an overview of india's consumerand retail sectors

8/7/2019 An overview of India's consumerand retail sectors

1/7

An Overview

of Indias

Consumer

and Retail

Sectors

A Recap of Events of the Past 27

A Look into the Future 31

Conclusion 32


2/7| An Overview of Indias Consumer and Retail Sectors27

| Volume 04perspectivel 1l


A Recap of Events of the PastImpact of Slowdown on Consumer Confidence, Private Consumption &

Organised Retail

India was relatively insulated from the events in the global economy over the last two years. Indias GDP grewby 6.1 per cent in 2008-09, as compared to 9 per cent plus growth in the previous few years. This growthwas primarily led by government spending and growth in the rural areas. While the impact of the slowdownon overall GDP was limited, private consumption was impacted substantially. Private consumption growth,which was largely tracking GDP growth till before the slowdown, took a significant dip on account of poorconsumer confidence. In the first few quarters of 2008-09, growth in GDP came down from 9.1 per centto 6.1 per cent and growth in private consumption went down from 8.5 per cent to 2.9 per cent. This dipsignificantly impacted the consumer products and retail sectors. Organised retail, which was growing atover 30 per cent year on year in 2005-06 and 2006-07, slowed down to around 16 per cent in 2008-09.

With the revival of economic growth from the second quarter of 2009-10 (GDP grew by 7.9 per cent), privateconsumption growth has returned (grew by 5.6 per cent), on the back on stronger consumer confidence.As a result, growth in organised retail has returned and we estimate the sector to have grown by 21 percent in 2009-10. On the basis of various projections that Indias GDP will grow at over 8 per cent in thecoming years, return in consumer confidence and growth in private consumption tracking GDP growth, weexpect organised retail to see 30 per cent plus growth in the coming years. This trend is already visible andis substantiated by data in exhibit 1.

Changes in Private Consumption and Retail Growth

Private consumption in India currently adds up to about Rs 34 lakh crore and accounts for ~60 per centof GDP. With growth in GDP expected at over 8 per cent, inflation expected at 6-7 per cent, and privateconsumption expected to stay at 60 per cent of GDP, nominal growth in private consumption is expectedto be 14-15 per cent. This means a doubling in private consumption in five years time, to reach about Rs67 trillion by 2015. This provides a very significant opportunity for Indian and international companies todevelop and create large business in the consumer products and retail sectors in India.

Organised Retail GDP Private Consumption

Impact of Slowdown on Consumer Confidence, Private Consumption & Organised Retail

Exhibit 1:

Source: Ministry of Finance, Technopak Analysis and Estimates Real Growth Rates

2011P 2012P 2013P 2014P 2015P2006 2007 2008 2009 2010

Q1

2010

Q2

2010FY

31%29%

27%25% 25%

8.1% 8.5% 8.5% 9.0% 9.0%

7.0% 7.0% 7.5% 7.5% 7.5%

33%31%

27%

16%21%

9.30% 9.7% 9.1%

6.1% 6.1%7.9% 7.2%

7.10% 6.3%8.5%

2.9% 1.6% 5.6% 5.2%


3/728An Overview of Indias Consumer and Retail Sectors |



The total retail (organised and unorganised) industry in India is currently estimated to be Rs 20 lakh crore.We project this to reach Rs 27 lakh crore by 2015. Organised retail, which is currently estimated to be Rs

1.0 lakh crore (5 per cent share), is projected to reach Rs 3.0 lakh crore (11 per cent share) by 2015. Thismeans a tripling of the current size and scale of organised retail in the next five years. While organised retailwill grow at a fast pace, it is important to note that a larger part of the Rs 7.0 lakh crore growth in total retailwill come from unorganised retail. We project this segment (unorganised retail) to grow by over Rs 4.5 lakhcrore in the next five years. Some key reasons for this trend are as below:

Growth in private consumption in India is so sizablethat even with 30 per cent plus growth rates,organised retail will be unable to garner a largershare in absolute terms in the next 5 years.

In certain consumer categories like apparel,footwear, and consumer durables and electronics,organised retail has established a strong value

proposition with the Indian consumer. However,in some very large categories like food & grocery,furniture and home, and pharma it is not same.So the same shopper visits organised retail forthe former categories and traditional retail for thelatter.

Inherent strengths of traditional retail (entrepreneurial drive, relationship management with catchment,real estate and labor costs not fully accounted for in P&Ls, flexibility to deliver very small quantities home,and the MRP regime) coupled with the fact that many mom & pop stores have geared up for competitionfrom new age stores (through improved store ambience, better product mix and support from brands /manufacturers in training, retail operations, etc.) puts them on a strong footing.

Given the large share that traditional retail will continue to occupy, especially in categories such as food &grocery, furniture and home, and pharma, it will continue to be an important channel for consumer goodscompanies, and for organised wholesalers (cash & carry).

Growth of Organised Retail: Real or Hyped?

