Indian Retail SectorTrends & Opportunities: technopak Arvind Singhal TiE – Delhi 22nd July 2006 Indian Retail Sector Trends & Opportunities


Contents: Contents Overview of Indian retail opportunity The emerging Indian consumer Changes in the retail sector Impact Areas Conclusion


Overview Of Indian Retail Opportunity: Overview Of Indian Retail Opportunity


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


..With high Private Consumption : GDP US$ 804 Bn Private Consumption US $482 Bn (60%) Retail US $300 Bn (62%) Non-Retail US $182 Bn (38%) Urban US $135 Bn (45%) Rural US $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%


Slide6: Growing Retail Market 2006 2010 2015 Source :Technopak Analysis


Retail Market : Rural/Urban Split: 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


Retail Market : Urban Split: Retail Market : Urban Split Source :RK Swami BBDO


Retail Market : Rural Split: 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)


Retail :Share of categories : Retail :Share of categories 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


Key Trends Impacting The Market…: 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?


In View Of The Rapidly Expanding Spend Categories…: In View Of The Rapidly Expanding Spend Categories… 1991 2004 2010 Note: The above categories account for 80% of consumer spending


Two-faced Indian Consumers…: 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


Implications: 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


Current Retail Channels: Current Retail Channels


Current Channels : 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


Current Channels : Organized Retail : 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 Current Channels : Organized Retail


Current Channels : Organized Retail : Market Size : US $ 8billion Current Channels : Organized Retail Source: Technopak Analysis


Leading Players (Illustrative List) : Turnover : Leading Players (Illustrative List) : Turnover 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 !


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


Rapid Transformation ….: 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


Impact Areas: Impact Areas


Impact Areas: Impact Areas Traditional Retailers


TREM: Technopak Retail Evolution Model: TREM: Technopak Retail Evolution Model


G-1 Shift In Channel Mix (Value): G-1 Shift In Channel Mix (Value) For the Key Categories stocked by the Kirana Stores


G-2 Shift In Channel Mix (Value): 2005 : 0.84 Million 2010 : 1.09 Million 2015 : 1.58 Million 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


G-3 Shift In Channel Mix (Value): 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


Impact On Traditional Retailers: 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


Impact Areas: Impact Areas Current Modern Retailers


Current Modern Retailers: 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


Value Driver in Retail : Value Driver in Retail Illustrative :The Food & Grocery Sector


Supply Chain Peculiarities : 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


… Leading to Significant Quality Drop and Value Loss: 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 Abnormal Cost Addition Very High Wastage


Consumer Price is 3.5 times of Farm Gate Price: High margin buildup at every intermediary and wastage lead to abnormal consumer end prices Consumer Price is 3.5 times of Farm Gate Price Illustrative


‘Perishable (F&V)’ Supply Chain : ‘Perishable (F&V)’ Supply Chain Consumer Retailer Regional Mandi Local Broker Local Mandi Farmer 7-8 % Margin 8-9% Commission 6-8 % Margin 13-15% Margins Back-end Front-end Wholesalers 9-11 Margin Auction rate 9-14% Commission Source: Technopak Retail Research Illustrative


Potato Cost and Margin Structure: 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 Price in Rs. / Kg 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. . Illustrative


Implications …: 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


Impact Areas: Impact Areas Branded Consumer Goods Players


Branded Consumer Goods Areas: 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!


Impact Areas : Impact Areas Opportunities


Incredible Opportunities In The Supply Side: 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


To Conclude ……: To Conclude ……


Conclusions: 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!


Thank You !: Thank You !


Slide45: For further dialogue, please contact : Arvind Singhal Chairman Technopak Advisors Second Floor, Tower D, Global Business Park Gurgaon 122 002 (National Capital Region of Delhi) Haryana, India Tel : (91-124) 414 1111, 288 1111 Fax : (91-124) 414 1112, 288 1112 Email : arvind.singhal@technopak.com Web : www.technopak.com