Impact of FDI in Retail on Urban and Semi-Urban Concumers

7/28/2019 Impact of FDI in Retail on Urban and Semi-Urban Concumers

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KIRLOSKAR INSTITUTE OF ADVANCED MANAGEMENT STUDIES

Impact of FDI on Urban and Semi Urban

consumers in Retail

SUBMITTED TO: Prof. SATISH IRDE SUBMITTED BY:

ABHISHEK KUMAR - 03

ANJANI KR. MOHANTY - 09

HARSH VERMA - 40

KAMAL KISHORE - 45

LAXMI GUPTA - 54

NITISH PRATAP SINGH - 67


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Who are urban and semi urban consumers

Urban Consumers

Data Highlights

This data release covers the total population, population (0 to 6 years) and number of

literates for each UA/City with a population of 1 Lakh and above as per the provisional

population totals of Census 2011.

Towns:

For the Census of India 2011, the definition of urban area is as follows;

1. All places with a municipality, corporation, cantonment board or notified town areacommittee, etc.

2. All other places which satisfied the following criteria:i) A minimum population of 5,000;

ii) At least 75 per cent of the male main working population engaged in non

agricultural pursuits; and

iii) A density of population of at least 400 persons per sq. km.

The first category of urban units is known as Statutory Towns. These towns are notified

under law by the concerned State/UT Government and have local bodies like municipalcorporations, municipalities, municipal committees, etc., irrespective of their demographic

characteristics as reckoned on 31st December 2009. Examples: Vadodara (M Corp.), Shimla

(M Corp.) etc. The second category of Towns (as in item 2 above) is known as Census Town.

These were identified on the basis of Census 2001 data.

Urban Agglomeration (UA):

An urban agglomeration is a continuous urban spread constituting a town and its adjoining

outgrowths (OGs), or two or more physically contiguous towns together with or withoutoutgrowths of such towns. An Urban Agglomeration must consist of at least a statutory

town and its total population (i.e. all the constituents put together) should not be less than

20,000 as per the 2001 Census. In varying local conditions, there were similar other

combinations which have been treated as urban agglomerations satisfying the basic

condition of contiguity. Examples: Greater Mumbai UA, Delhi UA, etc.

Out Growths (OG):

An Out Growth (OG) is a viable unit such as a village or a hamlet or an enumeration block

made up of such village or hamlet and clearly identifiable in terms of its boundaries and


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location. Some of the examples are railway colony, university campus, port area, military

camps, etc., which have come up near a statutory town outside its statutory limits but

within the revenue limits of a village or villages contiguous to the town. While determining

the outgrowth of a town, it has been ensured that it possesses the urban features in terms

of infrastructure and amenities such as pucca roads, electricity, taps, drainage system fordisposal of waste water etc. educational institutions, post offices, medical facilities, banks

etc. and physically contiguous with the core town of the UA. Examples: Central Railway

Colony (OG), Triveni Nagar (N.E.C.S.W.) (OG), etc. Each such town together with its

outgrowth(s) is treated as an integrated urban area and is designated as an urban

agglomeration. In the 2011 Census, 475 places with 981 OGs have been identified as Urban

Agglomerations as against 384 UAs with 962 OGs in 2001 Census.

Number of UAs/Towns and Out Growths (OGs):

Type of Towns/UAs/OGs Number of towns 2011 Census 2001 Census

1. Statutory Towns 4,041 3,7992. Census Towns 3,894 1,3623. Urban Agglomerations 475 3844. Out Growths 981 962

At the Census 2011 there are 7,935 towns in the country. The number of towns has

increased by 2,774 since last Census. Many of these towns are part of UAs and the rest are

independent towns. The total number of Urban Agglomerations/Towns, which constitutes

the urban frame, is 6166 in the country.

Population of UAs/Towns:

1. The total urban population in the country as per Census 2011 is more than 377million constituting 31.16% of the total population.

2. Class I UAs/Towns: The UAs/Towns are grouped on the basis their population inCensus. The UAs/Towns which have at least 1,00,000 persons as population are

categorized as Class I UA/Town. At the Census 2011, there are 468 such UAs/Towns.

The corresponding number in Census 2001 was 394.

3. 264.9 million persons, constituting 70% of the total urban population, live in theseClass I UAs/Towns. The proportion has increased considerable over the last Census.

In the remaining classes of towns the growth has been nominal.


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4. Million Plus UAs/Towns: Out of 468 UAs/Towns belonging to Class I category, 53UAs/Towns each has a population of one million or above each. Known as Million

Plus UAs/Cities, these are the major urban centres in the country. 160.7 million

persons (or 42.6% of the urban population) live in these Million Plus UAs/Cities. 18

new UAs/Towns have been added to this list since the last Census.

5. Mega Cities: Among the Million Plus UAs/Cities, there are three very large UAs withmore than 10 million persons in the country, known as Mega Cities. These are

Greater Mumbai UA (18.4 million), Delhi UA (16.3 million) and Kolkata UA (14.1

million). The largest UA in the country is Greater Mumbai UA followed by Delhi UA.

Kolkata UA which held the second rank in Census 2001 has been replaced by Delhi

UA. The growth in population in the Mega Cities has slowed down considerably

during the last decade. Greater Mumbai UA, which had witnessed 30.47% growth in

population during 1991-2001 has recorded 12.05% during 2001-2011. Similarly DelhiUA (from 52.24% to 26.69% in 2001-2011) and Kolkata,

Moving to the Cities

Indias still strong growth reflects the fact that it remains a principally rural nation.

According to the 2011 census, only 31% of the population of India lives in urban areas.

Urban migration, of course, is continuing but at a considerably slower rate than in China.

According to the United Nations, the urban population of India will be less than 35% in 2020

and approximately 40% in 2030. Yet despite this, the number of new urban residents will besubstantial. By 2030, another 225 million people will be added to the Indian urban areas,

more than the population of Japan and Germany combined.

The Largest Urban Areas

During the last decade, the number of urban areas (areas of continuous urban

development) in India rose by one half, from 34 to 51 (Table). However, growth was

somewhat less than forecast in the largest urban areas, a phenomena that appears

elsewhere, such as in now slower growing Mexico City, Sao Paulo, New York and Los

Angeles. This pattern seems to be found all around the world, according to a report by

the McKinsey Global Institute.

India: Urban Areas Over 1,000,000 Population: 2011

Rank Urban Area 2001 2011 % Change

1 Delhi, NCT-UP-HAR 15,358,000 21,622,000 41%

2 Mumbai, MAH 16,554,000 18,790,000 14%

3 Kolkata, WB 13,217,000 14,113,000 7%

4 Chennai, TN 6,425,000 8,696,000 35%

5 Bangalore, KAR 5,687,000 8,499,000 49%
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6 Hyderabad, AP 5,534,000 7,749,000 40%

7 Ahmadabad, GUJ 4,519,000 6,352,000 41%

8 Pune, MAH 3,756,000 5,050,000 34%

9 Surat, GUJ 2,811,000 4,585,000 63%

10 Jaipur, RAJ 2,324,000 3,073,000 32%11 Kanpur, UP 2,690,000 2,920,000 9%

12 Lucknow, UP 2,267,000 2,901,000 28%

13 Nagpur, MAH 2,123,000 2,498,000 18%

14 Indore, MP 1,639,000 2,167,000 32%

15 Coimbatore, TN 1,446,000 2,151,000 49%

16 Kochi, KER 1,355,000 2,118,000 56%

17 Patna, BH 1,707,000 2,047,000 20%

18 Kozhikode, KER 880,000 2,031,000 131%

19 Bhopal, MP 1,455,000 1,883,000 29%

20 Thrissur, KER 330,000 1,855,000 462%

21 Vadodara, GUJ 1,492,000 1,817,000 22%

22 Agra, UP 1,321,000 1,746,000 32%

23 Visakhapatnam, AP 1,329,000 1,730,000 30%

24 Malappuram, KER 170,000 1,699,000 899%

25 Thiruvananthapuram, KER 889,000 1,687,000 90%

26 Kannur, KER 498,000 1,643,000 230%

27 Ludhiana, PJ 1,395,000 1,614,000 16%28 Nashik, MAH 1,152,000 1,563,000 36%

29 Vijayawada , AP 1,011,000 1,491,000 47%

30 Madurai, TN 1,195,000 1,462,000 22%

31 Varanasi, UP 1,212,000 1,435,000 18%

32 Meerut, UP 1,167,000 1,425,000 22%

33 Rajkot, GUJ 1,002,000 1,391,000 39%

34 Jamshedpur, JH 1,102,000 1,337,000 21%

35 Srinagar, JK 971,000 1,273,000 31%

36 Jabalpur, MP 1,117,000 1,268,000 14%

37 Asansol, WB 1,090,000 1,243,000 14%

38 Vasai Virar, MAH 293,000 1,221,000 317%

39 Allahabad, UP 1,050,000 1,217,000 16%

40 Dhanbad. JH 1,064,000 1,195,000 12%

41 Aurangabad, MAH 892,000 1,189,000 33%

42 Amritsar, PJ 1,011,000 1,184,000 17%

43 Jodhpur, RAJ 856,000 1,138,000 33%

44 Ranchi, JH 863,000 1,127,000 31%45 Raipur , CHH 699,000 1,123,000 61%


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46 Kollam, KER 380,000 1,110,000 192%

