The Great Indian Bazaar Secure
Transcript of The Great Indian Bazaar Secure
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Retail Practice
The Great Indian BazaarOrganised Retail Comes of Age in India
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August 2008
McKinsey & Company, Inc.
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The Great Indian BazaarOrganised Retail Comes of Age in India
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Preface 5
Introduction 7
1. The Indian Retail Market: Emerging, Accessible but Surprisingly
Competitive 11
2. Indian Shoppers: Evolving in Step with the World, in Their Own Time 25
3. Retail Economics: Innovation at Every Step 43
4. A Call to Action: Emerging Priorities for Retailers and the Industry 71
Contents3
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Header5
The Indian retail market has attracted much interest in recent times. The market
is large and growing, and traditional mom and pop stores are modernising
themselves even as almost every Indian business house is exploring the retail
opportunity.
Yet, questions about the profitability of the sector remain unanswered. We feel
this is the right time to discuss what it takes to grow and to make money in
Indias retail market.
This report is the product of a year-long research project to gain a perspective
on this market by McKinsey & Companys Consumer and Retail practice in India
with support from colleagues in other emerging markets.
Kartik Sheth, an Engagement Manager based in our Mumbai office, led the
work. The knowledge effort was initially managed by Pooja Haldea and Archana
Jagannathan, both from our Mumbai office, supported by Amrita Dhar, Arpana
Shahi, Suhail Sameer, Sarayu Natarajan (alumni) and Vikram Vaidyanathan, all
consultants in our India office.
Finally, this report would not have been possible without the support of our
partners from India and other offices across the world. We thank Pierre Avanzo,
Laxman Narasimhan and Subbu Narayanswamy, who refined our insights. Many
other colleagues across the firm also contributed their knowledge: Manuela
Artigas and Nicola Caliccio (Brazil), Wai-Chan Chan and Anne Tse, (alumni,
China); Sandrine DeVillard (France); Brian Salsberg (Japan); Arend Van Wamelan
(South Africa); Peter Child and Khiloni Westphely (the UK). We thank them all.
Peter Haden Ireena Vittal
Preface5
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IntroductionThese are exciting times for Indian retail.
With continued economic expansion and retail growth, India is set to become
a US$ 4501billion retail market by 2015, comparable in size to Italy (US$ 462
billion) and much larger than Brazil (US$ 258 billion) today. Whats more, India
is perhaps the last virgin BRIC2market for organised retailers. The game here
has just begun, with organised retail3 accounting for less than 5 per cent of
todays market and likely to expand to anywhere between 14 to 18 per cent by
2015. By that year, we expect that around 65 million households will patronise
organised retail, amounting to over 300 million shoppers, almost equivalent to
the population of the US today.
This retail revolution could do wonders for the Indian economy: creating over 1.6
million much needed new jobs in the next five years, raising overall economic
productivity and, perhaps most importantly, lowering prices for shoppers as has
been the case in most economies across the world (Exhibit).
7
1 All figures in this report are at 2007 prices and exchange rates.
2 Brazil, Russia, India, China.
3 Organised retail has been defined as a network of similarly branded stores with an element of self-service.
THE GROWTH OF ORGANISED RETAIL WILL HAVE MANY BENEFITS
FOR INDIA
Would raise factor productivity and growth by 30-40%
Would add US$ 3-5 billion in GDP growth over five yearsHigher sectorproductivity
Could lower consumer prices by 3-5%
Could absorb 0.3-0.5% of total inflationLower prices forconsumers
Should reduce waste through supply chain pipes
Could increase farmer income by 20-30%Efficiency
Could improve tax contribution by up to 1% of retail sales or
Rs. 3,000 croreIncreased tax
contribution ofretail
Would create 1.6 million formal jobs in retailing alone
Would add 2-3 times as many new jobs in supporting systemsMore formalemployment
Exhibit
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But how much of this Indian retail story is for real? What are Indian shoppers really
looking for? What model should retailers adopt to make money in a market where
talent and real estate are currently in short supply?
