economics final final

8/8/2019 Economics Final Final

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DETERMINANTS OF INVESTMENT IN THE RETAIL INDUSTRY IN INDIA



Why Study Retail in INDIA???....

• Accounts for more than 12 percent of thecountry’s GDP• Employs around 8 per cent of the Population• Huge potential in Organized Retail as it accounts

for less than 3% of total Retail• India is the most attractive market for retail

business(Source: A. T. Kearney)

According to Euromonitor International,the Indian Retail market will grow in

value terms by a total of 39.6 per cent between 2006 and 2011, averaginggrowth of almost 7 per cent a year



Weekly MarketsVillage Fairs

Melas

Convenience StoresMom and Pop/Kiranas

PDS OutletsKhadi Stores

Cooperatives

Exclusive Brand OutletsHyper/Super Markets

Department StoresShopping Malls

Traditional/Pervasive Reach

GovernmentSupported

Historic/RuralReach

Modern Formats/International

Evolution of Indian retail

Source of Entertainmen

t

NeighborhoodStores/Convenie

nce

Availability/Low Costs /Distribution

ShoppingExperience/Efficie

ncy



India Experiencing Rapid Economic

Growth

9.4% growth rate makes India the second fastestgrowing economy in the world

GDP(US$ bn)

RealGrowthRate



.. and Rapid Transformation is Anticipated

Current Size & Future Projections for Indian Retail Market

342 373 408 445486

530

800

12 18 26 39 59 87

200

0100200300400500

600700800900

2007 2008 2009 2010 2011 2012 2017

U S $ B i l l i o n

Total Retail Organized Retail

And may reach a share of 25% by 2017



Modern Retail – Organized Channels

• The share of organized retail is lessthan 3% of the total retail market

• The size of modern retail is aboutUS$ 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 Braz il Indonesia Poland China Ind ia

Traditional Channel Modern Channel



Indian retail on the fast-track

8

GRDIIndia ranked first for the third consecutive year on theGlobal Retail Development Index – 2007, conducted

by AT Kearney across 30 emerging economies. Indiais ranked as the most preferred retail destination forinternational investors.

GCCIIndia ranked first for the fifth time on the GlobalConsumer Confidence Index – June 2007, conductedby The Nielsen Company. Indians were judged as theworld’s most optimistic consumers, with high financialconfidence about their income for the next 12 months.



Indian retail revolution

10/29/10

9

odern retail would increase its share in the totalail market to 22 per cent by 2010.

dian retail showed a growth rate of 49.73 per centh a turnover of US$ 25.44 billion in 2007-2008 asinst US$ 16.99 billion in 2006-2007.

rganized retail segment is expected to grow fromper cent to about 14 to 18 per cent by 2015.



DID YOU KNOW?10/29/10

10

Koutons Retail will be investing US$ 70.79

million to open 200 large Koutons FamilyStores and add another 1,400 stores inmodern retail format to the existing 605stores, within the next 18 months

Indian Oil Corporation (IOC) is planning toinvest US$ 189.103 million in rural areasduring the financial year 2009

Videocon Retail plans to invest US$ 168.45million to expand its electronic retail format,

Next Retail, and Planet M, the mobile, music,



What makes Indian Retail an AttractiveMarket ?

India tops the Global Retail Development Index



Determinants Investment in Indian Retail

High IncomeOpportunitiesHigh Income

OpportunitiesChangingAttitude

ChangingAttitude

InternationalExposure

InternationalExposure

Necessities toLifestyle

Necessities toLifestyle

• Service Sector:creating new jobs.

• Working Populationin 2010 will 70%

• IT Industry:

increasingprofessionalopportunities

• Rising Salary levels

• MNCs enteringIndia andhomegrowncompanies going

global

• Service Sector:creating new jobs.