Some recent high profile failures in organised retailhave led to a belief that growth in organised retail isnot as promising as it was believed to be. In order totake an objective view of the organised retail marketin India, Technopak traced the growth trajectory ofsome of the other large sectors in India. The growth

in organised retail is very similar to some of the otherlarge sectors however, the only difference being thatit not as consolidated as in sectors like Telecom(where 4-5 players command majority of marketshare).Hence, despite a few setbacks Technopakexpects that the organised retail would emergemuch more stronger than ever before and wouldalso see significant players emerging in the next fewyears.

Organised Retail GDP Private Consumption

Projections for Private Consumption and Retail

Exhibit 2:

All values in Rs lakh crore

Source: Technopak Analysis and EstimatesReal Growth Rates & Values, Inflation assumed at average 7%

29

12

62

93

27

3

20

0.90.3

Evolution Curve of Various Industries

Exhibit 3:

Source: Technopak Analysis

TO T1 T2 T3 T4 T5 T6 T7 T8 T9 T 10 T11 T12 T13 T14

IndustrySize

IT Organised Retail BPO Telecom





FMCG, CDIT and Apparel categories have experienced very different growth trajectories over the last fewyears. While CDIT has shown tremendous growth (primarily led by high growth in mobile handsets market),FMCG which has been a well penetrated market has been growing a stable rate.

Given the fact that the discretionary income of the Indian population is rising at about 15 per cent every year,one would expect the apparel sector to witness a higher growth. However, the actual growth rate has beenfairly low. We believe that, on a price performance value proposition to the consumer, players in apparelhave not offered the same value as the players in telecom or CDIT or automobiles etc. have. The cost oflaptops (which are in the CDIT category) decreased by about 25 per cent, while the volume increased byabout 76 per cent on a yearly basis. LCDs showed a similar trend too. In the apparel and home textilescategories, a smaller volume growth and a higher price growth translating to a low price performance valueto the consumer was observed.

Categories Description Impact of Recession Product examples

DurablesHeavy goods intended to last 3

or more yearsHighest impact

Refrigerators, WashingMachines, Automobiles

Semi-durablesGoods that are neither perishable

nor lastingHigh impact (dependent on

discretionary spends)Clothing, Furnishing, Home

Textiles, etc.

Non-durablesGoods that do not last for long,

so need becontinually replaced

Limited impact (due to basicnature of products)

FMCG, Food Products

ServicesServices that are

becoming essentialLimited impact (necessity based

services)Healthcare, Education,

Telecom, etc.

Exhibit 4:

Consumer Sector in India Effect of Recession and Recovery

Sector Growth Rates

Exhibit 5:

GrowthRates

FMCG CDIT Apparel

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010(P)

2011(P)

2012(P)

2013(P)

2014(P)






Thus, the share of wallet appears to have shifted from categories like apparel, home furnishings etc. toCDIT, automobiles and travel as shown in exhibit 6.

This hypothesis is further strengthened by thefact that post recession, categories like consumerdurables, automobiles recovered the fastestwhereas categories like apparel, home furnishings

etc. are still to recover completely.

Financial Performance

The financial performance of retail sector vis--visFMCG sector is different. The EBITDA and ROC forthe retail sector is about 10-12 per cent, while for theFMCG sector, the numbers are higher. Thus ,thereis an opportunity for the retail sector to get thesefinancial metric right.

The low level of returns in retail is primarily due

to the high level of inefficiencies at the back end.Inventory management which is an integral part ofany successful retail operation is currently lacking.A significant amount of capital of an Indian retaileris blocked in inventory leading to a strain on thebalance sheet. A comparison of Indian apparelretailers with international retailers highlights thispoint. While gross margins of apparel retailers inIndia are almost similar to any other internationalretailer, high inventory levels have led to significantlylower returns.

Categories Volume CAGR (Last 4-5 years) Per Unit Price Change

Talk time 80% -24%

Laptops 76% -20%

LCDs 40% -20%

Premium Shirts (Apparel) 6% 15%

Home Textiles 12% 25%

Exhibit 6:Apparent Shift in the Share of Wallet

Financial Comparison of FMCG

Companies and Retailers (FY09)

Exhibit 7:

0 30 60 90 120 150

1%

8%

22%20%

12%28%

10%11%

8%25%

23%35%

19%38%

12%

39%

19%48%

32%35%

15%121%

3%

-4%Vishal Retaii

Westside

Koutons

Shoppers Stop

Pantaloon Retail

Britannia

ITC

GSK

Marico

Dabur

P&G

HUL

Retailers

FMCGCompanies

EBITDA/Sales ROCE






A Look into the FutureThe last decade (2000-2009) has given India the confidence to dream big, and the next one is poised tobring those to reality. As India enters a new decade of growth there would be significant changes at bothconsumption and retail level. Some key themes expected to emerge in next few years which can have adirect impact on retailers and consumer goods companies include:

Dramatic Changes in the Indian Consumption Basket

Around 4-5 years back, the categories with highest consumption included food, clothing and housing.Recently, doctor and having healthcare services have become important and have overtaken clothing inthe consumption basket. The new order being roti doctor kapda makan.

