Everything You Need To Know About The Indian Retail Industry
The Retail Industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. But not all of them have yet tasted success because of the heavy initial investments that are required to break even and compete with other companies. The Indian Retail Industry is gradually inching its way towards becoming the next boom industry. Here are the triggers for the same:
- Retail sector in India is one of the largest contributors to its GDP. It accounts for around 8% of India’s employment and contributes to over 10% of the GDP.
- The sector is currently valued at around $600 Billion and is expected to reach the $1.3 Trillion mark in the next 5 years. India is 5th largest retail market in the world and ranks 15th in the Global Retail Development Index (GRDI). It moved 5 places up in the index compared in 2014. This has been attributed to the improving ease-of-doing business and FDI reforms.
- As of now, the organized retail contributes to 8% of the total trade and is expected to reach 24% in the next five years.
- Modern retail account to only 10% accounts of the market value of $600 Billion and is expected to increase to 15%-18% by 2020. Just for your information, traditional retail comprises of direct dealers, distributors, wholesalers and company-owned brand shops; whereas modern retail comprises of hypermarkets, department stores, discount stores, cash-and-carry stores, specialty stores, online retail, etc.
- In the last 15 years, the sector has witnessed a CAGR of 7.46% and is expected to show more than 16.5% compounded annual growth in the next 5 years.
- India boasts the fastest growing eCommerce market in the world. We are only talking about growth here and still, profitability remains a question for most of these companies. eCommerce sales were close to $20 Billion this year and are expected numbers are as follows:
- FY2016: $38 Billion
- FY2018: $55 Billion
- FY2020: $65-70 Billion (less than 7% of the overall sales, then)
- Food & grocery account for close to 70% of the total retail sales in India which currently stand at close to $925 Billion. Jewellery accounts for close to 6% and this number is expected to reach 8% by 2020. To add to the sales department, India is ranked 3rd in the world, only after China and Brazil in terms of net retail sales.
- Private label products’ share in India is currently just 6% where the number for US and UK is 19% and 39% respectively. This shows the amount of market yet to be tapped under this space in India
- eCommerce market in India is likely to be worth $38 billion by the end of 2016, a 67% jump in its value a year ago and a 10-fold jump since 2009.
- On a micro basis, growth of retail industry in India will be driven by the following factors:
- Growth in household incomes: India will witness more 2x growth in average household incomes from around $8000 currently to $18500 by 2020. Also, it is estimated that by 2030, India will have around 91 Million ‘middle-class’ families from its current number of around 21 Million.
- Urbanization: Around 32% i.e. ~43 Crores of the India’s population is urban and this number is expected to reach around 40% by 2020. This will significantly increase businesses of the companies falling under the ‘modern retail’ category.
- Nuclearization of families: Close to 65% i.e. ~28 Crores of the urban population and 60% i.e. ~53 Crores of the rural population is now nuclear. This is enabling an increase in the spending power of the people by 30%-50% which is significantly diverted to the retail sector.
- Generation change: India is set to become the youngest country on this planet by 2020, with close to 69% of its population in the working age group with a median individual age of around 29. This will provide our economy an unprecedented edge over China, Japan and the West whose population ageing and boost our GDP growth rate by 2%.
- Over 23 Crores people use smartphones in India as of now and this number is expected to reach around 60-65 Crores in the next 5 years. This will be in sync with the eCommerce growth trajectory that India is set to witness.
- India has witnessed a steady rise in the desire of its consumers to purchase foreign brands. As this becomes more and more evident, global brands will want to increase their penetration in India which will also boost its retail real estate industry. Last year, PE investment in retail properties was close to $40 Million and is expected to touch $75-80 Million this year.
- Also, greater brand recognition, growing number of HNIs, improved and a more technology dependent logistics structure, reduction in multiplicity of taxes, increasing rural penetration by the players, efficient payment channels, growing infrastructure which is expected to aid logistics, etc are set to take retail in India to the next level.
Government Subsidy & Initiatives:
- The government has scrapped its earlier policy of distinctions among different types of overseas investments and has set a single composite limit wherein portfolio investment of upto 49% will not require government approvals and nor will the parties involved will have to comply with sectoral conditions provided the investment does not involve transfer of ownership and/or control of Indian entities to foreigners.
- eCommerce in India has had its share of sunshines and rainbows when it comes to FDI policy set by the government. The policy permits 100% foreign direct investment in the marketplace model of eCommerce companies. Expected introduction of the much awaited Goods and Service Tax (GST) which will enable removal of excise duty and thereby facilitate cash flow improvements.