McKinsey & Companys Retail practice in India has spent the last two years studying
these questions, working with its clients and comparing Indias retail market
evolution with that of other emerging markets. This report summarises our latest
perspective. Its insights are based on three distinct sources (Exhibits 1 and 2):
1. How Half the World Shops, the first-ever quantitative global research on
shoppers across the BRIC markets, contrasted with shoppers in the US and
France to understand the differences. This is a proprietary survey of 10,000
shoppers across Brazil, Russia, India, China, and South Africa conducted over
the last two years. As part of this survey, we conducted home audits, joined
shoppers on trips to stores, pored over shopper diaries and led qualitative
and quantitative surveys across six emerging markets. In each of these
markets, we covered all the relevant income segments in tier I, II and III towns
and included both shoppers and influencers. In each, we assessed broad
attitudes to shopping and conducted in-depth analyses of shopping for food,
apparel and electronics.
2. The Bird of Gold: The Rise of Indias Consumer Market.We also built on insights
on income evolution and category consumption from proprietary research by
the McKinsey Global Institute in India and China. This report is a combination
Exhibit 2
THREE SOURCES OF INSIGHT
First ever quantitative global research on shopper behaviour andattitudes
6,000 BRIC shoppers; 2,800 South African shoppers; 1,700
US/French shoppers
Focus group/home audits/shopper diaries
The Bird of Gold : The Rise of Indias Consumer Market First-ever
comprehensive research segmenting consumer demand in India
Data from NCAER*, UN, the Reserve Bank of India, OxfordEconomics
Insights from in-depth client studies across countries
China
Thailand
Brazil
US
* National Council of Applied Economic Research, India
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of two disciplines: economics and management. By integrating these two
perspectives, MGI gained insights into the microeconomic underpinnings
of the broad trends shaping the global economy. As a result, the report
provides business leaders and policy makers with a fact base and insights
into one of the most important trends in the world economy over the next two
decadesthe integration of well over a billion new consumers from emerging
economies into the global marketplace.
3. Finally, we created detailed case studies of the evolution of organised retail in
several developing countries such as Brazil, Russia, India, China, South Africa,
Mexico, and mature ones in North America and Europe. We also reviewed
industry structure and conduct in these markets, paying special attention to
the performance of winning and struggling retailers.
This report is organised into four sections.
Chapter 1:The Indian Retail Market: Emerging, Accessible but Surprisingly
Competitive
Chapter 2:Indian Shoppers: Evolving in Step with the World, in Their Own Time
Chapter 3:Retail Economics: Innovation at Every Step
Chapter 4:A Call to Action: Emerging Priorities for Retailers and the Industry
A final word: Our perspectives on retailing in India extend from luxury to lifestyle
to value retailing across urban and rural markets. This report, however, refers
primarily to customers with the largest potentialin the large urban middle-class
or what we call the belly of the market, including nuances of their purchases in
key categories including grocery and food, apparel and electronics.
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1. The Indian Retail Market:Emerging, Accessible butSurprisingly Competitive
It is early days in the evolution of organised retail in India, but things are changing
fast. The market is growing exponentially, as economic growth lifts more of
Indias people into the consuming classes and organised retail lures more and
more existing shoppers into its open doors.
As stated earlier, by 2015, India is likely to be a US$ 450 billion retail market.
Over 300 million shoppers are likely to patronise organised retail, a five-fold
growth up to 2015, accounting for anywhere between 14 and 18 per cent of total
retail (Exhibit 1.1). The share of organised estimate is always a source of
huge debate. Our assessment of market potential assumes organised retail will
emerge where a critical mass of shoppers exist, purchasing the three largest
categories todayfood, apparel and electronics. We do not factor in any major
constraints such as diminishing real estate supply or discontinuous growth
through franchising of existing mom and pop stores.
