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Opportunity India: Retail Sector
October 18, 2006(FinancialWire) (Cross Border: US India News Wrap)Walt Disney Co. (NYSE:DIS), just last week, announced its plans to set up a chain of exclusive stores in India to sell branded stationary products, craft and apparel in partnership with RJ Corp., a subsidiary of Jaipuria Group of Companies. While Starbucks (NasdaqGS:SBUX) has announced its plans to enter the country in the next 18 months, companies such as Nike (NYSE:NKE), Nokia (NYSE:NOK) have already set up exclusive shops in India. Retail Sector in IndiaIndia is considered to be one of the ten largest retail markets in the world. The retail sector in India is highly fragmented with 97% of the industry being part of the unorganized sector and consisting mainly of traditional family run shops. According to the Investment Commission of India, the retail sector in 2004 was estimated at $206 bn and accounted for over 30% of the country's GDP. The organized sector (3%) has been growing at the rate of about 20% per annum over the last 5 years and in 2004 accounted for about $6.4 bn. Currently food and drugs category accounts for 69% of the retail market and apparel and accessories accounts for 14% of the market. The entire retail sector consists of around 12 mn retail outlets compared to about 16 mn outlets in the US. It employs about 7% of the workforce second only to agriculture. Some of the major Indian players today are Pantaloon Retail, RPG Retail with their chain stores Foodworld, Shopper's Stop, Lifestyle International, Bombay Bazaar, and Crossword. The entry of Reliance into the retail arena has brought an aura of prominence to the sector within the Indian economy. Foreign Investment in Retail SectorThe Indian government allows up to 100% foreign direct investment (FDI) in the Cash and Carry Wholesale formats but only up to 51% in the retail trade of single brand products. Hence foreign companies have 3 ways to enter the Indian market. Setting up of franchises is the most popular and the easiest way. Fast food retailers like Pizza Hut and Subway are in India in the franchisee format. Wholesale trading is the second format that foreign entrants are adopting. Metro AG of Germany has entered through this route. Establishing strategic licensing agreements with local retailers is the third route through which many apparel companies are setting shop in India. Growth of Consumerism With increase in urbanization and the higher levels of income due to the new areas of employment in the IT / ITES and BPO sectors, the Indian consumer has higher disposable income. Apart from the growing middle class and the upper middle class segments of population, there is a new growing class in the Indian population. It is the group of high networth individuals or the HNIs as they are popularly known. There is certainly a shift in consumer buying behavior and the entire concept of shopping seems to have changed. Consumers are now more trend conscious and their shift in attitude towards designs and quality rather than price has seen the apparel and accessories category booming. Indians have per se grown richer and this can be clearly seen in their spending habits on luxury items. The 'mall mania' has certainly seen some new formats of retail sales across the country. Opportunity IndiaAccording to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 bn by 2015. It is expected that India will be among the top 5 retail markets then. The organized sector is expected to grow to $100 bn and account for 12-15% of retail sales by 2015. It is estimated that the home improvements and consumer durables category and the apparel and eating out categories will grow at CAGR of 20% and 13% respectively over the next decade. According to Subha Kalathur, analyst at Valuenotes, there is certainly a lucrative opportunity for foreign players to enter the Indian terrain. Growth rates of the industry both in the past and those expected for the next decade coupled with the changing consumer trends such as increased use of credit cards, brand consciousness, and the growth of population under the age of 35 are factors that encourage a foreign player to establish outlets in India. The government policies towards FDI are the only hindering factors that do not make this a fairy tale for foreign players. But many of them have sought other ways to set shop in India. While many like Wal-Mart, JCPenney, and GAP have been procuring from India for a long time, those in the food business and apparel industry have also tried to work their way around by setting up franchises and license agreements with local players respectively. For retailers like Wal-Mart setting up a wholesale outlet like Sam's Club is certainly the way out. Disclaimer: Cross Border: US India News Wrap is a unique news and analysis service from ValueNotes. This weekly publication focuses on US corporations and what they're doing in India. This will be a unique service focused entirely on the US-India story; and will chronicle the growth in cooperation, closer economic ties, mutuality of interest and US corporations increase investment in India and its impact on companies, sectors and investing options. No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited. ValueNotes is an independent research firm based in India, and provides a range of custom research and business intelligence services, including India-based research outsourcing solutions. Through a constantly evolving range of products and services, the ValueNotes Outsourcing Practice (www.valuenotes.biz) provides service buyers, vendors, consultants and others in the outsourcing industry with access to in-depth analysis backed by reliable primary intelligence. Both ValueNotes and Investrend Research are members of the First Research Consortium, and participate in the organization's standards development panel for independent research providers located at http://www.firstresearchconsortium.com . 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