47 Gwalior, MP 866,000 1,102,000 27%

48 Durg-Bhilainagar, CHH 924,000 1,064,000 15%

49 Chandigarh, CH 809,000 1,026,000 27%

50 Tiruchirappalli, TN 847,000 1,022,000 21%51 Kota, RAJ 705,000 1,001,000 42%

Delhi: Delhi (National Capital Territory, Uttar Pradesh and Haryana) was reported by the

United Nations to have become the second largest urban area in the world, following Tokyo

in 2010. However, the Delhi urban area was nearly 1,000,000 people short of the population

than projected by the United Nations. However, over the decade, Delhi managed to become

the nation's largest urban area with a population of 21.6 million people, an increase of 41%

over its 15.5 million people in 2001 (Note 1). This is an impressive accomplishment, since

some demographers have long maintained that Mumbai could be destined to become the

largest urban area in the world in future decades.

Mumbai:Mumbai (formerly Bombay), in Maharashtra, placed second with a population of

18.8 million. This compares to a population of 16.6 million in 2001. The Mumbai urban area

grow only 14% between 2001 and 2011, a much slower rate than before, driven by declines

in the urban core of central Mumbai another general global phenomena and only

modest growth in the suburban Mumbai portion of the central city, with explosive growth in

the suburban areas outside the central city (Note 2). Mumbais 2011 population is

approximately 1.5 million below the level that would have been indicated by the 2010

United Nations projection.

Kolkata: India's third largest urban area, Kolkata (formerly Calcutta), in West Bengal,

registered a population of 14.1 million, an increase of only 7% from its 13.4 million

population in 2001. Like the two larger urban areas, the current population of Kolkata is less
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than project by the UN. As in the case of Mumbai the shortfall is by approximately 1.5

million.

Chennai: Chennai (formerly Madras), in Tamil Nadu, ranked fourth among India's urban

areas with a population of 8.7 million, up from 6.5 million in 2001. This 35% growth rate

propelled Chennai to a population more than 1 million above expectation.

Bangalore: Information technology centerBangalore (Karnataka) was the fastest growing of

the urban areas over 5 million people, with a population of 8.5 million, an increase of 49%over its 2001 population of 5.7 million. Should Bangalore's population growth rate continue,

it is likely to pass Chennai over the next decade to become the fourth largest urban area.

Like Chennai, Bangalore registered a population at least 1 million higher than anticipated.

Hyderabad: Hyderabad (Andra Pradesh), another of the nation's leading information

technology areas, rose to a population of 7.7 million people, from 5.5 million in 2001. With a

40% growth rate, Hyderabad exceeded its population estimate by at least1 million people.

Ahmadabad: Ahmadabad, in Gujarat, is the last of the seven urban areas with more than 5

million population had 6.4 million people, which is an increase from 4.5 million in 2001.

Ahmadabad grew 41% and achieve the population at least one half million higher than was

expected.

Surat: The fastest growing urban area of the 16 Indian urban areas with more than 2 million

people was Surat, in Gujarat. Surat grew from 2.8 million people to 4.6 million, for an

increase rate of 63%.


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Income of the Urban Population:

Income Distribution in India

Income distribution refers to the spread of a country's income percentage throughout its

population and yields a ratio between incomes of the richest in a country to the poorest.

When income is not proportionally distributed, it is called income inequality.

A great portion of India's population is a victim of rising monetary deficits, most of which

has crossed well under the poverty threshold. While the top 10% of Indias population

enjoys 31.1% of the countrys income, the lowest 10% suffers with merely 3.6%.


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The Consumerization of Urban India

India is one of the world's youngest nations with nearly two-third of its population under

the age of 35 years. Urban India accounts for nearly 30% of this burgeoning young

population. There is a significant shift taking place in the consumption pattern of the young

urban Indian consumer, aged between 21 and 40 years, led by various demographic,

psychological and economic factors.

Demographic trends and the strong growth in the Indian economy in the last few years are

charting a new growth path for many consumer goods and services companies. The growth

in the number of young working people in urban India who have grown up post

liberalisation, rise in their aspiration levels and increase in their spending power will be the

key drivers of growth for these businesses.

Favourable demographics

India's urban dwellers form 28% of the total population

but account for about 42% of the total private

consumption expenditure. Larger number of urban

centres and the migration of the young rural

population to urban centres for higher education and

employment have driven urban growth rates. The

growing share of young people in the population as

well as development of urban India is leading to a rising

number of working population in the cities who have higher spending power, led by high

income growth and credit availability.

The urban population between the ages of 15 to 34

years is expected to increase from 107 m in 2001 to

138 m in 2011, an increase of 30%. Also the proportion

of young urban dwellers is growing. The migration to

urban areas for better career opportunities will lead to

an increase in the 15-59 age groups in urban areas.

This group will boost consumption - as they have

higher earning capacity and will also be able to spend

more on themselves.

Aspiration levels

Strong economic growth, increasing globalisation, easy availability of credit and the rise of

BPO and retailing has resulted in higher household incomes, and these continue to rise with

the Indian economy. Also, the easy availability of credit has raised these aspirations. In India

there has been significant increase in the percentage of households in the high-income andmiddleclass groups in recent times. This higher income is driving aspirations, especially


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amongst the middle class, leading to an increase in the desire to change lifestyles by

increasing consumption. Western lifestyle exposure through more foreign travel and higher

penetration of television, internet and other media, has increased the desire of this class to

update its lifestyle. Also, wide availability of financial products and lower interest rates has

accelerated the penetration of credit. Ease of payment due to higher penetration of plasticmoney is also driving consumer-spend on impulse purchases.

Households in India (m)

The Classes 1994-951999-002005-06

Rich (above US$ 4600) 1 3 6

Consuming (US$ 970-4600) 29 66 75

Climbers (US$470-970) 48 66 78

Aspirants (US$340-470) 48 32 33

Destitutes (less than US$ 340) 32 24 17

In the last three to four years, there has been a marked shift in the consumption pattern.

The consumers are not satisfied by purely spending on basic products and services; they

want to indulge by consuming goods and services that satisfy their lifestyle needs, which can

broadly be classified as leisure, convenience & comfort, wellness and aspiration needs. The

malls are rapidly replacing the kirana stores and the cinema houses are now turning into

multiplexes. The number of mobile users has increased by 86.6% CAGR since 1997 to 2006.

Going forward, the demand for lifestyle goods is likely to witness robust growth.

The favourable demographics, rising income and change in lifestyle will lead to an explosive

growth in the lifestyle categories like retail, ready to eat foods, gems, autos, travelling,

hospitality etc. over the next few years. Not only the basic but the lifestyle goods and

services are likely to be the next growth drivers.

Lifestyle and the spending Pattern of the Urban Consumers:

Global retail chains are chomping on the bit to enter the Indian retail market. The promise

of growth in the emerging Indian market, the saturation of growth in their home retail

markets and the lack of mature organized retail markets in India are all reasons for their

interest.

Conventional wisdom about Indian consumers is that they consider the cost of the product

or service as the main criterion to make a purchase decision. But this has changed with time.

The organized retail market in India is growing, but over 90%, of Indian consumers still

depend on micro-shops and street vendors for their daily requirements. The organized retail


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chains are gaining popularity in the bigger metros, but with growing opportunities in tier-2

cities, the potential for a huge market exists.

The urban Indian retail consumer, values product attributes freshness as well as

unobservable attributes such as place of produce or environmental friendliness and is not

driven by the low-prices only. Products (and retailers) that do not share enough information

regarding the production methods tend to be preferred less by the urban Indian consumer.

For retailers interested in the Indian market or those seeking to enter the retail trade, it is

important to note that consumers, on an average, Value the transparency in the supply and

production chain and do not use price as the primary factor to make purchase decisions

there exist distinct consumer groups. Prefer fresh products, but products that are not local

are also well accepted. Prefer environmentally friendly products and attach high utility to

products that represent this information pictorial on the packaging do not accept anymore

products with no information. Urban Indian customers appear to fall into 3 major groupsdepending on their product and purchase choices.