11
BY 2015, ORGANISED RETAIL WILL HAVE A 14-18% SHARE
OF TOTAL RETAIL
US$ billion
Size of organised retail in India
4-5
7
CAGR30-35%
2007
65-80
2015
14-18
Share of
organised retail
Per cent
Exhibit 1.1
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But what will characterise this fast growing market? As is often the case with
India, every assertion and its opposite is true. The market is large but basket
sizes are small. Shoppers will embrace foreign and westernised brands but are
unlikely to let go of traditional categories any time soon. Organised retail will
expand rapidly but mom and pop stores will also hold their sway.
Dealing with these seeming contradictions wont be easy; many of the existing
players as well as new entrants will struggle to survive. A useful point of departure
is: who will be the relevant shoppers, those likely to be the customers of
organised retail?
POTENTIAL SEGMENTS FOR ORGANISED RETAIL WILL GROW FIVE-FOLD BY
2015
India has about 200 million households today. In an emerging market such
as this, income remains the most critical driver of consumption. In an earlier
McKinsey & Company report, The Bird of Gold: The Rise of the Indias Consumer
Market, we identified five distinct consumer segments1 (Exhibit 1.2), ranging
from around 1 million global households earning over US$ 22,000 a year in
2006 to about 100 million deprived households barely surviving on an annual
income of less than US$ 2,000 (the box Indian consumers fall into five groups
1 Chapter 2 of this report describes shopping behaviour in the various segments.
Exhibit 1.2
Total households HH retail spend
US$/HH
Globals>US$ 22,000
StriversUS$ 11,000-22,000
SeekersUS$ 4,000-11,000
AspirersUS$ 2,000-4,000
Deprived
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INDIAN CONSUMERS FALL INTO FIVE GROUPS
Indian households can be classified into five economic groups based on real
annual disposable income:
Globals: Enjoying an annual disposable income of over Rs. 1 million per
annum, households in this group comprise the richest people in the country
and can afford a global lifestyle. The group has traditionally consisted of senior
corporate executives, large business owners, politicians, big agricultural-land
owners and top-tier professionals. It now also includes a younger, upwardly
mobile sectionmid-level executives and graduates from Indias best colleges
who are offered the highest salaries in the country.
Strivers:With an annual disposable income of Rs. 500,000 to Rs. 1 million
per household, this group consists of highly successful people in cities,
towns, and villages who have established sources of income and substantial
savings. It includes businesspeople, professionals, government officials, and
medium-scale industrialists.
Seekers:Households in this group have an annual disposable income of Rs.
200,000 to Rs. 500,000 per household. By far the most varied economic
group in terms of employment, attitude, age, and other variables, this
group includes those fresh out of college as well as traditional white-collar
employees, mid-level government officials, and medium-scale traders and
businesspeople.
Aspirers: With an annual disposable income of Rs. 90,000 to Rs. 200,000
per household, this group includes small shopkeepers and farmers, and low-
skilled workers in industries and services. People in this group spend about
half of their income on basic necessities.
Deprived: This group consists of the poorest households in the country with
an annual disposable income of less than Rs. 90,000 per household, making
ends meet through unskilled or low-skilled activities. People falling in this
economic group often find it hard to find work throughout the year and have to
rely on seasonal or part-time employment.
Source: The Bird of Gold: The Rise of Indias Consumer Market, McKinsey Global
Institute, May 2007
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provides a brief description of each segment). The top three segmentsglobals,
strivers and seekers, comprising 14 million households in 2006, are existing
and potential shoppers for organised retail.
Our extensive study of consumption segments in India shows that only the top
three have the income, attitude and confidence to patronise organised retail
today, as described below:
Only the top 14 million households have the income to spend on categories
beyond the basic (food, housing, education, utilities and transport).
Members of these income groups are increasingly experimenting with new
categories (even in food) and consumption occasions as they become
richer and more comfortable with new shopping formats. The top 1 million
households, the globals, could be shoppers in any city in the world: they are
demanding, they know what they want, and they spend on many categories
including vacations abroad, branded apparel and new food service offers.
