% 37 6%

Medical Care and Health Services

8 3% 12% 12 3% 12% 21 3%

Recreation 2 0.6% 17% 3 1% 15% 7 1%

Others 12 4% 18% 23 5% 18% 53 8%

  300 100% 9% 427 100% 8.4% 637 100%

Above are indicative calculations only Share is % share of Retail market. The share would be about 60% of the above numbers in case they are to be seen as % PFCE. For example Food, Beverages and Tobacco would be about 40% of the PFCE

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Key Trends Impacting The Market…

Urbanization? How rapid is it going to be?

What is the likely impact on consumption and its growth/trends?

Changing family structures? What is the future family structure?

How is it going to impact shopping behavior?

How is it going to impact the spending power and hence consumption?

Demographic Changes? What would be the demographic structure of India in next 5, 10, 15 years?

How is it going to impact shopping behavior?

How is it going to impact the spending power and hence consumption?

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In View Of The Rapidly Expanding Spend Categories…

1. Food and Grocery2. Clothing3. Footwear4. Consumer durables 5. Home linen6. Movies and theatre7. Eating out

19911991

1. Food and Grocery2. Clothing3. Footwear4. Consumer durables 5. Expenditure on DVDs and VCDs6. Home linen7. Home accessories 8. Accessories9. Gifts10. Take-away/ Pre cooked / RTE meals11. Movies and theatre12. Eating out13. Entertainment parks14. Mobile phones and service15. Household help16. Travel packages 17. Club membership18. Computer Peripheral & Internet

Usage

20042004 20102010

1. Food and Grocery2. Clothing3. Footwear4. Consumer durables 5. Expenditure on DVDs and VCDs6. Home linen7. Home accessories 8. Accessories9. Gifts10. Take-away/ Pre cooked / RTE meals11. Movies and theatre12. Eating out13. Entertainment parks14. Mobile phones and service15. Household help16. Travel packages 17. Club membership18. Computer Peripheral & Internet Usage19. ???20. ???21. ???22. ???Note: The above categories account for 80% of consumer spending

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Two-faced Indian Consumers…

Seeking upgradation in some categories & value in the others! Key issue for any retailer is to identify the “upgrades” and “value-focused”

product categories to rationalize the product mix and maintain healthy margins

Consumer SpendsConsumer SpendsGroceryApparel

Eating Out

Upgrading

Mobile phonesHousing

AutomobilesDurablesEducation

Seeking cheaper options

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Implications

Profile of the Indian consumer is changing and so are the aspirations and buying behavior

Consumer understanding and consumer orientation will be one of the key drivers of future success

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Current Retail Channels

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Current Channels

Over 12 million outlets in India

95% of outlets are smaller than 500 sq ft

Indian retail space per capita at 2 sq ft/ person is lowest in the world

Indian retail density of 6% is highest in the world

Highest number of outlets per person (7 per thousand)

One of the most fragmented markets in the World

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The share of organized retail is less than 3% of the total retail market

The size of modern retail is about US$ 8 Billion and has grown by 35% CAGR in last five years

85% 81%

55%40% 36% 30%

20% 20% 3%

0%

20%

40%

60%

80%

100%

US Taiwan Malaysia Thailand Brazil Indonesia Poland China India

Traditional Channel Modern Channel

Current Channels : Organized Retail

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Market Size : US $ 8billion

Current Channels : Organized Retail

9%

17%

9%

3%5%1%7%7%

9%

20%

2% 9%

2%

CDIT F&G Footwear

Furniture Pharmacy Home improvement

Books and Music J ewellery and Watches Non store

Restaurant Apparel Entertainment

Misc Products and Services

Source: Technopak Analysis

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Leading Players (Illustrative List) : Turnover

 Name US $ Million

Future Group (Pantaloon) 444

Shoppers Stop 133

Landmark (Lifestyle) 80

Trent 53

Subhiksha 44

Vishal Mega Mart 25

The above analysis does not include the specialty retailers like Bata, Titan and Tanishq

Source: myIRIS,Media and Technopak Analysis

The biggest players are small as yet !