• Working Populationin 2010 will 70%

• IT Industry:

increasingprofessionalopportunities

• Rising Salary levels

• MNCs enteringIndia andhomegrowncompanies going

global

• From Save toSpend

• High disposableincome familystructures on arise

• Nuclear Families

• DINKS (DoubleIncome No Kids)

• Multi incomefamilies

• From Save toSpend

• High disposableincome familystructures on arise

• Nuclear Families

• DINKS (DoubleIncome No Kids)

• Multi incomefamilies

• Internationaltravel

• Exposure toglobal trends

• Highest Growth

in outboundtourists in theworld

• Internationaltravel

• Exposure toglobal trends

• Highest Growth

in outboundtourists in theworld

• Shift of expensebasket frombasics to lifestyleproducts

• Increased spendon Apparel,personal care,entertainment

• Easy Bank creditboosts retail

• Shift of expensebasket frombasics to lifestyleproducts

• Increased spendon Apparel,personal care,entertainment

• Easy Bank creditboosts retail

Customer value drivers are continuing to fragment as a result of changingdemographics & value systems

Consumption expenditure is 60 % of India’s GDP

Market &Government

Market &Government

• Easing out onImport barriers,Governmentsponsorshiptaking shape (FDIPolicy, Tax and

Duty structure,Subsidies)

• Fluid retailSegments

• M-Commerce &e-Commerceboosts retail

• Easing out onImport barriers,Governmentsponsorshiptaking shape (FDIPolicy, Tax and

Duty structure,Subsidies)

• Fluid retailSegments

• M-Commerce &e-Commerceboosts retail



Global Heavyweights in Indian RetailingJoint Ventures Product Range Retail Formats

Bharti-Walmart (with $2.5

Billion investment by Bharti)

Food & grocery, electronics & appliances, clothing &

footwear, furniture & furnishing, household articles.

Hypermarkets, Supermarkets and

Convenience

Carrefour-Landmark Food and groceries, FMCG, apparel and electronics Hypermarkets

Home Retail Group plc -Shopper's Stop Ltd andHypercity Retail India PrivateLtd

Franchising the Argos concept under the terms of thearrangement, Argos will be providing its brand,catalogue and multi-channel expertise and IT support

Multi Channel propositions

Tata-Woolworths Sourcing agreement for Consumer durables and Foodsunder brand name CROMA

Multi brand retail chain

Staples Inc – Pantaloon RetailGlobal Sourcing of Office equipments across variousbusinesses

Cash and carry

Reliance Food & grocery, electronics & appliances, clothing &footwear, furniture & furnishing, household articles.

Multi format and Multi Category

Birla Food & grocery, electronics & appliances, clothing &footwear, furniture & furnishing, household articles.

Convenience and Supermarket



The Indian Consumer



Driven from Consumption Throughout the1.1 Billion Population

5-7 millionSuper Rich

70 – 80 million

Afford Cars, Private Healthcare &Foreign travel

250 - 300 million

Afford goods like Refrigerators , Scooters& Colour TVs

600-700 million ( Generally Rural )Afford simple industrial products

e.g. bicycles , radios , textileserty Line = income less than $ 1/day

urce: McKinse ,

60 % of India’s population are under 24 years

http://images.google.com/imgres?imgurl=http://upload.wikimedia.org/wikipedia/en/thumb/2/23/Indian_Couple_on_Bicycle.jpg/180px-Indian_Couple_on_Bicycle.jpg&imgrefurl=http://en.wikipedia.org/wiki/Bicycle&h=250&w=180&sz=15&hl=en&start=1&tbnid=Vj2HXGk35I5f2M:&tbnh=111&tbnw=80&prev=/images%3Fq%3Dlower%2Bclass%2Bindians%26ndsp%3D20%26svnum%3D10%26hl%3Den%26lr%3D%26sa%3DN



What the consumer spends today

GDPUS$ 935 billion

Private ConsumptionUS$ 580 Billion

(62%)

Public Spending and CapitalFormation

US$ 355 Billion (38%)

RetailUS$ 342 Billion

(59%)

Non RetailUS$ 238 Billion

(41%)

Urban (5,100 towns) US$ 154 Billion

(45%)

Rural (6,27,000 villages)US$ 188 Billion

(55%)

Modern retail – US$ 12 billion8% of urban retail spends

Modern retailNegligible

Food

Apparel

Beverages

Footwear

Consumerdurables

Appliances

Stationery

Kitchenutensils

Furniture

Furnishings

Sports goods

Health &Beauty

Personal Care

Jewellery

Timing

Transport

Communicati

onRecreation

CulturalServices

Education

Rent

UtilitiesOther

Services

Source: Central Statistical Organization (CS0) and Technopak AnalysisConversion rate: 1 US$ = 40.86 Rs.