The next 13 million seeker and striver households are still experimenting
with new formats and categories but are eager consumers nevertheless.
Already, they spend only 15 to 20 per cent of their incomes on food (much
lower than the all-India average of 42 per cent). And today, over 50 per cent
of their retail spending is on categories other than food. Since penetration of
these segments is still low in most categories, they clearly have many years
of consumption growth ahead of them.
The 91 million aspirer households are just starting to buy more than the
basics but are still not comfortable with organised retail.The aspirer segment
is the market of tomorrow. Currently, its members do spend on categories
beyond the basics, primarily on special occasions, and increasingly sample
all the categories that better-off households do. Doing so is their signal
that they have arrived. However our work in India reveals that organised
retailwith its air conditioned stores, security guards at the entrance, and
uniformed staffintimidates them. As increasing incomes allow them to
browse and shop, and they get more familiar with these formats, they will
enter and buy. For now, they will walk around malls but not enter the stores.
The bottom 101 million households are focused on necessities. Indians in
this category are still spending a disproportionate amount on the basics of
life. Many of them are living under the countrys official definition of poverty
(consuming 2,400 calories per capita a day in rural areas, 2,100 in urban
areas). They spend as much as 60 per cent of their incomes on food. Other
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basics such as housing, health, education, utilities and transport take away
another 18 per cent. This leaves them very little for other categories. They are
unlikely to be users of organised retail at least in the next 5 to 10 years.
If living costs increase and GDP growth slows, the threshold of income of
households entering modern retail will change. But the impact at worst will be to
slow the pace of growth by a matter of months.
For India, these times could be called magical. Over the next 10 years, the relative
sizes of consumption segments will change substantially (Exhibit 1.3). Sustained
income growth with inflation under control will lift consumption among a massive
number of households over the next decade (Exhibit 1.4), as it did in China
between 2001 and 2004. The largest part of the growth will be among seekers,
with the number of households in this segment growing from 11 million in 2006
to 55 million in 2015. This group will lead the move towards organised retail. In
addition, the richest shopper segment, the globals, will also grow, from 1 million
to 3 million households, creating a market for lifestyle productsas is happening
in China today. The boom in luxury products though, is yet to happen.2
For retailers, the thing to note is that the shoppers they are attracting today are
going to be outnumbered by the new shoppers of tomorrow. They need to find
ways to retain the early shoppers, who will be the bigger spenders tomorrow
2 The rest of this report focuses on value and lifestyle retail, not luxury retail.
Exhibit 1.3
Household incomebracket
StriversUS$ 11,000-22,000
SeekersUS$ 4,000-11,000
AspirersUS$ 2,000-4,000
Globals>US$ 22,000
Deprived
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and core to a formats success. But they also need to manage how they are
perceived by the relatively less well-off shoppers of tomorrow. Retailers who
welcome them early and hook them through a better understanding of their
needs will enjoy the riches to come.
So what do these shoppers look for? What is the shopping basket currently and
how will it change?
BASKET SIZE IS SMALL AND LIKELY TO REMAIN SO, UNLESS CONSUMPTION
IS SHAPED ACTIVELY
As organised retail grows in India, the country will remain a market of millions of
small transactions. Today, the shopping basket of those frequenting hypermarkets
in India amounts to US$ 7 to US$ 10 a trip, very small compared to US$ 40 to
US$ 45 in the US and about half of the Chinese bill size (estimated at betweenUS$ 10 to US$ 18). While basket size will increase, it is likely to remain small for
some time to come since organised retail is still in the early stages of growth.
