Retail IndustryAmit RaiAnkit SuranaAnish PandeyAbhishek TiwariAnubhav Srivastava

Retail Industry*

Evolution of Indian Retail IndustryBarter system was known as the first form of RetailFollowed by Kirana Stores and Mom & Pop StoresFinally Manufacturing era necessitated the small stores and specialty storesIt was a sellers market till this point of time with limited number of brands available1980s experienced slow change as India began to open up economy. The latter half of the 1990s saw a fresh wave of entrants with a shift from Manufactures to Pure Retailers. Post 1995 onwards saw an emergence of shopping centersEmergence of hyper and super markets trying to provide customer with 3 Vs - Value, Variety and Volume Expanding target consumer segment

Overview*

Industry Description Indian retail Industry is Fifth largest in the world.

The current penetration pegged at 5-7 per cent.

Accounts for 24% of countrys GDP and 8% of the total employment.

Food is the largest segment in terms of its.*

Tax Impacts and Regulatory Environment The retail sector has not been conferred an industry status till now. Hence, there are no specific rules and regulations governing the sector. However, there are certain laws pertaining to the establishment of stores and conduct of activities, which retailers need to follow:The Shop and Establishments ActThe Standards of Weights and Measures Act The Provisions of the Contract Labor(Regulations and Abolition) Act The Income Tax ActThe Customs ActThe Companies Act

In addition to the above law: Retail companies have to follow certain regional rules and regulations on the basis of their stores location; different states have different laws to regulate the retail trade.

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Tax ImpactsPresently, there are multiple indirect taxes:

Customs dutyCentral Value Added Tax (CENVAT)Service taxCentral Sales Tax (CST)State value added taxCentral value added taxEntry tax

GST implementation :-In order to integrate all of these taxes into a single unified tax system and bring about broad-based reforms in the indirect tax regime, the government of India has envisaged The introduction of a uniform Goods and Services Tax (GST) across the country.

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Regulatory EnvironmentFDI Policy with regard to Retailing in India: FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route. FDI up to 100 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products. India allowed FDI of up to 51% in multi-brand sector. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores, up from previous cap of 51%. The retailers (both single and multi-brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers.

Regulatory Environment Contd..Multi-brand retailers must bring minimum investment of US$ 100 million. Half of this must be invested in back-end infrastructure facilities such as cold chains, refrigeration, transportation, packaging etc. to reduce post-harvest with 3 years of setup.Losses and provide remunerative prices to farmers.The opening of retail competition (policy) will be within parameters of state laws and regulations.Overseas companies must put half of their investment in infrastructure such as processing, manufacturing, storage, warehouses and packaging

Structure & Phase of The Industry

Retail formats in India:Hyper marts/supermarketsMom-and-pop storesDepartmental storesConvenience storesShopping mallsE-trailers Discount storesVendingSpecialty stores

StageThe retail Industry is still in its nascent stage of growth

The foreign direct investment (FDI) inflows in single-brand retail trading during April 2000 to June 2012 stood at US$ 42.70 million

Cash and carry represents an opportunity worth around Rs 8,250 billion (US$ 149.19 billion) of the Rs 27,500 billion (US$ 497.29 billion) annual retail business in India

India's e-retail industry is likely to touch Rs 7,000 crore (US$ 1.26 billion) by 2015, up from Rs 2,000 crore (US$ 361.66 million)

Focus on rural sector increasing

Size

The Indian retail market is currently estimated at USD 450 billion. Food segment contributes largest part of total value of retail market, followed by fashion, leisure & entertainment and fashion accessories. India's organized retail space is evolving fast and achieve penetration level of 7%, which signifies huge potential growth. Indian luxury market currently stands at USD 3.5 billion and expected to grow to make India the twelfth-largest luxury retail market in the world by 2016. Retail has become largest source of employment and has deep penetration into rural India. Retailing contributes to 22% of GDP and around 8% of the employment.

Retail Growth In IndiaOrganized Retail Growth In India

Key Success Factors for the industryEffective forecastingStrong balance sheetStock controlMarket positionProximity to marketCreating Systems In RetailHiring the Right EmployeesMarketingBuying The Right MerchandiseCustomer Service

Risks for Retail Sector

Low-growth consumer marketsRegulation and complianceInability to control costs/rising input pricesInability to benefit from e-commerceWrong price imageSupply chain disruptionsInability to penetrate emerging marketsFailure to respond to shifting consumer behaviorSourcingVolatility in commercial real estate markets

Opportunities for Retail SectorRising emerging market demand and rise of global middle classNew marketing channels and social mediaCompetitive differentiation via CSR and green brandingMultichannel approachDemographic changePrivate labelLaunching new products and services Global urbanization Competitive differentiation via local branding Enhancing efficiency in the supply chain

Porters Five Force Model

Threat of New EntrantsPower of Suppliers95% of the market is made up of small, uncomputerised family run stores.