Categories like education, personal transport, travel and leisure have been witnessing rapid growth.Categories of apparel, home textiles and housing are expected to move below education as there aresignificant changes that are expected in the education sector. As the size of these categories is dependentupon the consumers wallet, it puts pressure on the categories that are not offering competitive priceperformance value to the consumer.

For example, our spending on self learning and coaching amounts to about Rs 45,000 crore. The size of theeducation market, containing the spending on self learning and coaching as well as tuitions is equivalentto the size of the organised retail market in India. Thus, the spending on this category is coming from thesame share of wallet. Going ahead it is expected that emergence of new categories would put significantpressure on some of the categories which lag on price performance matrix.

Commoditisation Trap: Bigger Threat than Before for BrandsGiven the changing consumption habits of the Indian consumer and share of categories, we expect thatthere would be a new way of classifying the consumption of Indian consumers. On one hand there wouldbe a need based consumption categories like food and groceries, footwear, textile and apparel and therewould be aspiration based categories like personal transport, health and beauty services, jewellery andwatches. Categories which are mainly need based would see low consumer involvement resulting incommoditisation of these categories. Low-involvement, in turn, will imply:

Consumers zeroing on just one or two attributesfor taking the consumption decision e.g. just thesize of the LCD panel for the TV, just the capacityof the refrigerator, just the fiber composition of the

garment and the confidence in the retailer / brandetc.

Consumers will optimize their purchases largelyon simple attributes of price and convenience(time efficiency) in order to release more resources(money, time, mental involvement) for the aspiration/ lifestyle based consumption categories.

Diminishing power of manufacturers brandsoperating in such categories.

Emergence of private labels and increasing retailer presence across the country would see a rapid

commoditisation across various categories. We are already witnessing a certain degree of commoditisationin the mobile phone market with the emergence of large number of smaller brands challenging the marketleader. Consumers are also taking their decision based on one or two main factors like price, battery lifeetc.

Commoditisation in the Mobile Phone Market

Exhibit 8:

20%

16%

12%

8%

4%

0%

64%

60%

56%

52%

48%2007 2008 2009

63%

1% 3%

56%54%

18%

5 15

28

Market Share of

Local Players

No. of Players

Nokia Market

Share

NOKIA

SpiceLava

MicromaxKarbonn

Market Share of Local Players Nokia Market Share






Emergence of New Hot Spots of Consumption

Currently the top 8-10 cities contribute to disproportionate share of the markets in most of the consumergoods categories. However, going ahead growth in India would be far more exclusive as the new hot spotsof consumption (primarily driven by investments in these regions) appear on the map.

In the near future, investments in mega projects and development of infrastructure is expected to createnew hot spots in India. These new centers of consumption would present an opportunity for both retailand consumer product companies to focus on and derive growth from the consumption potential of thesenew hot spots.

Focus on Financial Returns

Last year has been a steep learning curve for the organised retail. Going forward we expect an increasedfocus on the financial returns by retailer rather than just the top line. This would imply focusing on

performance improvement through better inventory management, gross margins, improvement throughbetter sourcing and private label programme. We expect that profitable growth would be the way forwardfor organised retail than top line growth.

Revival of Investor InterestGlobally, retail and consumer product industryattracts a large quantum of investments throughprivate equity. Pre 2008 we saw a number of privateequity deals in the retail space. The industry is againemerging as a strong contender for private equityinvestments. The recent deals in Caf Coffee Day,Lilliput and successful listing of Jubilant Foodworks (Dominos) on the stock exchanges have revivedinvestor interest in the sector.

As retailers look to raise fresh capital, understanding what the markets reward will be the key. Generally,retailers tend to look at new growth as the key area that they want to take back to investors for valuation ofbusiness.

In the international market, ROCE has the highest correlation with the performance of retail business andother parameters. The same store sales and the new stores growth comes second. Hence, it would bevery important for retailers to focus on generating returns through better performance and working capitalmanagement.

ConclusionThe events of the last 15-18 months have provided a steep learning for the retail and consumer productindustry. While the last decade (2000-2009) has seen significant addition to consumption and retail market,it is expected that consumption is likely to double in India over the next 5 years, (nominal growth of Rs 33.75lakh crore). There is going to be significant changes in the overall consumption basket hence brands in lowinvolvement categories would be under the increasing threat of commoditisation. Profitable growth wouldbe the emphasis for retailers and investors in the time to come. We expect that in the next 5-10 years, thescale of business opportunity and pace of change would be fundamentally different from what it has beenin the past. This calls for almost every company to go back to the strategy drawing board and develop avision for the next decade in order to emerge as a successful player in the consumer and retail sector.

Performance Metric Correlation to Value

ROCE 0.65

Same store sales growth 0.40

New growth 0.20

Authors

Raghav Gupta, President | [email protected] Bhatiani, Principal Consultant| [email protected] Gupta, Consultant | [email protected]

an overview of india's consumerand retail sectors

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