There are vast implications of the small basket size. At the very least, the small
basket size suggests that it will take twice as many customers as in China and
four times as many customers as in the US to achieve the same sales density
in India. That most stores in India are currently a fourth to a sixth the size
of those in developed markets, (with similar demand peaks on the weekend)
indicates the extent of the retail operations challenge. The result is visible in
Exhibit 1.4
CHANGE IN THE UNDERLYING INCOME CURVE WILL DRIVE GROWTH
Number of consuming HH growing at fastest rate . . . . . . similar to the Chinese evolution
1985
1995
2005
2015
2025
-5
0
5
10
15
20
25
30
35
0 10 0 2 00 3 00 4 00 5 00 6 00 7 00 8 00 9 00 10 00
Annual household disposable income
thousand, Indian rupees, 2000
Distribution of household income
% of households
2001mean
2006mean
Thresholdmiddleclass
22,000 28,000 33,000
39 million
households
in 2004
17 million
households
in 2001
Annual urban household income distribution
RMB
Source: MGI; IGD Global Retailing conference
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stores today. The best stores look packed, with long check-out lines. Clearly
operational efficiency, e.g., at check out, and sound asset utilisation are critical
from day one.
But that is not all. Our work also suggests that shaping consumption will be
critical to driving growth in this market. For example, it is evident that some of
the more successful stores today are the victims of their own success, becoming
saturated at 8,000 to 12,000 customers per day. Without expanding their sizes,
to ensure healthy store growth these retailers will find it essential to shape their
customers consumption. This can be done in two ways: creating new peaks
apart from the weekend and offering more categories to increase basket size.
They will also need to consider what kind of customers they would like to convert
into their core franchise.
Building a sustainable model will therefore require that retailers think carefully
about who their target shoppers are, what these shoppers want and how to
service them efficiently. Just as importantly, retailers must know how to reach
this soon-to-be massive number of Indian shoppers.
THE MARKET IS GEOGRAPHICALLY CONCENTRATED
Perhaps it will be good news for retailers that the Indian market is surprisingly
concentrated and is likely to remain so. But they must also note the corollary:
while this concentration makes it easier to reach shoppers, it also creates
intense competition in specific parts of the country.
The first question to consider is where do the targeted Indian shoppers live?
Urban India accounts for 30 per cent of the countrys total population but
currently accounts for 64 per cent of its consumption. The number of urban
dwellers will remain high even in 2015, when consuming households are likely
to have grown five-fold, as stated before. Rural India has lots of individually rich
shoppers, but they are widely dispersed and hence difficult to reach.
Whats more, the market within urban India is further concentrated: 39 per cent
of Indias buying power is in the eight large tier I cities (Exhibit 1.5 and 1.6).
The concentration is even greater in luxury retailing. Recent McKinsey research
shows that just five neighbourhoods in Mumbai and Delhi and one in a town in
Punjab account for 65 per cent of potential luxury customers in India.3But as
3 Its important to note here that this degree of concentration by no means suggests that
organised retail in India makes sense only in these 34 cities. There could be equally valid retail
strategies aimed at tier III and IV towns or even rural India. This report however is restricted
to large-scale strategies to build presence first where the major consuming segments arelocated. We believe that unconventional or niche strategies might create significant value but
will clearly require a very different business model.
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incomes increase over the next five to 10 years, buying power will spread to an
additional 26 tier II cities.
One model of retailing suggests that perhaps organised retail is likely to focus
on these 34 cities, which account for over half of todays spending and most of
Exhibit 1.6
BUYING POWER IS CONCENTRATED IN 8 TIER-I CITIES TODAYESTIMATES
Share of urban income
Per cent; 2001
39
14
9
39
Number of cities*
Tier I
Tier II
Tier III
Tier IV
26
33
8
5,094 towns
* Classification based on population. Tier I >4 million, Tier II 1-4 million, Tier III 0.5-1 million, Tier IV rest of urban centres
Source: Census of India 2001; NCAER The Great Indian Middle Class; MGI
Exhibit 1.5
CLASSIFICATION OF CITIES AND TOWNS
Mumbai
Kolkata, Delhi,
Chennai
Bangalore
Hyderabad
Ahmedabad, Pune
Surat, Kanpur, Nagpur, Lucknow,
Jaipur, Kochi, Vadodara, Indore,Ludhiana, Madurai, Bhopal, Patna,
Nasik, Agra, Varanasi, Rajkot, Meerut,
Jabalpur, Dhanbad, Kozhikode . . .