Estimated expenditures by 2012

GDP*US$ 1,450 billion

Private ConsumptionUS$ 870 Billion

(60%)

Public Spending and CapitalFormation

US$ 580 Billion (40%)

RetailUS$ 530 Billion(61%)

Non RetailUS$ 340 Billion(39%)

UrbanUS$ 252 Billion

(47.5%)

RuralUS$ 278 Billion

(52.5%)

Modern retail – US$ 78 billion31% of urban retail spends

Modern retail – US$ 9 billion3% of rural retail spends

Source: Technopak Analysis ll figures are in nominal terms after taking into account inflation



Rising Urbanization



Rapid Urbanization10/29/10

20

3 out of world's 21 mega cities, inmillions: Mumbai(19); Delhi (15); Kolkata (14)

Estimated Urban Population by 2017:

500 million



Impacts of Rapid Urbanization10/29/10

21

Real Estate Prices skyrocketedGrowth of Organized Retail sectorRetail growth in Tier II cities includedImprovement in Retail Infrastructure



VC/PE INVESTMENTS IN RETAIL



Driver for VC/PE

10/29/10

23

• Players taking the “first-mover advantage” • Emergence of India as Retail Sourcing Hub • Increasing Technology Adoption • Online Retailing • Emerging rural retailing • Leisure and entertainment • Special Economic Zone (SEZ) synergies

• Tourism Related Opportunities



INVESTMENT BY VC AND PRIVATE EQUITYFIRMS

10/29/10

24

Major VC/PE deals of the year 2007



FDI IN INDIA



FDI In India

FranchiseInternational company gives name and technology to localpartner. Gets royalty in returnIn case master franchise is appointed for region or country, hehas right to appoint local franchisees

Nike, Pizza Hut, Tommy Hilfiger, Marks and Spencer, MangoManufacturing

Company sets up Indian arm for productionBata India. It also has right to retail in India

DistributionInternational company sets up local distribution officeSupply products to Indian retailers to sellAlso set up franchised outlets for brand

Swarovski, Hugo Boss

Wholesale tradingCash and Carry operations100% FDI permitted

Metro Cash n Carry



Benefits of FDI

Improves competitionDevelops the marketProvides access to global markets for Indian producersGreater level of exports due to increased sourcing bymajor playersEg. Wal-Mart from China improved multifold after FDIpermitted in ChinaSimilar increase in sourcing observed for Metro in IndiaInvestment in technologyCold storage chains solve the problem of wastageGreater investment in the food processing sector technologyBetter operations in production cycle and distribution



Benefits of FDI

Better lifestyleGreater level of wages paid by international players usuallyMore product varietyNewer product categoriesEconomies of scale to help lower consumer priceIncreased purchasing capacity of consumers

Manpower and skill developmentThrough retail training andGreater managerial talent inflow from other countries

Tourism DevelopmentA strong retailing sector boosts tourism as seen from theexperience of Singapore and Dubai

Long term benefitsUp-gradation of agricultureDevelopment of efficient small and medium size industries



Benefits to Government

Greater PerCapita Income

Greater ConsumerSpending due to

economic boom

Increasing Tax PayingPopulation

GreaterSourcingFrom India

Reduced TaxEvasion

GDP Growth

Increased TaxRevenues

GreaterExports

Employment

Benefitsto Govt.



Benefits to Government

Increase employment levelsFDI would result in market growth and expansionEmployment generated at various levels

Increased consumer demand implies employmentgeneration across the value chain

Does not need very high skill setsNeeds high school graduates and other similar skill

levelsCurrently this is a majorly unemployed demographic

groupBoom in employment

Similar to job generation in ITES industryOn a much larger scaleBut new jobs comparatively lower down the value chain



LICENSING REQUIREMENTS



LICENSING REQUIREMENTS

• Shops & Establishment Act

• Municipal Corporation Act• • Drugs & Cosmetic Act, 1940

• Prevention of Food Adulteration Act

• Agricultural Produce Marketing Committee Act

• Essential Commodities Act

• Standards of Weights and Measures Act, 1976

• The Copyright Act, 1957

l d h ll



RetailChallenges

Organizing Retail in India-Challenges

• Heterogeneous market

– Product offerings in different stores across the country will be

very different – No standard mode of operation across formats

– Market not mature (has to be validated)

