Retail..Retail..Retail....!

Reliance Retail joining hands with US based stationary major Office Depot. Today's new in ET(Economic Times). From the past couple of months almost everyday we see these kind of news about Indian Retail Market. Some time we used to see these kind of news about IT industry. But now slowly IT is loosing its pace to Retail. I am giving a try to consolidate the reason for this Retail boom in India.

Tata, ITC, Bharti, Birla, Murugappa, piramal and of course Reliance. These India's largest non-retail conglomerates are aggressively moving head to change face of Indian Retail Market.
India's top petrochemicals and non-retail conglomerate, Reliance Industries Ltd., announced in June -2006 that it would invest $5.6 billion in the Indian retail market through a new subsidiary, Reliance Retail, in everything from food to clothes and travel services in a mixture of convenience stores, supermarkets and hypermarkets around the country, as well as in distribution centers aimed at connecting farm with retail. Some how we can say this as the starting point for the Indian retail flame. The reasons behind all these business tycoons targeting the retail market are:

1. India ranked number one in A.T.Kearney's Global Retail Development Index in both 2005 and 2006 for the consumer market's potential and attractiveness.

2. GDP growth rate that has averaged slightly over 8%, second only to china's has risen the PPP(purchasing power parity) of the Indian middle class population. It is estimated that these rising incomes have led to the development of a middle class population of some 300 million,

3. Only 3% of the Indian retail market is made up of organized retailing.

These figures, combined with the fact that nearly 80% of India's population is under the age of 45, 54% under the age of 25, and that only a little over 3% of the consumer market is made up of organized retailing, has perked the interest of some global multi-brand retailers planning to enter the market in JV (Joint Venture) with the some of the Indian tycoons like Bharti,Reliance....., In fact it is expected that the top retailers in India could capture as must as 10% or even more of the market by 2010. However, retailers will have to move fast as it is said that the Indian retail market is at a peaking stage, where the market is developing quickly and becoming modern.

The current size of the organized retail market in India is only some where between $6 and $8 billion, however it is growing at between 20% and 30% a year much at the expense of the unorganized market made up of family-owned mom and pop businesses which make up about 97% of the consumer market and make for a very fragmented and chaotic retail industry.

As such, investing in the Indian retail market is expected to reach $4.5 billion by 2010. This push by organized retail in the Indian market can already be seen in the fact that there was but one shopping mall in India in 2001, but over 100 2005, with another 150 to 200 expected to come on-line by 2008. In 2004 there were about 100 department stores in India led by shoppers Stop, a Raheja Group subsidiary, but the number has been growing 24% per year and is expected to reach over 300 by 2008. Large supermarkets and hypermarkets have also been growing. FoodWorld, Originally a joint venture between the RPG Group of India and Dairy Farm International of Hong Kong, grew into a 96 store chain of large supermarkets and had been recording 30% annual growth, and Food Bazaar, a division of India's largest retailer Pantaloon Retail, started in 2002 and with 43 large supermarket outlets as of 2006, growing at about 10 per year. Hypercity Retail, also a subsidiary of Raheja, plans to build 55 hypermarkets by 2015. In all, 35 hypermarkets and another 1500 supermarkets are expected to be built by 2008.

So where are the foreign retailers in all of this? Despite ongoing deregulatory reform in the Indian economy foreign direct investment is still not allowed in the retail market (except for a brief period in the 1990's). This does not mean though, there are not other, indirect avenues for access. Basically, there are four ways for foreign consumer brands to access India's market, franchising, Wholesaling, licensing or by having a manufacturing base in India. Such global brands as Pizza Hut, McDonalds, Adidas, Nike, Benetton, Marks and Spencer, Baskin and Robbins and Dominos are but a few who have chosen the franchising route, many of them in joint ventures with Indian firms. These companies are now well-positioned though, as the Indian government in early 2006 announced it will allow 51% ownership in JVs by single brand companies in the retail market. Already single brand companies like Gap, Zara, Timex and Starbucks have announced plans to enter the market. In wholesaling, where 100% foreign investment is allowed, Metro of Germany, Shoprite fo South Africa and Itochu of Japan have set up cash and carry wholesaling operations which entail the building of distribution infrastructure to assist local manufacturers. The move has not been without pitfalls as Metro was sued by local merchants saying that they were also catering to the retail market.

However, with 85% of organized retailing taking place in India's urban areas, 66% taking place in India's 6 main cities alone, and with nearly all new mall development and hypermarkets aimed at these cities competition in these markets could become fierce. Already the retail focus is shifting to India's 61% second tier cities with populations of 500,000 or more. Additionally, rural areas with approximately 700 million Indians representing 58% of India's disposable income and 40% of the middle and near-middle class are increasingly becoming targeted by organized retailing and large consumer product companies, Hindustan Lever, Coca-Cola and Reliance quickly come to mind. The rural market for FMCG is growing, while not quite as fast, nearly as fast as its urban counterpart. The rural market accounts for half the total market in India for fans, Pressure cookers, bicycles, soap, tea, tooth powder and motorcycles. Also, the income gap between rural and urban areas in India is actually shrinking, for every $100 earned in 1990 urbanites made $82 more. That recently shrunk to $56.

There are many hurdles in the Indian market. India is still very poor with between 50% and 70% of the population living on less than $2 a day, with rural incomes overall much lower than their urban counterparts. The country's GDP needs to grow 8%-10% a year to lift the population out of poverty. Reform in the agricultural sector, which makes up about 22% of India's GDP but employs more than 60% of India's workforce, is badly needed. Although India's agricultural industry has competitive advantages, remnants of socialist policies have encouraged a continuation of peasant farming. Furthermore, infrastructure in rural India remains poor with about 70% of the roads without 2 lanes and/or not paved making logistics a nightmare only 20% to 30%, and in many cases less, of the retail price of the fruits and vegetables compared to 40% to 50% in the US.