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Rapid Transformation Anticipated

Top 20 players put together will target about US$ 60+ Billion revenue by 2011, accelerating the growth of Modern Retail

Retailer Estimated Investment

in US$ Billion

No. Of Years

R1 6.0+ Within next 5years

R2 2.0+ Within next 5years

R3 2.0+ Within next 5years

R4 2.0+ Within next 5years

R5 1.0+ Within next 5years

Next 15 Retailers 7.0+ Within next 5years

Total 20+

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Rapid Transformation ….

Investments in the range of US$ 20+ Billion expected in the next 5years in Retail & its Supply Chain alone

Size of modern retail likely to touch US$ 60+ Billion by 2011

At least 2.5 Million additional direct jobs likely to be created in the next 5 years

Hyper-competition is expected to set in by 2008-9 as the footprint of the top-5 players starts significant overlapping in top 20 – 30 towns

Significant impact on other retailers and branded good players – creating new opportunities and threats

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Impact Areas

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Impact Areas

Traditional Retailers

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TREM: Technopak Retail Evolution Model

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G-1 Shift In Channel Mix (Value)

2010

31.56%

19.92%5.74%

2.07%5.32%

4.42%

7.30%

0.75%

22.92%

2005 :0.68 Million

2010 :0.88 Million

2015 :1.29 Million

Source: Technopak Retail Evolution Model

Retail Universe:

Grows by 28%

Reduces by 16%2005

42.66%

20.42%

7.81%

2.51%

9.04%

5.44%

7.99%0.05% 4.06%

For the Key Categories stocked by the Kirana Stores

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2005 :0.84 Million

2010 :1.09 Million

2015 :1.58 Million

2005

46.29%

27.22%

6.17%

8.36%

4.11%2.76% 1.07%

0.23%3.78%

2010

35.77%

20.60%4.12%

5.39%

2.89%1.76%

26.28%

0.46%2.74%

Source: Technopak Retail Evolution Model

Retail Universe

Grows by 34%

Reduces by 18%

G-2 Shift In Channel Mix (Value)

For the Key Categories stocked by the Kirana Stores

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2005

80.67%

12.81%

0.92%

0.97%

0.42%0.52%

0.11%

3.57%

2010

75.53%

15.77%

3.42%

2.32%

0.66%

0.48%

1.04%

0.77%

Modern Grows by 3.4%

Reduces by 8%

G-3 Shift In Channel Mix (Value)

2005 :5.61 Million

2010 :6.71 Million

2015 :9.53 Million

Retail Universe:

For the Key Categories stocked by the Kirana Stores

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Impact On Traditional Retailers

Impact confined to perhaps 300,000 to 500,000 retailers across India coming in direct range of about 1000 Hypermarkets and about 3000+ supermarkets by 2011

Overall, the universe of traditional retailers will actually increase by 2011 and even by 2015

Importance of traditional channel to become even more for established FMCG and other consumer product companies

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Impact Areas

Current Modern Retailers

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Current Modern Retailers

Most will come under severe pressure

Most are grossly undercapitalized, and have largely invested in the “front end” rather than the back end

Most have weak business processes and IT systems

Most have no serious understanding or investment in supply chain

Most have no real margin drivers in their business model that can enable them to make exceptional investments in the immediate future

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Value Driver in Retail

Illustrative :The Food & Grocery Sector

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Farmers

Traders

Commission Agents

Wholesalers

Retailers

Indian farmer trapped in a vicious cycle of low risk taking ability, low investment, low

productivity,weak market orientation, low value addition,

low margin. Indian agribusiness globally

uncompetitive, despite rich & abundant natural resources.

Large number of retailers, but most are small and fragmented. Low volume, and low bargain

power.