Environment conscious group

Majority of the urban population (around 44%) falls in this group. These consumers attach

maximum value to environmental impact of the products purchased. They prefer local

produces and are willing to pay a small premium to get products that have these

characteristics.

Health conscious group

This group prefers products that are not treated with pesticides and are particularly

sensitive to health issues.

Price dependent group

Consumers belonging to this group make their product choices by considering the price

alone and they are not heavily affected by the method or place of production. They also do

not worry substantially about the environmental impact of the products purchased.

The urban Indian consumer has grown to a large extent from being a price only driven buyer

to a more discerning buyer who needs to be convinced about a product's attributes. Urban

Indian consumers are aware of potential environmental impacts and the effect of bio-

technology on farming. Retailers need to improve their communication related to products,

the supply chain operations and provide better organized retail experience to meet the

requirements of the informed urban Indian buyer who is willing to pay a price premium.


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Comparisons between the marketing strategies adopted in Rural and Urban

Areas

State No. of Towns

West Bengal 43

Andhra

Pradesh

40

Maharashtra 27

Karnataka 26

Tamil Nadu 22

Madhya

Pradesh

20

Haryana 19

Bihar 18

Western UP 16

Gujarat 15

Rajasthan 13

Punjab 11

Eastern UP 8

Orissa 8

Central UP 6

Chhattisgarh 6

Kerala 5

Jharkhand 4Himachal

Pradesh

1

Uttaranchal 1

Total 309


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Semi Urban Areas

Surrounding residential areas of a bigger city, with a population ranging 1 to 5 lacks are said

to be sub urban areas. A group of these can collectively be regarded as the suburbs.

Generally they pertain to residential districts.

Semi Urban Consumers

Male Profile

He is aware about myriad products thatare on offer in the market place, thanks

to television

He is a responsible, family person andstarts looking for employment at an

early age

He looks for respect more than anythingelse

He could be a bank clerk, an accountant,a factory worker, small shop owner, a

teacher etc.

His annual income is pretty low ascompared to an urban male but he is

recognizing better lifestyle needs & aims

for a higher income

Female Profile

She is coming out of her closet andis exercising her choice in selected

categories

She is literate, but nowtransforming as a career oriented

woman

Mostly women seek work in HomeSciences

She is comfortable going out ingroups and tries to find similar

company She is a content woman, happy with

her changing lifestyle and

recognition


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Buying habits

They buy daily usable things in large quantities like wheat flour, edible oil etc. Besidesthe daily use items; they buy things in small quantities and are not concerned with

economy They recognize the need of advanced quality products but buy them only on special

occasions like wedding or festival

They like to show what they have bought when in groups, or evening meets, verycommon in semi urban

The samples or small quantity bottles, in FMCG, is more often preferred by women There is a general perception that if more quantities are bought, it would lead to more

wastage.

They are also flamboyant at times with their purchases so often they go to theirneighbors after shopping or take them along.

Purchase Patterns

Influence Customs - They believe in old customs and traditions which influence a loton the purchasing decision. They look at functionality than on the style, brand and

features.

Packaging and Color - The size, color, shape, and packaging of the product matters alot. For example, in the south people prefer yellow as good, but in the North it is a signof a disease.

Retail Outlet Friendly - More retail outlet friendly customers, and there are fewerstores available per 1000 population.

Long Term Usage - They buy the product if they feel that the product will sustain forlong term usage

Economical with Good Quality - There is a saying in Hindi "sasta, sundar, mazbootThey buy the product if it is in their budget. But if the product is good in technology,

quality and adds value to their role and status in the society then they do not look at

money to buy it. If it is good and long lasting then there is no go back from theconsumers.

Society - They are driven by society. Word of mouth is the key factor in purchasing aproduct


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The Male Member in the family exercises the right to make purchase decisions Only decisions with respect to the eatables are chiefly contributed by the woman in

the family

The neighbours, friends and peers play a crucial role in the decision making for asemi urban consumer

As he is a society man primarily, he also wants to buy what his neighbor or hisfriends have purchased

Category Influencer Decision Maker User

Automobile Peers, Neighbours

Finance Peers

Durables Peers, Neighbours

FMCG Friends, Acquaintances,

Relatives

Telecom Peers, Friends, Neighbours

Decision Making Pattern in Semi Urban


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Markets University/College areas Hotels/Tourist Complexes NRIDefense AreasUP, Haryana, Punjab,MP, HP, Rajasthan

Reasoning

UP, Haryana, Punjab, MP, Rajasthan

People are very flamboyant, enjoyfestivals and spend lavishly during

festivals

Most expensive weddings take place inthese states, also the gatherings are

enormous

HP is a state with high educationalpreferences and only sources of

development as usually research work is

undertaken there A ri studies

Potential

Congregations


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Industrial Govt. Offices Banks Fisheries/Beach IT Belts

Potential Money Belts

Reasoning

Bihar, Jharkhand, Kerala

Extremely rich people, coal and diamond mines,rubber plantations(Kerala, Maharashtra,

Karnataka)

IT Hubs, Industries in all sectors (Orissa, TamilNadu)

Bank chains, posh residential societies

Bihar, Jharkhand,

Maharashtra, Kerala, TamilNadu, Karnataka, Orissa


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Types of Retail outlets urban and semi-urban consumers in India presently use for

shopping:-

Mom and Pop Store (also called Kirana Store in India)

Mom and Pop stores are the small stores run by individuals in the nearby locality to cater todaily needs of the consumers staying in the vicinity. They offer selected items and are not at

all organized. The size of the store would not be very big and depends on the land available

to the owner. They wouldnt offer high-end products.

Merchandise:

Eggs

Bread

Stationery

Toys

CigarettesCereals

Pulses

Medicines

Department Stores

A department store is a set-up which offers wide range of products to the end-users under

one roof. In a department store, the consumers can get almost all the products they aspire

to shop at one place only. Department stores provide a wide range of options to the

consumers and thus fulfil all their shopping needs.

Merchandise:

Electronic Appliances

Apparels

Jewellery

Toiletries

Cosmetics

Footwear

Sportswear

Toys

Books

CDs, DVDs

Examples - Shoppers Stop, Pantaloon

Discount Stores

Discount stores also offer a huge range of products to the end-users but at a discounted

rate. The discount stores generally offer a limited range and the quality in certain cases

might be a little inferior as compared to the department stores.


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Wal-Mart currently operates more than 1300 discount stores in United States. In India

Vishal Mega Mart comes under discount store.

Merchandise:

Almost same as department store but at a cheaper price.

Supermarket

A retail store which generally sells food products and household items, properly placed and

arranged in specific departments is called a supermarket. A supermarket is an advanced

form of the small grocery stores and caters to the household needs of the consumer. The

various food products (meat, vegetables, dairy products, juices etc) are all properly

displayed at their respective departments to catch the attention of the customers and for

them to pick any merchandise depending on their choice and need.

Merchandise:Bakery products

Cereals

Meat Products, Fish products

Breads

Medicines

Vegetables

Fruits

Soft drinks

Frozen Food

Canned Juices

Warehouse Stores

A retail format which sells limited stock in bulk at a discounted rate is called as warehouse

store. Warehouse stores do not bother much about the interiors of the store and the

products are not properly displayed.

Speciality Stores

As the name suggests, Speciality store would specialize in a particular product and would

not sell anything else apart from the specific range. Speciality stores sell only selective items

of one particular brand to the consumers and primarily focus on high customer satisfaction.

Example -You will find only Reebok merchandise at Reebok store and nothing else, thus

making it a speciality store. You can never find Adidas shoes at a Reebok outlet.

Malls

Many retail stores operating at one place form a mall. A mall would consist of several retail

outlets each selling their own merchandise but at a common platform.


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E Tailers

Now a days the customers have the option of shopping while sitting at their homes. They

can place their order through internet, pay with the help of debit or credit cards and the

products are delivered at their homes only. However, there are chances that the products

ordered might not reach in the same condition as they were ordered. This kind of shoppingis convenient for those who have a hectic schedule and are reluctant to go to retail outlets.

In this kind of shopping; the transportation charges are borne by the consumer itself.

Example - EBAY, Rediff Shopping, Amazon

Dollar Stores

Dollar stores offer selected products at extremely low rates but here the prices are fixed.

Example - 99 Store would offer all its merchandise at Rs 99 only. No further bargaining isentertained. However the quality of the product is always in doubt at the discount stores.