Tiruchirapalli, Amritsar, Faridabad, Aurangabad,Allahabad Gwalior, Jodhpur, Raipur, Bhubaneshwar,
Goa, Pondicherry Aligarh, Moradabad, Mangalore,
Gorakhpur, Bhavnagar
Rohtak, Rourkela, Udaipur, Anand, Faizabad, Hassan,Shimla, Roorkee, Gurgaon, Shillong
Tier I: Majorcities
Tier II: Mainstream cities
Tier III: Climbers
Tier IV: Small towns
26 cities
Population >1 million
33 citiesPopulation >500,000
8 cities
Population > 4 million
Total income >100 billion Indian rupees
5,094 towns
Note: Population for each city estimated using the average urban household size (from MGI model) and the estimated number of households
in each city from NCAER (in the year 2001).
Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute
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Indias economic growth. In this respect, India will be similar to China, where the
key economic centres of Beijing, Shanghai and Guangzhou produced the first
shoppers for organised retail, followed by the next 29 tier II cities, which enjoyed
a second wave of economic growth to emerge as major retail centres between2000 and 2007 (Exhibit 1.7). Today over 1,000 cities in China can support a
hypermarket compared to under 200 cities in India today.
Knowing where the high-potential shoppers are located is only the first step in
the game. Just as importantly, retailers need to think about how their priorities
will change over the coming years as Indian shoppers and competition in the
industry evolve.
HETEROGENEOUS EVOLUTION IS LIKELY
The early focus of organised retailers in India has been on acquiring sites to
open doors and attract customers, both critical factors in building a business
from scratch. Differentiation has been less crucial at this nascent stage, as
supply creates demand and an attractive price proposition and convenient
location have been sufficient to attract shoppers. Indeed, every day, more new
players announce their entry.
But we believe several of these entrants will struggle in the next phase of retail
evolution, as the rules for winning change dramatically and suddenly. We would
Exhibit 1.7
EXPECTED GEOGRAPHIC SPREAD OF RETAIL IN INDIA IS SIMILAR
TO CHINAS
WAVE 1 First phase of
retail action (in the mid-90s)
Key cities: Beijing,Shanghai and Guangzhou
WAVE 2 Second phase(2000-2007)
Tier II: 29 capital andprefecture cities
WAVE 3 From 2007
Tier III: 251 urban areas
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not be surprised if many of these initial adventurers do not survive the next
stage of evolution in India. This has been the case in several other sectors that
developed in the last 15 years in India (whether airlines or telecommunication)
and also in the retail sector in China, which is about 10 years ahead of India in
its evolution (Exhibit 1.8).
Our work with retailers in China confirms that the country has reached the
exploratory stage, especially in the top urban centres. In these markets,
winners are those who can retain customers (not just acquire them), offer a
differentiated proposition vs. other players (not just open a store) and increase
operational efficiency as scale becomes material. Shoppers are now used to
basic benefits (such as attractive prices and convenient location) and are looking
for more. Winners will reinvent themselves and deliver clear benefits. Others are
as likely to consolidate as have players in other sectors.
Importantly, moving from phase 1 to 2 is a matter of competitive intensity and
not time or the buying power of the city. Hence in cities such as Bangalore and
Hyderabad, early signs of phase 2 are evident as real estate availability has
allowed new formats to develop. On the other hand, cities like Delhi and Mumbai
are still in phase 1 despite the high buying power of their residents. In Bangalore
Exhibit 1.8
EARLY DAYS FOR ORGANISED RETAIL
Dominance of
mom and pop
stores
First few
organised local
retailers appear
Large-scale
innovation in
formats and
value
propositions by
local retailers First few global
retailers enter
Global
retailers start
acquiring
3-4 winning
local retailers
survive and
flourish
Multiple global
retailers in thetop 10
Organised
retails
share of
total
market
3-5% 5-30% 30-80% >80%
India BrazilChina Singapore
Time from fragmented stage
5-15 years 10-25 years > 25 years
Phase 1
Fragmented
Phase 2
Exploratory
Phase 3
Consolidated
Phase 4
Mature
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and Hyderabad, organised retail already has a concentrated presence with an
estimated share of 18 to 24 per cent or four to five times the all-India share.