Numerous intermediaries, lead to cost addition

without value addition while blocking the information flow

Supply Chain Peculiarities

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0

20

40

60

80

100

Quantity drop through Food Supply Chain

•More Intermediaries add to the inefficiency in the Chain :

•Leading to wastage in the Chain

•Drop in the quality of the product

Source : KSA Analysis

… Leading to Significant Quality Drop and Value Loss

Price Increase through the Chain

100125 131

196

344

0

100

200

300

400 Abnormal Cost Addition

Very High Wastage

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High margin buildup at every intermediary and wastage lead to abnormal consumer end prices

Consumer Price is 3.5 times of Farm Gate Price

Farmer Trader Com. Agent Wholesaler Retailer

Addnl. Cost

Wastage

Mark-up

Price 100

5%

10%

25%

125

2.5%

-

5%

131

5%

10%

50%

197

10%

25%

75%

344

Farmer Growers Co-op Distribution Co. Retailer

Addnl. Cost

Wastage

Mark-Up

Price 100

10%

2%

13.2%

113

40%

2%

50%

170

25%

2%

50%

255Illu

strativ

e

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‘Perishable (F&V)’ Supply Chain

Consumer Retailer

Regional Mandi

Local BrokerLocal MandiFarmer 7-8 % Margin

8-9% Commission

6-8 % Margin

13-15% Margins

Back-end

Front-end

Wholesalers

9-11 Margin

Auction rate9-14% Commission

Source: Technopak Retail Research

Illustra

tive

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Potato Cost and Margin Structure

Source: Technopak Retail Research

Cost and Margin Structure of Potato

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Intermediaries

Pri

ce

in

Rs

. / K

g Margin

Storage

Labour

Wastage

Grading/Packaging

Transportation

Cost Price

Margin 0.25 0.35 1.00 1.40

Storage 0.10 0.10 0.30 0.00

Labour 0.05 0.05 0.07 0.03

Wastage 0.10 0.15 0.22 0.10

Grading/Packaging 0.00 0.10 0.40 0.00

Transportation 0.00 0.05 1.00 0.00

Cost Price 3.20 3.70 4.50 7.50

Farmer Local mandi / CA Wholesalers Retailers

Rs. 3.70

Rs. 4.50

Rs. 7.50

Rs9.03

Disintermediation, that is, purchasing directly from the consolidator will add up to 50% of margin at the retailer level, which is 33.3% more than that of an unorganized retailer. . Illu

strativ

e

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Implications …

Farm to Kitchen is the right though most challenging and most capital intensive strategy

Current players have not even dis-intermediated beyond the first level from their front end and hence will find immediate challenge from the new entrants who are focussing on the entire value chain, and can potentially deliver more value (quality, availability, price, service) to their consumers than many of the current players

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Impact Areas

Branded Consumer Goods Players

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Branded Consumer Goods Areas

At the mass market, most Indian consumers are brand-blanked through aspiring for brands (that can denote quality, trust, value)

Most major new entrants will start with heavy proportion of Private Labels, and will probably use branded goods to demonstrate the price – value imbalance between such branded goods and their private labels

Technopak believes that Branded good companies are in for some surprises, and have to go back to the drawing board for strategy – learning from US and UK markets will not be of much use!

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Impact Areas

Opportunities

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Incredible Opportunities In The Supply Side

A new ecosystem of suppliers needed across diverse areas e.g. Manufacturing

All categories of consumer goods

Store fit-outs and accessories e.g. shopping carts, packaging, etc.

Services

Entire gamut including IT, Logistics, Design (Store and Product), Communication, Promotions, HR – recruitment and training et al

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To Conclude ……

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Conclusions

Size of Indian retail market very promising

Indian consumer is already behaving differently and more so in the coming years – fresh learning needed even by the most experienced consumer oriented businesses

Disruptive changes in the offing – however major disruption anticipated for current modern retailers and many consumer product manufacturing and marketing companies. Opportunities for many others

Evaluate investment opportunity on the basis of future change

rather than recent history!

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Thank You !

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For further dialogue, please contact :

Arvind SinghalChairmanTechnopak AdvisorsSecond Floor, Tower D, Global Business ParkGurgaon 122 002 (National Capital Region of Delhi)Haryana, India

Tel : (91-124) 414 1111, 288 1111Fax : (91-124) 414 1112, 288 1112Email : arvind.singhal@technopak.comWeb : www.technopak.com