Retailers in India

Retailer Stores

Pantaloon Retail Big bazaar, Food bazaar , Hometown, furniture bazaar,

collection-I,e-zone,

shoefactory,Depot,Futurbazaar.com,Bowling co.

K Raheja Group Shopper's Stop, Crossword, Homes stop, Mothercare.Tata Group Westside, Star India Bazaar, Croma, Titan, Tanishq.

RPG Group Foodworld, Spencer's, Music World

Landmark Lifestyle, Home Centre, Landmark International, Max Retail,

Funcity.

Piramal Group TruMart, Priamyd Megastore

Reliance Reliance Hyper-mart

Aditya Birla Group Louis Phillipe, Van Heusen, Allen Solly, Peter England,

Trouser town.


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Impact of retail in USA

The Pre-Modern Period (pre-1945) - During this era, mom-and-pop stores and general

stores operated throughout the country. The mom-and-pops were family-run businesses

(grocery stores, hardware stores, etc.) that served the needs of townspeople. General

Stores were common and offered a variety of items that consumers could buy in one place.

Retail Development 1945-1975

During this era, the development of store chains took place, and bigger discount and

department stores opened across the U.S. The names Woolworth, Sears, J.C. Penney, Wal-

Mart, Montgomery Ward, and Macys became more common in cities and suburbs.

Big Box and Category Killers 1975-1990

This period saw the tremendous expansion of discounters such as Wal-Mart and Kmart, plus

other national chains like Sears and J.C. Penney. It also saw the introduction of specialty

store category killers. These chains introduced specialty superstores that covered an

entire category, such as Best Buy and Circuit City (now bankrupt and out of business) in the

consumer electronics business, or Office Depot and Staples in the office-supply business.

Throughout the U.S., malls, strip centres, stand-alone specialty stores, and big-box general

merchandise chains sprouted up. Markets became saturated and, in many cases,

overstored.

The Consolidation of Retail 1990-2000

This period was marked by rapid industry consolidation in all retail channels,where the big

chains got bigger and many regional chains and mom-andpop stores were laid to waste.

Today every retail channel features several companies that capture a bulk of the market

share. Wal-Mart and Target in thediscount industry, Home Depot and Lowes in the home-

improvement business,CVS, Walgreens, and Rite Aid in the drugstore industry, Best Buy and

Circuit City in the consumer electronics industry, and Wal-Mart, Kroger, Safeway, Ahold,

Costco, and Albertsons in the grocery business.

This decade also saw the rise of the supercenter and warehouse club concepts, which

emphasize one-stop shopping for everything from food to clothes to electronics to tires.These big,impersonal stores with everything under one roof took root, in stark contrast to

the mom-and-pop stores that had once emphasized service and community. They offered a

single destination for shoppers and low prices. The supercentrebecame Wal-Marts biggest

growth vehicle in the 1990s and helped make it, byfar, the worlds largest retailer.A retail

study in 1990 predicted that 50% of all retail stores would be out of business by the year

2000, a bold prediction that, in retrospect, proved fairlyaccurate.

The long list of venerable retailers who existed in 1990, but who are now defunct include

Ames, Bradlees, Caldor, Alexanders, Montgomery Ward, Hills Department Stores, F.W.

Woolworth, G.C. Murphy, E.J. Korvette, McCrory, S.S. Kresge, Venture Stores, JameswayCorp., Zayre, etc. The list goes on and on. The smaller mom-and-pop stores, unable to


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compete with the growingnumber of megastores on price, were affected even worse. The

study recognizedthe impending growth and power of chains like Wal-Mart, Target, Costco,

andHome Depot, and rightly projected that many small and midsized regionalchains would

vanish from the retail landscape. The list of retailers above once represented the core

business of many midsized manufacturers. As the decadeprogressed, vendors found their

list of accounts shrinking, with only severalretailers commanding a large percentage of theirbusiness. To their dismay,these retail giants began to exercise greater power in negotiating

on price andsupply chain procedures, and reduce the number of suppliers. Many vendors

have felt powerless to dispute or challenge the demands of the big chains for fearof losing a

significant portion of their business.

The Future Takes Shape 2000-2005

Industry consolidation has had profound effects on merchandising strategies, on shopping

patterns, and on suppliers. One result has been the loss of clout of brand names as the big

suppliers, as well as retailers private brands, converge in the middle of the market. On theone hand, discount and mass retailers are finding it advantageous to introduce exclusive,

name-brand merchandise lines, while higher- price department stores are trying to lower

costs and increase unit sales by developing store brands, which offer consumers essentially

the same quality as brand names without the higher price tag (and with higher margins for

the retailer).

Shoppers Combining Shopping Experiences

Consumers are finding it advantageous to buy their groceries in the same places that they

buy electronics, toys, shoes, and auto parts. Time-pressed consumers can avoid spending allday travelling to various stores to do their Christmas shopping. To accommodate this, big-

box retailers are expanding their offerings. Discounters are selling food and drugs; drug

chains are selling food and items for the home; home improvement chains are offering

electronics and appliances; and super-centres and warehouse clubs offer everything under

the sun. Costco - A good example of the evolution of shopping can be seen at Costco. This

warehouse club operator offers limited selections of high-quality goods at low mark-ups.

And it makes a handsome profit by keeping its operating costs at a minimum. Consumers

can buy items in bulk, thus reducing the amount of shopping trips while saving money. The

addition of gasoline has put warehouse clubs into competition with gas stations and relatedconvenience store operators like Circle K and 7-Eleven. Wal-Mart Supercenters and its Sams

Club division provide similar experiences for lower-income shoppers. The Mass

Merchandisers The unrelenting consolidation that has characterized the world of mass

merchants continues to this day. Even though their growth has slowed, Wal-Mart continues

to expand its super-centers, putting local merchants out of business. We see retail

consolidation among mass merchants and in other channels continuing unabated.

Supermarkets in Developing Countries

Supermarkets have been around for half a century in several developing countries, but the

phenomenon was limited mainly to large cities, upper-middle-class or rich consumer


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segments, and domestic capital chains. In contrast, a supermarket revolution in developing

countries took off in the early-to-mid-1990s. The patterns and determinants of that

revolution are detailed in the following subsection.

Diffusion of Modern Retail over Regions and Countries

The spread of supermarkets has taken place in three established waves and continues in a

fourth emerging wave. The first-wave countries experienced supermarket sector takeoff in

the early-to-mid-1990s. Included in that group are much of South America and East Asia

(outside China and Japan, north-central Europe and the Baltic countries, and South Africa. In

those countries, the average share of supermarkets in food retail went from roughly 1020

percent in 1990 to 5060 percent on average by the early 2000s (Reardon and Berdegu

2007). Comparing that to the roughly 7580 percent share that supermarkets had in food

retail by 2005 in the United States and western Europe, it appears a process of convergence

was taking place. The first-wave countries saw supermarket diffusion in a single decade that

took some five decades in the United States and the United Kingdom. The second-wave

countries are Mexico and much of Southeast Asia, Central America, and south-central

Europe. In those areas, the share went from about 510 percent in 1990 to 3050 percent

by the early 2000s, with the takeoff occurring in the mid-to-late 1990s.

In the third-wave countries, the supermarket revolution started in the late 1990s or early

2000s, reaching about 520 percent of national food retail today. These areas include parts

of eastern and southern Africa, some countries in Central and South America, transition

East Asia (China and Vietnam), Russia, and India. It is somewhat anomalous that they are

latecomers in the third wave, because their demand-side characteristics (income, absolute

size of the middle-class population, urbanization rate, and share of women in theworkforce) make them similar to many countries in the second wave, which had

supermarket take-off some five to seven years earlier.

The main reasons for the lag were policies imposing severe constraints on retail foreign

direct investment (FDI) that were progressively relaxed in China and Russia in the 1990s.

Note that the growth rates of supermarket food sales and retail FDI are inversely correlated

with the waves. Thus, the fastest growth occurred in the supermarket sector in China (about

40 percent a year), whereas the more mature, relatively saturated supermarket sectors in

Brazil and Taiwan saw growth of only 510 percent.