The ability to establish favorable supply contracts, leases and be competitive is becoming virtually impossible.

The vertical structure and centralized buying gives chain stores a competitive advantage over independent retailers.

On the whole threat from new entrants in retail industry is high.

Historically, retailers have tried to exploit relationships with supplier.

In retail industry suppliers tend to have very little power.

Following examples explain the same.

Sears in 1970 set very high standards for quality; suppliers that did not meet these standards were dropped from the Sears line.

Walmart places strict control on its suppliers.

Power of BuyersAvailability of SubstitutesCustomers have comparatively high bargaining power in unorganized sector than in organized sector.

As the customer will demand products from organized units he will be more focused towards quality aspect

The tendency in retail is not to specialize in one good or service, but to deal in wide range of products and services.

What one store offers is likely to be same as that offered by another store.

The threat from substitutes is high.

Competitive RivalryRetailers always face stiff competition and must fight with each other for market share and also with unorganized sector.

They have tried to reduce cut throat pricing competition by offering frequent flier points, memberships and other special services to try and gain the customers loyalty.

Thus retailers give each other stiff but healthy competition which is evident from their aggressive marketing strategies and segment policies.

SWOT AnalysisStrengthsMajor contribution to GDP: the retail sector in India is hoveringaround 33-35% of GDP as compared to around 20% in USA.

High Growth Rate: High Potential: since the organized portion of retail sector is only 2-3%, thereby creating lot of potential for future players.

High Employment GeneratorLow Labor CostTechnology intensive industryRising disposable incomeUrbanizationShopping convenienceChanging consumer habits and lifestylesHigh availability of quality retail space

WeaknessPolicy related issues Lack of industry status for retail. Numerous license, permits and registration requirement.Limited consumer insight Lack of detailed region specific customer data.Lack of Skilled LaborTaxation hurdle Inconsistent octori, entry tax structure, vat and multiple taxation issues. large grey market presence.Underdeveloped supply chain Underdeveloped logistics infrastructure &absence of national cold chain networks.Lack of adequate utilities Lack of basic infrastructure like power, transport and communication.

OpportunitiesPotential for investment.Locational advantage.Sectors with high growth potential.Fastest growing formats.Rural retail.Create transparency in the systemHealthy Competition will be boosted and there will be a check on the prices (inflation)Intermediaries and mandi system will be evicted, hence directly benefiting the farmers and producersQuality Control and Control over Leakage and WastageHeavy flow of capital will help in building up the infrastructure for the growing population

ThreatsPolitical issues.Social issues.Inflation.NostalgiaLack of differentiation among the malls that are coming.Poor inventory turns and stock availability measures.Big players can knock-out competitionCurrent Independent Stores will be compelled to closeIndia does not need foreign retailersRemember East India Company it entered India as trader and then took over politically.The government hasnt able to build consensus.

Demand-Supply Dynamics, Demand TrendsThe global demand has been falling consistently due to crisis in US and Europe.

On the supply side, retailers are slowing down their expansion plans and many real estate developers are falling behind schedules in their shopping mall projects, considering the credit crunch.

However in Future Indian retail is expected to grow 25 per cent annually. Modern retail in India could be worth US$ 175-200 billion by 2016. The Food Retail Industry in India dominates the shopping basket. The Mobile phone Retail Industry in India is already a US$ 16.7 billion business, growing at over 20 per cent per year.

The Retail sector in the small towns and cities will increase by 50% to 60% pertaining to easy and inexpensive availability of land and demand among consumers.

Markets for the ProductsIndia has emerged as the fifth most favourable destination for international retailers.

Rural marketing through direct channel contributes about 23 per cent of the firm's total sales, which it expects to increase to more than 35 per cent in the next three years.

India's franchise market is growing at a healthy pace with tier II and tier III cities gradually getting attracted to the network of retailers and franchisers.

Indian apparel retailers are increasing their brand presence overseas in developed markets. While most have identified a gap in countries in West Asia and Africa, some majors also looking at US and Europe.

India will be a high potential market with accelerated retail growth of 15-20 per cent expected over the next five years according to a report.