• Infrastructure will bring about logistical challenges

– Though, improvements in road networks, power supply areunderway

• Trained employees with understanding of retail businessare inadequate compared to the needs of organized retail

• Barriers to Entry

– High taxes, bureaucratic clearance process and labour laws

• High cost of real estate

– though over 600 malls are to come up all over the country bythe next 4 years

• Indian retailers are deeply entrenched, are expanding andbuilding on logistics and technology initiatives



The Way Ahead

• India is amongst the least saturated of allmajor global markets in terms of penetration of modern retailing formats

• Many strong regional and national playersemerging across formats and productcategories

• Most of these players are now gearing up toexpand rapidly after having gone through theirrespective learning curves

• Real Estate Developers are also moving fastthrough the learning curve to providequalitative environment for the consumers

• The Shopping Mall formats are fast evolving

• Partnering among Brands, retailers,franchisees, investors and malls

• Improved Infrastructure

In view of a compressedevolution cycle, retailers need to

simultaneously address issues of speed,Execution and efficiency



CASE STUDY

http://trak.in/wp-content/uploads/2009/02/subhiksha.png



SUBHIKSHA

THE RISE:• Started in 1999 by IIM-A Alumnus• Expanded to more than 1000 stores by end of 2007

THE FALL:• Operations closed down in Jan 2009

WHAT LED TO THE DOWNFALL OF SUCH AFLOURISHING RETAIL GIANT?



PERSPECTIVE

Before Subhiksha entered Subhiksha in monopolistic competition

Decreasing demand and huge sunkcosts, Subhiksha in losses

Entry of new firms, zero economicprofit



SUBHIKSHA contd…

THE FINANCIAL PERSPECTIVE

BALANCE SHEET

CASH FLOW STATEMENT



BALANCE SHEET(Rs in Crs)

Year Mar 07 Mar 06 Mar 05

SOURCES OF FUNDS :

Share Capital 31.81 29.2 24.7

Reserves Total 174.39 87.27 40.66

Equity Share Warrants 0 0 0

Equity Application Money 0 0 0

Total Shareholders Funds 206.2 116.47 65.36

Secured Loans 245.03 80.01 20.55

Unsecured Loans 0 0 0.31

Total Debt 245.03 80.01 20.86

Total Liabilities 451.23 196.48 86.22

APPLICATION OF FUNDS :

Gross Block 191.75 39.08 23.31

Le ss : Accumulat ed Depreciation 20.35 10.37 7 .75

Net Block 171.4 28.71 15.56

Lease Adjustment 0 0 0

Capital Work in Progress 16.98 50.03 0

Investments 0.01 0 0

Current Assets, Loans & Advances

Inventories 279.32 57.29 34.44

Sundry Debtors 0.3 0.01 0.83

Cash and Bank 12.87 65.04 37.8

Loans and Advances 71.43 22.66 5.5

Total Current Assets 363.92 145 78.57

Less : Current Liabilities and Provisions

Current Liabilities 93 21.69 2.67

Provisions 3.31 3.94 3.65

Total Current Liabilities 96.31 25.63 6.32

Net Current Assets 267.61 119.37 72.25

Miscellaneous Expenses not written off 0 0 0

Deferred Tax Assets 0.23 0.08 0.02

Deferred Tax Liability 5 1.71 1.61

Net Deferred Tax -4.77 -1.63 -1.59

Total Assets 451.23 196.48 86.22

Contingent Liabilities 57 30 4

http://www.capitaline.com

CASH FLOW STATEMENT(Rs in Crs)

Mar-07Mar-06Mar-05

Cash Flow Summary

Cash and Cash Equivalents at Beginning of the year

65.04 37.8 1.2

Net Cash from Operating Activities -160.8 9.47 3.04

Net Cash Used in Investing Activities -119 -82.39 -2.66

Net Cash Used in Financing Activities 227.61 100.16 36.22

Net Inc/(Dec) in Cash and Cash Equivalent -52.17 27.24 36.6

Cash and Cash Equivalents at End of the year 12.87 65.04 37.8

Intranet Version of Capitaline CorporateDatabases



Thank You

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