Example: China

China ranked fourth, fifth, and third in the AT Kearney Global Retail Development Index in

2005, 2006, and 2007, respectively, and is a fascinating case of extremely rapid supermarket

diffusion. Modern retail in China comprises roughly 10 percent of the national retail and 30

percent of urban food markets (Hu et al. 2004). China had no supermarkets in 1989, and

food retail was nearly completely controlled by the government. From its beginning in 1990,

the supermarket sector climbed meteorically to about 15 percent of food retail nationally

(some 35 percent in the big cities) by 2003, and today its annual sales are roughly $100

billion. Many of the driving forces for super marketization were in place (e.g., risingincomes, urbanization), and all it needed to become a reality was the progressive


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privatization of the retail market and, even more importantly, the progressive liberalization

of retail FDI that started in 1992 and culminated in 2004, as a provision of World Trade

Organization (WTO) accession. FDI drove intense competition in investment among foreign

chains and between foreign chains and domestic chains that even accelerated before WTO

accession and thereafter with full liberalization of FDI.

Diffusion over space within a country

Supermarkets tend to start in large cities, then spread to intermediate cities and towns, and

then enter small towns in rural areas. The business strategy is the same as for chains,

spreading in waves over countries: the richest and largest market is entered first because it

offers the highest profit per capital invested; competition and saturation of the initial base

drives investment by a given chain into the series of subsequent markets. While the gross

return declines, cost savings result from economies of scale and the procurement system

change discussed later in the report. Often the multinational chain acquires or joint

ventures with the large domestic chain and both acquire smaller local chains operating invarious regions of a country. Competition from larger chains in turn pushes intermediate-

city-based chains to extend into the hinterland towns, seeking refuge from the increasing

competition in its base market; this process accelerates the diffusion of supermarkets over

space.

Diffusion over consumer segments and socioeconomic strata

Controlling for the pattern of spatial diffusion, similar waves of diffusion occur over

socioeconomic groups and consumer segments. Obeying the same business logic as in

spatial diffusion, supermarkets focus first on upper-income consumer segments (nationaland expatriate), move into the middle class, and finally enter the markets of the urban poor.

Format diversification with diffusion over space and strata

As modern retail spreads, format diversification tends to occur to facilitate the spatial and

consumer segment differentiation. For example, to penetrate the markets of inner cities

and small towns where space is limited and product assortment can be narrow, chains use

discount stores, convenience and neighbourhood stores, and small supermarkets.

Diffusion over product categories

The penetration by supermarkets of food retailing has occurred in the following waves of

food categories:

1. The first wave of product penetration is in processed foods (canned, dry, andpackaged items such as rice, noodles, and edible oils). This is a result of the

economies of scale in procurement as well as direct relations with processed-food

manufacturers.

2. The second wave is in semi processed foods (with extensive or minimal processingsuch as dairy products) and minimal processing and packing (chicken, pork, beef, andfruit).


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3. The third wave, by far the slowest and the longest in starting in developing countries,is into the vegetable market (particularly for leafy vegetables and bulk vegetables).

Example: China compared with Hong Kong

In a study of a random sample of 1,200 consumers in the six largest cities in China, Goldmanand Vanhonacker (2006) found that modern retailers already have a retail market share of

94 percent in non-food goods, 79 percent in packaged and processed goods, 55 percent in

baked goods, 46 percent in meat, 37 percent in fruit, 35 percent in poultry, 33 percent in

fish, and 22 percent in vegetables. Compare that to the more advanced case of Hong Kong,

which likely represents the average Asian consumer sometime in the medium-term future.

Hong Kong supermarkets have a 59 percent share in fruit retail and a 55 percent share in

vegetables (thus, a share similar to supermarket penetration of produce retail in Brazil), 52

percent in meat, 39 percent in poultry, and 33 percent in fish (Coca-Cola Retailing Research

Council Asia 2005). Evidence emerging from a large ACNielsen consumer survey in Asia

suggests that younger consumers are forsaking wet markets and that in less than ageneration the average produce buyer may well be substantially more supermarket

oriented, which will accelerate the effects of the retail transformation on the horticulture

sector (Planet Retail Daily News 2005).

Example: Indonesia

AC Nielsen (2007) undertook a survey of 1,300 consumers in the capital of Jakarta (capital)

and in the second-tier cities of Bandung and Cirebon, focusing on consumers buying habits

in supermarkets versus traditional markets. The survey revealed that penetration of grocery

retailing has occurred much more rapidly in processed, dry, and packaged foods and inhousehold and personal care products, for which supermarkets gain a cost advantage as a

result of economies of scale from centralized procurement and distribution. Savings are

passed on to consumers, drawing them to the channel. The supermarkets progress in

gaining control of fresh-food markets has been slower because of procurement challenges,

price, cultural habits, and perspectives regarding freshness; moreover, shoppers still

purchase fresh produce mainly at wet markets and small vegetable stalls, where they get

low prices, credit, and personal service.


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BRIC NATIONS

RETAIL SECTOR IN BRAZIL

Even in the late 1990s, Brazil was just like any other emerging economy, characterized byextremes of wealth and abject poverty with no social class dividing the bridge between. A

decade and more down the line,the effervescence in the middle cannot be missed. Yes, the

great Brazilian middle class defined as those who earn between $690 and $2,970 a month

has arrived and is here to stay. If Brazil has made a name in the global retail sector, it had

better thank these late comers, empowered with good purchasing power and access to

credit.

Fast Facts

Brazil is the fifth largest country in the world and the largest Latin Americaneconomy.

The Economist Intelligence Unit had forecasted that Brazil will overtake the U.K. tobecome the sixth- largest economy in 2011.

Brazil is the biggest exporter of iron ore and the largest exporter of meat, coffee, andchicken.

Brazil is the fifth most populated country in the world Over the last two decades, thanks largely to welfare schemes launched by the

government, the poverty rate has halved in Brazil.

Income equality in the country has also fallen sharply, declining on average by 1.2% ayear.

The Brazilian retail market is worth about $230 billion. More than 30 million Brazilians have risen out of poverty since 2003 to create a new

middle class.

Demographics also favor the growth of the consumer- oriented sectors of theeconomy. About 80% of the countrys 190 million population lives in urban areas.

Of course, the commodities powerhouse has benefited from the high prices of iron ore

spurred byChinas voracious appetite. But what makes the Brazilian success saga stand outis that someshrewd social engineering by some of the countrys visionary leaders ensured

that thecommodities wealth trickled down to the poorest sections of society. To put thingsin perspective, the so-called middle class, who comprised some 38% of the countryspopulation in2001, currently accounts for a whopping 55%. Social welfare schemes such asthe Bolsa Familiaimplemented by former president Lula da Silva after he took over in 2003also ensured that in addition to benefiting from liberal handouts, low-income families alsoreceived the goldenopportunity to educate their children, which made a real difference intheir lives. The scorchinggrowth of the domestic retail sector over the course of the lastdecade or so, triggered by theemerging middle class, also has something to do with thecountrys demographics. Economistshave pointed out that about 80% of Brazils populationof 190 million lives in urban areas.


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Hyperinflation and its aftermath

By the mid-1990s, international retailers woke up to the fact that developed markets had

reacheda point of saturation and offered little scope for further expansion. Quite naturally,their eyes fellon the newly emerging markets, especially those Eastern European nationsthat had come outfrom behind the Iron Curtain around the same time. Despite the shift inthe retailers mindsetduring the decade, due to a number of economic issues Latin Americadid not figure on theirradar screens until toward the end of the 1990s. To begin with, SouthAmerican markets as a whole were characterized by economic instability. High levels ofpublic debt and hyperinflationwere the hallmarks of many Latin American economies andBrazil was no exception. To putthings in perspective, inflation in Brazil had touched a mind-boggling 5000% in 1994. Thisdaunting inflation scenario worked to the detriment of bothconsumers and retailers alike. If buyers were forced to make purchases soon after they

received salaries for fear of losing the realvalue of their money, retailers too had to revisetheir price lists frequently. To sum up, the economic situation was not encouraging forretailers as they tried to gain a toehold in thedomestic sector.

Thankfully, the situation changed for the better under Fernando Cardoso, the visionary

leaderwho was the president of Brazil from 1995 to 2002. Cardoso launched what has cometo beknown as the Real Plan, which introduced a new Brazilian currency. The Plan, whichwasnothing short of a shock treatment for the economy, also helped tame inflation. Theinitiative unleashed a generation of consumers who for years had been fettered by highinflation. Grantingthe central bank operational independence in 1999 also helped, with thebank setting its inflationtarget at a slightly variable 4.5% beginning in 2005. Brazil was luckyto have an equallycompetent successor to Cardoso in Lula da Silva who assumed office in

2003. In addition to family welfare schemes, Lulas programs included subsidized housing,an easier access to credit, and generous pay hikes, among other initiatives. Consumerlending was boosted as banks were allowed to deduct interest charges on debt directlyfrom the workers payroll. According to a study by Brazils Getulio Vargas Foundationquoted in the Financial Times, about 49 million low-income Brazilians rose to the ranks ofthe middle and upper-middle classes since 2003.Meanwhile, Chinas role in the emergingmarket story was playing out well in the background, with the Asian economy eclipsing theUnited States as Brazils largest trading partner. The current incumbent Dilma Rousseffexpanded the scope of the good work initiated by her predecessors, boding well forconsumers and industries alike. With this, the stage was set for consumer-oriented sectors

such as retail to train their guns on the Brazilian market.