Company NameNet Sales(Billion $)CountryWalmart$421,849.00 USACarrefour$120,297 FrenchTesco$94,185UKMetro AG$89,081 GermanThe Kroger Company$82,189 USASchwarz Unternehmens Treuhand KG$77,220.00 GermanCostco Wholesale$77,946 USAHome Depot$67,997 USATarget$67,390 USAAldi GmbH & Company oHG$58,000 German

Company NameNet Sales(Billion $)Pantaloon Ret0.79Shoppers Stop0.37Trent0.16Brandhouse0.14REI Six Ten0.11Provogue0.11Koutons Retail0.10Kewal Kiran0.05Cantabil Retail0.03Arunjyoti Enter0.01Prozone Capital0.00

Major PlayersSource Moneycontrol.comPantaloons Retail India Ltd. is market leader with 43% of the market share in terms of turnoverFollowed by Shoppers stop, Brandhouse, Trent, Provogue

Source Moneycontrol.com

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Market Share

Sheet1

NameMarket Share

Pantaloon Ret43%

Shoppers Stop18%

Brandhouse8%

Trent8%

Others12%

Provogue6%

Koutons Retail6%

To resize chart data range, drag lower right corner of range.

Pantaloon Ret

Shoppers Stop

Trent

Provogue

Brandhouse

Koutons Retail

Cost Structure

Profit Trend

ROCE

TrentThe Companys operations consist of Westside stores, Star Bazaar and Landmark stores. The Westside stores include a private label fashion apparel format. During fiscal year ended March 31, 2012 (fiscal 2012), 13 stores were opened, including the Bhopal (DB City Mall), Pune (Phoenix Market City), Mumbai (Infinity Mall), Varanasi (Dhanushree Complex ), New Delhi (Moments Mall), Mumbai (R-City Mall), Bilaspur (City Mall), Udaipur (Rkay Mall) and Bangalore (Orion Mall).The Star Bazaar is the discount hypermarket format. As of March 31, 2012, there were 15 operational stores (three in Mumbai (Andheri, Dahisar and Thane), four in Bangalore, two in Ahmedabad and Pune, one each in Aurangabad, Surat, Chennai and Kolhapur). The Landmark stores include the format retailing inter-alia books, music, toys and gaming, which are managed by a subsidiary of the Company, Landmark Limited.The company disclosed rise of 24.70% in standalone net profit on y-o-y basis to Rs 127.64 million, while total income rose 12.65% y-o-y basis to Rs 2.20 billion for the quarter ended June 2012.

Key Financials (Trent)

Period & months2012/032011/032010/032009/032008/03Net Operating Income8698.86861.55633.35117.35141.6Cost of Sales8827.36789.35479.15029.74958.6Reported PBDIT-128.572.2154.287.6183Other Recuring Income902.5695.8430.7259.742.9Adjusted PBDIT774768584.9347.3419Depreciation159.5136.3118.592.388.5Other Write-offs00000Adjusted PBIT614.5631.7466.4255330.5Finanical Expenses77.112395.143.342.9Adjusted PBT537.4508.7371.4211.7287.6Tax Charges100.7172.3105.730.747.4Adjusted PAT436.7336.5265.7181240.2Non-recurring Items-91.694.712266.185.6Other Non-cash Adjustments127.6-0.814.520.52.9REPORTED PAT472.7430.4402.2252.1325.8

Shoppers StopIncorporated as a private limited company on June 16, 1997The foundation was made by K Raheja CorpShopper's Stop Limited (SSL) is engaged in the business of retailing variety of household and consumer products and books through departmental stores. As of March 31, 2012, SSL operated through 51 departmental stores. As of March 31, 2012, it opened 13 departmental stores, which includes two stores in Chennai and Pune and one each at Indore, Vijayawada, New Delhi, Mysore, Latur, Ahmedabad, Mumbai, Bengaluru and Gurgaon. During the fiscal year ended March 31, 2012, the Company also opened seven HomeStop one each at Lucknow, Vijayawada, Pune, Bengaluru, Ahmedabad, Mumbai, hydrebad taking its tally to 11 stores. In May 2012, it opened Shoppers Stop store at Jalandhar.

Key Financials (Shoppers Stop)

Period & months2012/032011/032010/032009/032008/03Net Operating Income20,347.6019,290.0015,683.7013,275.1011,460.10Cost of Sales17,134.2016,264.9013,122.2011,478.709874.2Reported PBDIT3213.33025.22561.51796.41585.9Other Recuring Income186.990.843.279.51131.1Adjusted PBDIT3400.231162604.71875.91669.4Depreciation377.2310310.3631.3392.7Other Write-offs00000Adjusted PBIT302328062294.41244.61276.7Finanical Expenses2039.11668.31601.11556.41131.1Adjusted PBT983.91137.7693.4-311.8145.6Tax Charges335.5386.5211.358.962.8Adjusted PAT648.4751.2482.1-370.782.8Non-recurring Items-5.80.538.6-266.5-0.5Other Non-cash Adjustments00-18.40-12.7REPORTED PAT642.6751.8502.3-637.269.7

ProvogueProvogue (India) Limited (PIL) was incorporated on 17th November 1997 as Acme Clothing Private Limited.Divisions of the company include accessories, women's wear and men's wear.The EPS of company has dropped from 12.56 in 2012 to 2.17 currently.The sales and Net worth have also dropped significantly.PAT has come down to -25.08 crores from 17.85 crores from last year.The tactical marketing policies, aggressive promotional campaigns, and unique distribution techniques through malls, stores have helped Provogue grow to become a leader in the garments segment in India. This concept of being different has carved out a definite niche in the hearts of the buyers.Overall the outlook looks very strong and positive and is the best bet in the companies among retail.