- Following is the FDI policy status on single and multi brand retail:
- FDI in multi brand retail: 51%
- FDI in single brand retail: 100%
- This will prove beneficial to the SMEs as any FDI of and above 51% will enable 30% of procurement of manufactured or processed products from them (the 30% number is set to be relaxed now, but no clarity on the new figure yet). Also, a minimum investment cap of $100 Million has been set in FDI in multi brand retail which will enable higher investment ticket sizes.
- Just for you information, single brand retail which has witnessed close to $350 Million of investment in the past 15 odd years, is set to experience a growth like never before.
This week, the government also cleared a model law that allows shops, malls and cinema halls, among other establishments, to run 24×7 throughout the year. This move has been expected to be welcomed by all retailers as it will boost their revenues as well as growth. It will also help generate additional employment since shops and establishments will have freedom to operate for longer hours, and require more manpower.
Other Major Developments:
- Recently, Chinese eCommerce giant Alibaba.com announced that it was exploring all sort of options to directly enter India this year. It said that it was fine with building its business organically or using other means. And yes, the government has ‘shown’ full support to the cause. Also, it is expected of Alibaba.com to partner with a one of the domestic players so that FDI can be taken care of. This is threatening, for current homegrown eCommerce giants and the brick-and-mortar stores to some extent as this is the same situation which happened 10 years ago when the American behemoth Walmart was trying to enter India.
- Alibaba’s entry into India is threatening to its Indian peers due to the former’s warchest size. Also, for those who think Walmart is way more established and larger than Alibaba, the US retailer recorded revenues of $482 Billion in 2015, and its Chinese challenger is expected to touch $490 Billion by the end of this year. These numbers are jaw dropping, as according to reports, the combined GMV of Flipkart, Snapdeal, and Amazon, which have close to 80% market share is just around $14 Billion, while that of the top 10 offline retailers was $12.6 Billion.
- This week, as per the latest FDI policy changes, 100% foreign direct investment will be permitted after government approval for trading, including that via eCommerce, with respect to food products manufactured or produced in India.
What to expect next:
- The government clarifying that 100% foreign direct investment (FDI) is allowed under automatic route in a marketplace eCommerce model and not in inventory-based eCommerce model, raises eyebrows on the future plans of the current players.
- Another addition to this 100% FDI clarification is that Indian retailers who have explored FDI options (i.e. almost all the eCommerce players) cannot directly or indirectly influence the price of goods sold on their platforms. This will be pinching for above mentioned Indian unicorns liike the Flipkarts, Snapdeals, Amazons, PayTMs, etc but a blessing in disguise for brick-mortar giants like the Reliance Group, Aditya Birla Group, Future Group, etc who have just entered the digital arena and can do whatever they want (in pricing regards). Although it is not a sustainable way of attracting customers, it does work.
- Another setback was when the DIPP clarified that an eCommerce company will not be allowed to sell more than 25% of its sales via a particular vendor or its group companies. This is set to affect the current giants like Flipkart and Amazon who derive majority of ‘income’ through WS Retail and Catamaran ventures (Joint Venture) respectively.
- All these factors have started to affect the valuations of these internet giants who also haven’t been able to show the amount of growth they gave their investors before. The effect, in March this year, Morgan Stanley marked down the value of its investment in Flipkart by 27% to $11 Billion, followed by a further 15% devaluation by another investor, T Rowe Price. HSBC too slashed Zomato’s Billion Dollar valuation, literally into HALF. This shows the snowballing decrease in the investor sentiment in Indian internet companies (eTailers to be specific) which was at its peak last year.
- These developments has kind of leveled the playing field for the offline players, who are actually making profits as the new policies will now force the loss-making and discount-driven eCommerce players to restructure their model and raise funds (which is expected to become a daunting task) at a valuation possibly lower their current numbers.
- If fundraising becomes an issue for these internet giants will have to end their discount wars which they use to lure customers, and the offline players are set to capitalize as the price sensitive consumers of India will again switch towards the traditional shopping techniques i.e. mall/hypermarket shopping. Thus, we can expect the so called ‘eCommerce Crash’, possibly in the next 2-3 years, unless these cash burning loss making companies find a way to turnaround their balance sheets which seems highly impossible at the moment.
- Also, one interesting thing that can be noted, is that every time we've witnessed a
change in trend in the retail space, we have always discounted the efficiency and ease-of-operations that traditional retail players enjoy. And time and again, we have been proven
wrong; the latest example is that of the eCommerce companies as mentioned above. The traditional retail
businesses have always survived the tide and still enjoy the majority of the sales
pie, and to take that from them, considering current hurdles, well the eComs will
definitely have to pull out a rabbit from each of their hats, if they were to survive and
thrive like their offline peers