Besides the availability of credit, which was a big boost to the growth of the retail sector in

the country, a typical Brazilian shopping trait also played a role. According to a 2011

McKinseytrait

Quarterly Report, Brazilian consumers are more open to using credit than consumers in

other Report, emerging markets, and low income groups in particular require consumerfinance products to markets, low-incomepurchase goods. The report reveals that 60% ofpeople use credit in Brazil, while in India it is 30%, and in Russia and China the use of creditstands at 24% and 13% respectively.


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TYPES OF CREDIT

DIRECT CONSUMER CREDIT (CDC)

Direct Consumer Credit (CDC) was one of the earliest consumer finance products to be

launched in Brazil. Under this system, consumers purchase goods in instalments through

bank orders or pre-dated bank checks. This form of credit, which mostly works in

arrangement with retailers, has been usurped by credit cards in recent times. HSBCsconsumer finance unit Losango, which has been put up for sale, follows this business model.

PAYROLL LOANS

Under this system, payments are deducted from the borrowers pay check itself. Payroll

loans are considered less risky to lenders as credit is given against payroll guarantees. This

form of credit benefits consumers too, as interest rates tend to be lower than the direct

credit offered by retailers.

CREDIT CARDS

Over the years, credit card transactions have become the favored buying instrument for

Brazilians. The credit card processing segment in Brazil is valued at about $420 billion a year,

with Reuters reporting that there are more than 630 million outstanding credit cards in

Brazil. Home-grown credit card processors Cielo and RedeCard have a vise-like grip on the

industry, while the likes of Visa, MasterCard, and Citibanks Credicard unit have big plans

chalked out for the Brazilian market.


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Retail segment in Brazil

Although organized retail in Brazil could be traced back to 1948 when the current market

leader Companhia Brasileira de Distribuicao (CBD), better known as Pao de Acucar, started

off as a small bakery, the last decade witnessed hectic activity in the sector. Among foreign-

owned entities, French retailer Carrefour S.A. was among the early birds to set up shop inBrazil, coming in as early as 1975. Walmart Brazil, the third in the pecking order, was

established in 1995. However, the deep-pocketed foreign players would soon realize that

the Brazilian market was a different kettle of fish when it came to consumer behavior

patterns. In contrast, home- grown retailers such as Hypermarcas and apparel retailer Lojas

Renner S.A. have continued to grow at faster rates, helped by their knowledge of the local

market.

Brazil became a hot destination for investors since it found a place for itself in the now

famous BRIC group of emerging economies. While some of Brazils bigger counterparts ran

for cover during the financial crisis of 2008-09, the Latin American economy managed tokeep its head above water, thanks to the consumption potential of its people. Of course,

various stimulus packages rolled out by the government also put more money in the hands

of consumers.

Brazils retail market is estimated to be worth about $230 billion, driven mostly by domestic

demand. Besides the 40% growth in GDP per capita during the last eight years or so,

population distribution also plays a vital role in encouraging the growth of sectors such as

retail. About 30% of the countrys population lives in the 10 principal metropolitan cities.

Sao Paulo brims over with a population of 18 million, while Rio de Janeiro has 10 million.

Still, the consumption habits of this predominantly urban population are diverse. As a PwCreport points out, the lower income sections tend to spend more on essentials such as food

and beverages, while those in the upper income bracket splurge on leisure, durable goods,

as well as luxury items. The Brazilian market is also perhaps the most internationalized

among the BRICs, as the top 10 retailers corner almost 60% market share among

themselves. Food retailers, apparel retailers, consumer goods makers, appliance retailers,

and consumer staples companies form the backbone of the sector.

Major Players

Brazil has emerged as the worlds third-biggest grocery market, next only to America andChina, thanks to the aggressive growth strategy adopted by players operating in the market,

both foreign and domestic. Global retailers such as Walmart and Frances Carrefour bank on

the Brazilian market to make up for sagging sales elsewhere. At the same time, domestic

market leaders such as Pao de Acucar give them a run for their money. Still, the new

entrants find it tough to gain a foothold in the highly competitive market, which offers great

potential for growth.


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GRUPO PAO DE ACUCAR

Pao de Acucar is by far the biggest diversified retailer in Brazil, selling everything from

groceries to home appliances to clothing. The company, which has a market share of about

18%, has made strides under the stewardship of Abilio Diniz. The companys foray into the

sale ofhome appliances has been spurred by the acquisitions of the Globex Utilidades SAsPonto Frio chain as well as the Casas Bahia outlets. The retailer operates under brand names

such as Pao de Acucar, Sendas, Extra, CompreBem, and Extra Eletro.

CARREFOUR S.A.

The French retailer, second only to Walmart worldwide, has been a significant market

presence in Brazil for more than 25 years with a market share of about 14.5%. Brazil figures

prominently in the diversified retailers game plan after its hypermarket format failed to

click and European sales tumbled. However, Carrefours attempt to combine itself with Pao

de Acucar last year had to be abandoned after a major shareholder in the Brazilian marketleader objected to the deal.

WAL-MART BRAZIL

Though the worlds largest retailer took some time to become established in the country, its

Brazilian unit is now one among its best performing subsidiaries. Last year, Walmart Brazil,

which has a market share of 12%, created ripples in the market when it implemented its

Everyday Low Prices strategy to take on its rivals. Though Walmart Brazil first entered the

market through a joint venture with local player Lojas Americanas, its growth has been

driven by acquisitions of the local units of Netherlands Royal Ahold and Portugals Sonae.

Apparel Retailers

Unlike the retail grocery and household appliance market, local and traditional brands

dominate the apparel and fashion sector in Brazil, the worlds fifth largest apparel

marketplace. With more than 60% of the countrys population below the age of 29, the

apparel market has been growing at a rate of 7% a year, according to a McKinsey Quarterly

Report published in July 2011. Fashion-conscious Brazilians are heavily swayed by clothing

lines endorsed by local celebrities. Moreover, unlike in other emerging market, they tend to

purchase apparel on credit more frequently.

LOJAS AMERICANAS

Founded in 1929 by four Americans, the discount retailer sells clothing lines, toys,

household goods, small household appliances, chocolates and candies, as well as CDs and

DVDs. Lojas also has a presence in the online retail space under the brand B2W Varejo.

LOJAS RENNER S.A.

This discount clothing retailers clientele is comprised primarily of young females, with the company clocking 60% of its sales revenues through credit. American department store


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chain J.C. Penney had a controlling stake in Lojas, which it divested later.

COMPANHIA HERING (CIA HERING)

Still owned by the founding Hering family, CIA Hering is easily the oldest home-based textile

and clothing maker. In recent times, the retailer has focused on opening stores in tier 2Brazilian cities aimed at the newly emerging middle class who have access to credit.

The mega deal that never materialized

It all began in June 2011 when Carrefour publically announced that it received a proposal to

combine its Brazilian operations with those of Pao de Acucar. Under the terms of the deal,

both Acucar and Carrefour Brazil were supposed to merge into Gama, a holding company

funded by the government-owned Brazilian National Development Bank (BNDES). The

combined entity, as The Economist pointed out, would have had sales of $43 billion or a

21% share in the fast - growing retail market. The deal would have no doubt benefited boththe sides, but for the objections of Casino, a French retailer which holds a 37% stake in

Acucar. Expectedly, Casino cried foul, terming the deal illegal. The stand-off also strained

Acucar-Casino ties, according to media reports from Reuters. Although the business

proposal had the implicit blessings of Brazilian policy makers eager to create true national

champions in fast-growing sectors such as retail, the deal ultimately had to be shelved.

Store Formats

As pointed out by a July 2011 McKinsey Quarterly Report on the retail sector, Brazilian

shoppers stand out for some unique behavioral patterns. First of all, shopping for them is arelaxing, everyday activity where they expect salesmen at the counter to treat them royally.

Most shoppers, the report observes, would like to travel to the stores by foot, which means

they prefer retail shops located closer to their homes. Another marked trait of the domestic

shopper, the study shows, is that he or she is extremely price-conscious compared to their

peers in India, China, and Russia. Keeping these trends in mind, Brazilian retailers have

devised a variety of store formats to reach out to this lucrative consumer. Rather than

focusing on a particular format, these ambitious players have pursued a multi-pronged

approach which includes neighbourhood supermarkets, hypermarkets, convenience stores,

discount stores, and online stores.

