The Hindu Business Line : Retail: The next big thing?

THE Indian consumer could well be crowned King with all economic indicators in the right place. Queuing up for the coronation ceremony are a multitude of global companies that are looking at India as the next consumer market powerhouse. And it seems to be the retail sector that will give the desi consumer royal status.

A study by McKinsey points out that India's market for consumer goods could reach a whopping $400 billion by 2010 - making it one of the five largest in the world. Further, KPMG in a recent report titled `Consumer Markets in India - the next big thing?' has said: "India represents an economic opportunity on a massive scale, both as a global base and a domestic market." The report, however, finds that the next leap in the growth of the consumer market will be spearheaded by the changing dynamics of the retail sector. "Companies expect that the next cycle of change in Indian consumer markets will be the arrival of foreign players in consumer retailing. Although FDI remains highly restricted in retailing, most companies believe that will not be for long," says Deepankar Sanwalka, Executive Director and Head - Consumer Markets, KPMG India.

FDI in retail has once again begun to appear imminent following Prime Minister Manmohan Singh's recent interview to McKinsey, in which he expressed confidence that he would be able to get the Left parties on board on the matter. KPMG is in fact going ahead with its plans to conduct a series of five roadshows in the US and a few countries in Europe to hold discussions about the opportunities in India's consumer markets, especially in retail. And the numbers do lend credence to the enthusiasm.

The Economist Intelligence Unit (EIU) country briefing on India, 2005, estimates the retail market in India will grow from $394 billion in 2005 to $608.9 billion in 2009. In fact, KPMG finds that the organised retail sector in India is expected to grow at a higher rate than GDP growth in the next five years, driven by changing lifestyles, strong income growth and favourable demographic patterns. According to EIU, India currently has more than five million retails outlets, out of which 96 per cent are smaller than 500 sq. ft. But this scenario is changing fast. The structure of retailing is developing rapidly with malls becoming increasingly common in large cities, and development plans being projected at 150 new shopping malls by 2008.

According to the KPMG report, the annual growth of department stores has been estimated at 24 per cent, which is faster than overall retail; and supermarkets have taken an increased share of the general food and grocery trade over the last two decades. Specialised retailers are developing rapidly in segments such as consumer durables and white goods, books, music, lifestyle goods, household furnishings, healthcare and beauty.

Further, despite the view that disposable incomes remain concentrated in urban areas, given the growing number of double-income households, the report reveals that the sheer size and potential of the rural segment has been underestimated. The Indian market is evolving dynamically and there is hidden consumption power in the low-income rural areas that offers considerable opportunities for organised retailers in the kind of rural territories that many companies have failed to address. The retail growth therein is expected to be double-digit if infrastructure allows the consumer companies to reach new markets at reasonable costs.

With growth in disposable incomes, the KPMG report reveals, the Indian consumer is emerging as more trend-conscious with the development of modern urban lifestyles. In fact, recent studies have found that as Indians have grown richer, they have begun to spend more on vehicles, phones and eating out in restaurants. The spending is focused more outside the homes, unlike in other Asian countries where consumers have tended to spend more on personal items as they grow richer.

Not surprisingly, the KPMG report finds that specialised retailers are coming up rapidly and Indian retailing is undergoing a slow but deep-rooted shift away from total reliance on countless small family-run stores towards larger, more formal retail outlets. It adds that the food and beverages segment is an emerging growth area.

Similarly, the gems and jewellery market is a key emerging area. Gemstones and jewellery represents the most significant segment of Indian retailing, accounting for a high proportion of total retail spend. However, for foreign retailers willing to do business in India, concerns such as cost of retail space, FDI controls, `unorganised' sector competition and shortage of urban retail space need to be addressed, the report says.

The distribution network in particular needs to be strengthened. In fact, most of the companies surveyed found that the large geographical spread is a problem and so are the logistics of connecting various regions. "India is not like one country, it is like 25 different countries," one retailer said. Taxation barriers between States also hinder efficient regional distribution." Consumer companies are faced with various roadblocks with respect to distribution such as large geographic area, infrastructural constraints, distributor costs, fragmented market, lack of national distribution networks and lack of distribution hubs," says Sanwalka.

Further, a partial opening of the retail sector may not be enough to attract large-sized foreign retailers. In fact, two major multinational retail chains are believed to have indicated they would not like to enter India unless they could own at least 51 per cent equity in the venture. The rationale is that these companies would like to operate here on a large scale, and the higher the equity they can hold, the easier it will be for them to expand. However, till the policy environment allows so, these companies remain in wait-and-watch mode while the Indian consumer too waits for that royal opportunity to come by.

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