The State of India’s Retail Market: Part II

The State of India’s Retail Market: Part II

By Ramesh Sethuraman, Contributing Editor

April 19, 2011

Last week, we introduced the state of India’s retail market. In that article, we classified the varying retail formats in that country, and in particular, called out their vast differences from more Western retail formats. This week, we shall focus on the regional challenges and consumption patterns brought about by the country’s varying geographies.

The regional differences within the enormous country of India are profound. Unlike US or European retail markets, the regional differences between Indian states tend to be extreme – in addition to weather and language differences, food and clothing desires are significantly different across states. To further complicate matters, people from the same state living in varied urban and rural areas often have wildly different consumption patterns.

For example, a traditional Indian woman from Tamilnadu (Southern state) will typically wear a Saree, whereas women from Punjab (Northern state) more commonly wear ‘Salwar kameez’. In India, apparel’s color is highly important, and preference by geography varies significantly. Similarly, people from southern states predominantly have rice-based diets, whereas people from northern states will predominantly eat wheat-based foods. Further still, people from Andrapradesh (Southern state) prefer more spicy foods, whereas people from Gujarat (Western state) are far more inclined towards “sweet-tooth” foods. This creates a tremendous challenge for retailers hoping to sell across multiple regions.

India’s per capita income for last year was INR 46,492 (≈ USD $1030); over 75% of the population is earning $2 or less per day. While this understandably limits the individual’s spending capability, the lower-income customer segment makes significant contribution to the industry as a whole. This has forced CPG companies such as Unilever towards micro-level bulk-breaking of products, in order to have a greater degree of penetration. For example, a 5 ml Shampoo sachet from Unilever will sell for INR 2 (≈ 5 cents) across the country. Similarly, sweet candies are sold in single units, which helps keep the cost to a little over one cent. This is only made possible by a lean-supply chain network capable of overcoming a lack of nation-wide infrastructure.

In fact, the Indian retail market is extremely complex in nature due not only to regional and consumption differences, but also because recent economic dynamics are drastically changing any pre-existing consumer patterns that a retailer might have been able to determine just a few years ago:

a) Improvement in the basic education system has increased the % of educated population in India (especially women). Nuclear and single families are on the rise and with increased public awareness, families are now limiting their number of children.

b) With more business and job opportunities created by steady economic growth, both partners have started to earn in many families. As a result, the percentage of middle class families and their disposable income per-head is increasing.

Those earning between Rs45,000-Rs1.80 lakh per annum are considered middle income households, whose number surged to 140.7 million out of the total of 228.4 Indian million families at the end of 2009-10. As per NCAER report, 62% of Indian households belong to the middle class, which is the target for most retailers and consumer goods firms. (53% of all air conditioners are owned by middle class homes and nearly 46% of all credit cards are to be found in these households.)

c) The globalization of the economy has brought new consumer goods companies into the country and media has increased national brand awareness. By shrinking package size and quantity, consumer goods have become more affordable to the masses.

d) An increase in awareness on hygiene and personal health care among the public is leading to increases in consumer spend on such products.

e) Television channels, movies and media have brought better exposure to international cultures. Also Indians are getting increasingly influenced by western culture and would like to try new things such as pasta, pizza, and international fashion apparel and beauty cosmetics.

Retailers in the still-small segment of retail segment (which as we discussed in last week’s article stand to benefit from huge business potential going forward) were heavily impacted by the recent global economic slump. One of the earliest players in the Indian retail scenario came to a near standstill and required immediate liquidity. Even the top 5 national retail chains slowed their expansion plans and scaled down operations. However, as the country entered into year 2011, Q4 2010 inspired a bit more confidence to the organized retail market. Interestingly, small format retailers felt the pinch neither during the economic slump, nor during the hype cycle of organized retail. Instead, during this period, small mom & pop retailers were underdoing transformation to quickly adapt; the impact of competition from large format retail giants has been almost nullified.

When compared to leading south-east Asian countries, India has the lowest percentage of organized retail. The share of organized retailing in India is around 6%, whereas in China, this number is over 20%. Countries like Thailand, Malaysia and Singapore have markets where organized retail comprises between 40-50% of overall retail. This is primarily due to limitation of imposed by Indian government in Foreign Direct Investment (FDI) in the retail sector.

There have been widespread fears that the entry of global retail giants could hurt individual mom & pop retailers (kirana stores). These stores currently dominate the retail trade in India and employ 33.1 million people, the most outside of farming. The government has tried to defuse some of these concerns by suggesting that the retail sector be opened up to foreign firms in a “calibrated manner”. It has also pitched issues such as inflation and employment control in multi-brand retail. Today, global retail giants such as Walmart & Metro have setup cash & carry operations in India. All major global retailers are lobbying with the government to have complete control of their operations.

Currently, the top five companies in retail hold a combined market share of less than 2% due to their focus only in urban markets. With over 641,000 inhabited villages and 72% of the total population residing in these rural areas, significant growth of the organized retail sector can emerge only from the rural markets. It has been estimated that over 55% of the disposable income is from these rural areas. According to data from the National Council of Applied Economics Research, rural India now accounts for 70% of the nation’s soap users and 38% of the total sales of bicycles. By the end of this year, India’s organized retail market is estimated to reach $50 billion US, and by 2012 the rural retail market is projected to have a total of more than 50% market share.