Supermarkets

Supermarkets, the typically large modern-day self-service grocery stores, tend to dominate

the segment, accounting for 80% of purchases made. Leading players such as GrupoPao de

Acucar, Wal-Mart, and Carrefour all follow this format.

Hypermarkets

The hypermarket format, a superstore which combines a supermarket and a department

store, is also very well entrenched in the Brazilian retail market. Carrefour, for instance,makes three quarters of its sales from its hypermarkets, in addition to its other store


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formats such as supermarkets, cash&carry, and convenience stores.

Convenience Stores (Hybrid Indigenous format)

Big retailers were quick to realize that the one -size fits all model could not be applied to

the Brazilian market. Thus, retailers operating in Brazil adopted the concept of theconvenience store, mostly located in gas stations, to augment the traditional retail format.

E-Commerce

According to Euromonitor International, Brazilian Internet retailing has shown impressive

growth in recent years. The report points out that increasing access to broadband and

falling prices of personal computers have driven the upsurge. E-commerce has increasingly

expanded beyond traditional economic hubs like Sao Paulo, as lower-income groups join the

Internet bandwagon. Encouragingly, women, who have traditionally lagged men in making

purchases online, now make up 50% of web shoppers in Brazil.

The road ahead for retail

Still, the Brazilian juggernaut would do well to realize that it may not be wise to bank solely

on fluctuating commodity prices and an overstretched consumer in its march forward.

Beneath the glitz and glamor of Brazils shopping aisles lurk some issues that are common to

many emerging markets, such as rampant inflation, hot capital inflows, and poverty, among

other factors. First, the country, through its education system, will likely need to focus on

training a future workforce to support the burgeoning retail industry. Poor infrastructure,

the bane of the Brazilian retail industry for years, is also a concern, although preparationsfor the 2014 soccer World Cup and 2016 Olympics are expected to go a long way to address

the need. Although sectors such as natural resources and banking are dominated by what is

known as state capitalism, where the government exerts control of strategically important

companies, notably Brazils retail industry has remained more or less independent. Still,

corruption and bureaucratic red tape hamper the development of the retail sector and, as

media reports point out, big foreign players find it difficult to navigate the byzantine ways of

Brazilian bureaucracy.

Many analysts are alarmed over Brazils rapid credit growth, fearing that a U.S.-model credit

bubble may be brewing. However, as a Financial Times report pointed out, this concern maybe unfounded as about 60% of consumer loans are made against payrolls, property, or cars

and are offered at fixed rates.

To sum up, the Brazilian retail success story should be understood in the wider context of

the rise of its middle class as is the case with many emerging markets. Yet, unlike in other

developing markets, deep-pocketed multi-nationals such as Wal-Mart and Carrefour have

tasted unprecedented success in the retail sector. Amid the unraveling Euro-zone crisis and

slowing global growth, Brazil, despite all its shortcomings, may yet prove to be an oasis of

growth for global retailers.


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RETAIL SECTOR IN CHINA

Ever since China reformed its economy, understood the immense importance of FDI and

also urged for foreign capital participation in the economy-the country has received

remarkable amount of FDI since 1979. It has become the second largest recipient of FDI just

behind the US and definitely the largest among the developing. The FDI in China becomes

most popular since 1979 and it has received $306 billion in between the next 20 years. That

is attributed to few major incidences in that span of 20 years including the establishment of

Special Economic Zones (SEZs). The government of China established four SEZs in

Guangdong and Fujian provinces and offered special incentive policies for FDI in these SEZs.

That make the movement of FDI in the country towards upward direction and the trend has

not been changed.

To fully appreciate the economic strength of China, one needs to understand the macro

factors that are driving the country. Chinas economy is the second largest in the world

roughly 2.3 times larger than Japans and 70% of the worlds largest economy, the US. Since1978, China has achieved an average 9.9% annual GDP growth, and the International

Monetary Fund (IMF) forecasts the Chinese economy to surpass the US by 2016. Although

growth projections are less bullish for the next five years, the projected 9% annual growth

rate still outpaces other BRIC countries.

Fast Facts

Retail sales increased 16.3% in 2011 Q1, while GDP expanded 9.7%. Retail sales areexpected to double in the next three years.

Retail sales in China amounted to nearly $2.1 trillion in 2010, nearly 50% of those inthe U.S. Chinas retail sales are expected to grow by around 10% in 2011.

Chinas retail sector is showing some signs of consolidation in 2011. The marketshare of the top 20 retail chains rose to 8.9% in 2011 from 8.4% in 2010

Over 25 of the worlds largest retailers are conducting business in China.


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Five of Chinas domestic retailers are ranked among the 250 largest global retailerson the Global Powers of Retailing for 2010.

By 2015, China is poised to zoom to the position of the third biggest consumermarket globally, after the U.S. and Japan.

China slipped to the 6th rank on A T Kearneys Global Retail Development Index2011, from the top position in 2010.

Urbanization is driving the retail boom

China has experienced unparalleled levels of urbanization since the onset of economic

reforms begun in 1978. Compared to 1980, today Chinas urban population has increased by

over 200%. According to a McKinsey research study, by 2025, two thirds of the Chinese will

be living in urban areas. By 2030, Chinas urban centers will be inhabited by 350 million

more people, this increase itself beating the entire population of the U.S. today. Also by

2025, 221 Chinese cities will boast of a population of over one million, with 23 cities

registering over five million. The urban economy is expected to generate 90% of Chinas

GDP by 2025, with its aggregate consumption and disposable incomes twice those of

Germany.

While the 1990-2005 period saw the emergence of two mega-cities in China with a

population of over ten million, namely Beijing and Shanghai, by 2025 the number of mega-

cities is expected to climb to eight, adding Tianjin, Shenzhen, Wuhan, Chongqing, Chengdu

and Guangzhou to the group. These mega-cities are fast emerging as urban retail hubs in

China.


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The power of the aspiring middle-class

World over, the resurgent demand from the growing middle-class has been instrumental in

driving global growth. The World Bank estimates that the global middle-class will grow from

430 million in 2000 to over 1.15 billion in 2030 (incomes ranging from $3650-$7300

annually).

More importantly, while the developing countries

accounted for 56% of the global middle-class in

2000, this figure is expected to zoom to 93% by

2030. China and India together will account for a

phenomenal two-thirds of this expansion. In China,

the process of economic growth led to fast-paced

urbanization and improvements in the standards of

living, and with this, more and more urban migrants

were propelled to the emerging middle-class.

The middle-class has become the face of the contemporary and aspiring Chinese consumer,

who is now being wooed by domestic and foreign retailers alike. Defining the middle-class

as people with incomes ranging from $6000-$25,000 a year. Constituting about 23% of the

Chinese population today, the middle-class is raring to grow to 25% in 2010 and 33% by

2020. The urban middle-class will lead this explosive expansion, with over 60% of urban

households estimated to join this group by 2016, compared to 39% in 2006.

Evolution of consumer behaviour in China

The consumption behaviour of the Chinese population is evolving quickly, along with rapidly

increasing wealth. Wage levels in China have risen steadily after the introduction of the

open door policy, and people are becoming more affluent. This has created a shift in

consumption patterns, from catering solely to primary needs to indulging in the upper layers

of Maslows Hierarchy, improving quality of life and increasing social esteem. All six main

segments gained over 10% in retail value every year, with outperformers such as gold, silver,

jewellery and automobiles, and underperformers such as cosmetics and household

appliances and AV equipments.

Increasing consumer power

Increasing income is another major driving force behind the sectors future growth. In

particular, we see rural households and low-income urban households as one of the main

drivers of retail sales growth during the 12th Five-Year Plan period, with a higher than

average income growth rate. During the period of 2001-2005, the per capita disposable

income of urban households increased at a higher CAGR of 10.8% compared to rural

households net income growth of 7.6%. However, thanks to the governments policy of

improving living standards in rural households, both urban and rural households incomes

increased at a CAGR of 12.7% during 2006-2010.


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The Evolution of the Asset Class

Chinas retail market has undergone a transformation over the past two decades, moving

away from traditional department stores to large-scale integrated shopping malls.24 Much

of this trend can be explained through the transformation of retailing within the country.

From the 1980s to early 1990s, the predominant retailers in China were large department

stores which were often owned and operated by state-owned enterprises (SOEs). Since the

last decade, Chinese shoppers have been gravitating toward more foreign and smaller-

format retailers, producing a need for shopping malls to accommodate these stores.

