India's retail sector generates an annual turn-over of €277 billion and is expected to grow at least 7% - 10% YoY until 2010. By 2011 India's retail sector is estimated to turn over €500 billion. Planned investments until 2011 are worth €324 billion already.
After Agriculture, the retail industry is India's 2nd largest employer with 8% of the total workforce, generating 10% of the annual GDP.
India's fast growing middle-class with rising incomes are putting the country on the no.1 spot when it comes to multinational retail operators most desired investment opportunities, bypassing China.
India has the highest density of retail outlets in the world : 12 million on a population of 1.1 billion = 1 shop for every 91.7 citizens. Only 2% (€ 5.5 billion) is covered by organized retail organizations. The remaining 98% reaches the population via outlets e.g. mom & pop stores (kiranas) and pushcarts. Over 96% of all retail outlets has a floorspace of less than 50m2.
India's retail landscape is totally fragmentized and disorganized. This offers huge opportunities for foreign retailers but the local situation and current (historical) market segments must be taken into account.
Main market segmentation :
Wide reach/Low cost
PDS outlets/Khadi Stores/Coops
Wide reach/Low cost
Hyper- and Supermarkets/Department Stores/Shopping Malls
Example India's largest retailers (€ turn over) vs. Walmart :
Annual Turn over €
Currently FDI in the retail sector is still restricted to cash & carry wholesale operations and franchise formulas. Due to the enormous significance of the retail industry for the country, both in terms of generated revenue as well as employment, the government is extremely cautious when it comes to completely liberalizing FDI investment in the retail sector. There is a certain amount of truth in the argument that India's fragmented retail industry would be unable to cope with the onslaught of foreign multinational retailers would FDI be completely liberalized at this moment in time.
2006 did not yet see any major liberalization of the FDI regulations concerning the retail industry as India's government policies of the past have shown that it will not be rushed into changes that it regards as potentially unfavourable for the country.
Tesco contemplated entering India in 2006 with Bharti as a partner. When Bharti felt Tesco was not aggressive enough it went into partnership with Wal-Mart, planning to open hundreds of stores within the coming few years. At the start of 2007 the first one's were scheduled to open in Hyderabad where the joint venture planned 2 hypermarkets with a floor space of over 7,000m2.
The sensitive nature of the changes was made clear by a letter of Sonia Gandhi to parliament early February 2007 urging a review of the Bharti-Wal-Mart deal to ensure more safeguards against foreign chain retailers entering India via the backdoor. The current government will most probably heed this call and implement restrictions on foreign retailers banning them from selling certain core products.
Not only foreign firms have recognized India's retail market potential. E.g. local retailer the Raheja Group plans to invest almost €53 million and expand from its current base in Mumbai where it operates 1 HyperCity hypermarket (annual turn over €24.5 million) to 20 stores by 2009 eyeing Delhi but also Lucknow and Aurangabad, bringing organized retailing to tier II cities.Current modern retail outlets proliferation major cities :
(Size measured in population shows that Mumbai is equal to the Netherlands)
The most dramatic change for Indian society will come from a vastly increased number of modern hyper- and supermarkets. When they will be able to enter the market, the traditional outlets will come under severe pressure. Currently 70% of all wet-products (fruit/vegetables/dairy) is sold via pushcart sellers. They will be unable to compete against modern retail operations. Traditional retail operators like these have perished in every country where modern retailing made its inroads.
However, this development would also have many positive factors. It will mean an enormous boost for the food processing industry. Currently 40% of perishable goods rot during transportation due to a lack of proper(refrigerated) infrastructure. Only 2% of fruit and vegetable products and 14% of milk reaches the market via the processed food industry (see also the article "Food Processing" under the industry "Agriculture"). An increase of modern food retailing will also mean an increased growth of the processed food industry. And a better developed food processing industry segment will in turn mean another boost for franchise food chains such as McDonalds since better quality food in larger quantities will become available.
Besides the food segment, also the apparel market will see an increased development. Benetton and Marks & Spencer already operate in India via franchise formulas. Levi's is planning to have 300 stores in India nationwide by 2008. Since currently only 11% of all clothes is sold via modern retail outlets, this segment is also poised for further dynamic growth in the coming years.
Some caution has to be exercised though. India has to be approached as the continent that it is. The many different states all have their own culture, language, food- and clothing habits. What will work in Punjab might not necessarily work in Tamil Nadu, same as Norway is different from Southern-Italy. Also the availability of modern retail outlets will not mean an immediate switch by the population at large of shopping habits. Besides the acquisition of daily necessities shopping also forms a social function which is better fulfilled by markets and small neighbourhood shops than by large, convenient but also impersonal, hypermarkets.
India's retail landscape will change dramatically over the coming years but old patterns and habits will remain in place as well for a long time to come.