Key Financials (Provogue)

Period & months2012/032011/032010/032009/032008/03Net Operating Income6095.95622.64806.73567.63361.4Cost of Sales54994921.64287.13211.62885.4Reported PBDIT596.9701519.6356476Other Recuring Income152.7151187.4231.7164.2Adjusted PBDIT749.6852707587.8565.5Depreciation118.1119.3122.895.181.1Other Write-offs00000Adjusted PBIT631.5732.7584.2492.7484.4Finanical Expenses322.1260.4199.5149.7164.2Adjusted PBT309.4472.3384.7343320.2Tax Charges45.885.6119.4109.563.5Adjusted PAT263.6386.8265.3233.5256.7Non-recurring Items-13.3-48.31360.17.5Other Non-cash Adjustments0-4.45.31-6.1REPORTED PAT250.3334.1283.5294.6259.7

Brand House RetailBrandhouse Retails was established as a pure play retail organization. As a company that caters to the entire spectrum of the socio-economic stratum in the Indian marketBHRLs retail expertise extends from mid-price to the lifestyle and luxury segment.HRL is amongst the leading fashion retailers in India. It currently manages the retailing of the following brands through exclusive brand outlets across India Reid & Taylor, Belmonte, Carmichael House and dunhill.A network of 784 company-operated and franchise stores across the country of approximately 8.93 lac sq ft. each one focus on garments, fashion accessories and home furnishings offering international & domestic brands.91 Cities, 784 Stores and 6.6 Sq. Ft of retail area covered.

Key Financials (Brand House Retail)

Period & months2012/032011/032010/032009/032008/03Net Operating Income7834.87374.56574.65523.53137.9Cost of Sales7286.56777.86010.25108.22833.8Reported PBDIT548.3596.6564.4415.3304.1Other Recurring Income0.92.722.90.638.8Adjusted PBDIT549.2599.4587.3415.9311.6Depreciation97.498.885.682.847.1Other Write-offs00000Adjusted PBIT451.8500.6501.7333.1264.5Finanical Expenses297.7283.1191.687.838.8Adjusted PBT154.1217.5310.1245.3225.8Tax Charges54.360.5113.810495.1Adjusted PAT99.7157196.4141.3130.7Non-recurring Items0-0.20.1-4.10.5Other Non-cash Adjustments-14.744.4-34.4-3.4-0.1REPORTED PAT85201.2162.1133.9131.1

Pantaloon Retail (India) LtdPantaloon Retail India Limited (PRIL), a retailer was incorporated in 12th October of the year 1987, headquartered in MumbaiCompany operates through primarily the Lifestyle' and Value' formats through multiple delivery mechanisms and lines of business, some of them being, fashion, food, general merchandise, home, leisure and entertainment, financial services, communications and wellness.The Company has stores in 51 cities across the country, constituting over 6 million square feet of retail space.Caters to the Lifestyle' segment through its 35 Pantaloons Stores and 5 Central Malls, as well as through 78 Big Bazaar hypermarkets, 113 Food Bazaars.In the year 1991, the company had launched BARE, the Indian jeans brand. Initial public offer (IPO) was made in May of the year 1992Multiple retail formats including Collection i, Furniture Bazaar, Shoe Factory, EZone, Depot and futurebazaar.com are launched across the nation in the year 2006

Key Financials (Pantaloon Retail (India) Ltd)

Financial Year Ending2012/062011/062010/062009/062008/06Net Sales4,326.794,840.965,630.217,026.815,941.22Cost of Sales3,966.224,385.834,953.656,346.095,449.77Reported PBDIT785.56455.13676.56680.72491.45PBDT486.99261.66375.52356.28279.01PBIT593.1308.76514.68540.67408.06PBT294.53115.29213.64216.23195.62PAT285.0576.67179.56140.58125.97

Future Prospects

Uncertain macroeconomic environment Prices of apparel also surged concomitantly with the increase in cotton prices and the levy of excise duty on branded apparelStore expansion to drive revenue growthRetail consumption growth to remain strongThe overall retail market is likely to grow at healthy compounded rate of 15 per cent from Rs 24 trillion in 2011-12 to Rs 47 trillion in 2016-17Organized retail penetration to cross 10% by 2016-17Food , Grocery & Beauty products to grow fasterSlower growth expected in books, home dcor, and consumer durables.Focus on reducing store-level operating expenses

Future Prospects Cont.

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