Department stores were traditionally a popular way for new brands to establish themselves

in China, but in recent years modern shopping centers became mainstream to meet

demand. The shopping center format has become the predominant retailing asset of choice

in Chinas Tier 1 cities, and has begun to take shape in Tier 2 cities as well.

Unleashing the retail dragon through reforms and foreign investment

While by now most prominent global retailers have forged an entry into the thriving retail

industry in China, the framework of rules and regulations governing this sector have

remained largely ambiguous and fraught with contradictions. Prior to 1992, foreign retailers

were prohibited from setting up joint ventures or wholly-owned subsidiaries for wholesale

or retail trade in China. Loosening its tight regulations somewhat, in July 1992 the State

Council permitted foreign investment in retailing on a trial basis in Beijing, Shanghai, Tianjin,

Guangzhou, Dalian, Qingdao, as well as the five Special Economic Zones (Shenzhen, Zhuhai,

Shantou, Xiamen, and Hainan). By 1997, about two dozen foreign-invested stores in China

had been approved by the central government to conduct business. However, hundreds of

foreign invested retailing as well as wholesaling enterprises had already established

themselves in Chinese cities, having sought approval from the provincial or municipalauthorities. In order to curb the mushrooming of foreign-invested retail enterprises, the


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central government ordered a moratorium on local approvals, revoking many approvals

made in 1997 and 1998 as well. The ownership structure of many of these enterprises was

also restructured, making them Chinese majority-owned.

Beyond the First-Tier Cities

Outside of top-tier cities, delivery of products is a bigger problem for retailers than demand.

In these regions, appropriate supply is not available to all retailers. The result is a bifurcation

where the best retail

projects charge high

rents, with a substantial

drop in rents for non-

prime assets. With the

exception of Beijing, the

majority of Chinese cities

are not inundated with

top retail properties.

Rather, the majority of

Tier 2 cities have an

undersupply of stock in

relation to the demand

for products.

Key Criterions

Compiled for closer analysis a list of 19 Tier 1 and 2 cities that will benefit from

transportation linkages and interconnectedness with regional economic hubs. Eight

variables were taken into consideration, including

Population growth

Disposable income growth

Future wealth creation

Amount of current supply

Historical retail sales growth

The level of infrastructure Future development pipeline

Rental outlook

Retail formats in vogue

Chinas retailing sector remains highly fragmented, housing many small and medium-sized

retailers unlike the U.S. where the big retailers have a dominating presence. China was

home to over 549,000 retail enterprises. Despite the fact that the number of chain stores

has grown in recent years, cross-provincial retailers remain less common because of local


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market access barriers. However, China does flaunt a wide array of retail formats, each at a

different level of evolution and development:

Department stores: These stores were popular earlier on, but are facing intense

competition now and are battling to stay ahead. (Golden Eagle, Parkson, Beijing Cuiwei,Shenzhen Suibao)

Hypermarkets: The development of hypermarkets has been led by international retailers,

who are now spreading their wings to tier 2 and 3 cities, as markets in tier 1 cities reach

saturation. (Wal-Mart, Carrefour, Vanguard, Tesco, Metro, RT Mart Shanghai, Trust-Mart)

Supermarkets: This highly fragmented market dominated by domestic players, is witnessing

cutthroat competition, often leading to weeding out of the weaker players coupled with

strategic consolidation. (A-Best Supermarket, Baijia Supermarket)

Convenience stores: Though still in the development stage, this format is witnessing

increasing competition, mostly among domestic chains. (Quick of LianHua, Alldays & Kedi of

NGS)

Specialty stores: Electronics/Appliances: This segment is clearly dominated by domestic

players, with limited foreign investment. (GOME, Suning)

Discount stores: Still evolving, this format remains concentrated in tier 1 cities. The first

discount store was introduced by Carrefour in 2003.

Franchising: Constituting about 3% of Chinas total retail market, franchising seems to have

tremendous potential for future growth. (KFC, McDonalds, 7-eleven, Pizza Hut)

Direct selling: With direct selling rules introduced in 2005, providing the much needed legal

framework, the potential for further growth remains immense. (AMWAY, Mary Kay, Avon)

Online retail: Online shoppers grew 68% between 2009 and 2010 to 185 million. Online

retail sales have been predominantly consumer-to-consumer transactions. However, with

over 29% of its population using the internet, online retail sales are poised to grow over 30%

per year. (Taobao, Alibaba, eBay

Lessons Learned

Over the past decade, there has been a surge of interest from both foreign and domestic

investors in China retail real estate market. However, hard lessons have been learned by

some of these investors, and these lessons include poor asset planning and management,

the lack of local knowledge and various issues with partners (such as lack of alignment ofinterests).


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A number of foreign investors entered China retail real estate markets by replicating the

Western retail malls concept, but many have failed. Main reasons are conflicts with their

local partners, and the lack of local knowledge and professionals, such as misunderstanding

the local culture and consumer behaviour, mismatching product offerings and poor asset

planning and management.

When it comes to asset planning and management, some retail assets in China have been

plagued by poor property management. Notable trends that tend to occur especially with

local owners are:

Leasing space to the highest bidder without much regard on the overall tenant mix. Strata-titled mall for sale for a quick profit, but inhibiting any future value growth for

the property.

No concept for layout and circulation planning leading to inefficient designs. Max out the leasable space allowed by local zoning without regard for demand,

leading to excess space, especially on higher floors.

Lack of proper market analysis and due diligence during the design phase often leadto the wrong product and tenant mix.

Interestingly, the average size of retail projects in Tier 1 and Tier 2 cities reflects the lack of

proper planning. The average size of both shopping malls and department stores tend to be

significantly larger in Tier 2 cities where demand is arguably much lower. By contrast, Hong

Kong has only six projects larger than 100,000 sq m, and they were phased developments.

Overbuilding often results in the developers eagerness to maximize floor area without

taking actual demand into consideration. The lack of sophistication and local knowledge that

are often associated with both local and foreign investors has led to numerous failed

projects. With the exception of a handful of players, the majority of developers continue to

build assets without the proper planning.


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Enhanced Welfare Gains for Consumers India

On average in 2004, Indian consumers spent about 51 percent of their total expenditures on

food; in rural areas, that figure was about 55 percent and in urban areas it was 42 percent

according to the National Sample Survey (Planning Commission 2004). Although India has a

large rising middle class, its income levels are much lower than those in developed

countries. Most Indians are very price sensitive. Any pressure on prices, especially for food,

gets the immediate attention of policymakers. For example, the onion crisis in the summer

of 1998 paved the way for the exit of the ruling government at that time (Desai 1999). In

2007, inflation crossed the 6 percent mark, triggering a series of inflation-controlling policy

changes spearheaded by food price controls. The lesson seems clear: any relief in food

prices makes consumers happy.

However, policymakers need to remember that policies to rein in inflation should not

conflict with the interests of other major stakeholders in the economy, especially producers

(farmers). If falling prices for food are achieved by making transportation, logistics, and

procurement more efficient (e.g., by better planning), then both producers and consumers

benefit. However, reducing consumer prices by suppressing prices for producers could lead

to a conflict, and policymakers would have to make difficult policy choices. The emergence

of organized retail undoubtedly gives consumers a wider choice of goods, more

convenience, and a better shopping environment, among other benefits. This is feasible

because organized retail can take several formats, from small neighbourhood stores in

densely populated cities with high real estate prices to large air-conditioned malls in the

periphery where real estate is cheaper.

Organized retail can appear small but spread in all local markets, providing the convenienceof a neighbourhood kirana store but with procurement on a mass scale that keeps prices

low and provides greater variety. This is confirmed by the consumer survey in the ICRIER

report (Joseph et al. 2008) and the experiences of countries like the United States, Chile,

and Mexico. With a reasonably long history of organized retail, the United States has shown

that many organized retailers have been able to hold retail prices down, especially for mass-

consumption goods. Fishman (2006) shows that retailers like Wal-Mart have held the U.S.

inflation rate down by at least 1 percentage point (normal inflation hovers around 24

percent). The success of such retailers to hold the price line comes largely from their

efficient national and global sourcing and scale economies. In India, given a very large price-

sensitive population, holding the price line for a large mass of consumers could be a greatboon to consumer welfare. However, that boon is not likely to happen overnight.

Organized retailers tend to start off from first-tier cities with high purchasing power and

then go to second- and third-tier cities with more price sensitive populations. Several chains

in India have started in cities like Hyderabad and Ba

Impact of FDI in Retail on Urban and Semi-Urban Concumers

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