The impact is visible in the performance of many stores and the search for
differentiation has already started.
Phases 3 and 4 of the retail evolution are still some distance away. With a
25-year history of organised retail, Brazil resembles the consolidated market
of phase 3. Well-established retailers hold 60 to 80 per cent4of the total retail
market. Mergers and acquisitions have been frequent, and shopper segments
are increasingly thinly sliced, with distinct formats catering to each. The basis
of competition has moved from mere presence and efficiency to innovation and
then increased customer lock-in.
What does all this mean for retail in India? First, it is likely to have a small
share and face intense competition. Second, organised retail will grow alongside
traditional retail, not usurp it.
Small but growing share for organised retail, with pockets of intense
competition
As more players try to build initial positions in India, the competitive landscape
will become crowded, especially in some catchments and cities. With few
entry barriers, there will be many more entrantslocal and, depending on howregulations evolve, global. It is quite likely that, even with a 14 to 18 per cent
overall share nationally, organised retail will feature catchments with intense
competition quite early in the game. In Hyderabad, for instance, one catchment
already has over 10 hypermarkets, six convenience stores and hundreds of
traditional mom and pop stores fighting for a share of the wallets of its newly
affluent shoppers. This is also true for some areas in Bangalore.
Second, price and location will soon lose their power and winners will need to
swiftly differentiate themselvesbe famous for something (Exhibit 1.9). Till
now just opening stores was enough to generate footfalls and retailers were
catering to all consumer segmentsthey were everything to everyone. Now
retailers will be forced to make choices about the segment to target and then
tailor their delivery to cater to this segment. However, it will be important for
them to differentiate themselves only to the extent that they remain attractive
to a large enough customer segment and hence viable.
4 Organised retail in Brazil includes a large informal sector that qualifies as organised.
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Finally, this evolution will happen sooner than expected. As weve said above, in
the more developed markets, differentiation is already a prerequisite.
Mom and pop stores will survive
Diverging from popular belief, we see that mom and pop stores will retain their
hold in India even as organised retail evolves.
Both will grow alongside, as has happened in China (Exhibit 1.10). Shopper
attitudes, existing regulations and a cost advantage over organised retail will
preserve the popularity and viability of traditional retail. The street vendor
and neighbourhood store (kirana store) benefit not just from Indians habit of
buying fresh food often, making convenient location a must. They also gain from
their sagacity in offering credit and home delivery. These stores have for long
maintained accounts for households, waiving payment till the end of the month
and sending goods to the door, at just a phoned-in request. Kirana stores also
enjoy lower operating costs and higher asset turns. Further, organised packaged
goods players have recognised them as a sweet spot and are working closely
with them to improve in-store experience and service.
True, this cost advantage could diminish as organised retailers start to leverage
their scale to negotiate better with their suppliers. However, the biggest
challenges to traditional stores sustainability will not be competition but the
opportunity cost of the real estate they are occupying and the willingness of the
next generation to continue in this business.
Exhibit 1.9
ORGANISED RETAILERS WILL NEED TO BE FAMOUS FOR
SOMETHING
Price promotions and
discounts
Lowest prices everyday
Convenient location in high
street/mall
Convenient in-store layout
Mix of private label and high-
end brands across categories
and price points
Distinctive fashion to drive
footfall
Price
Experience
Convenience Authority/Range
Service
Fun family experience
Comfortable and safe environment
Attentive and knowledgeable staff
Products available when required
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Despite these two challenges, we are already seeing the Indian entrepreneurial
spirit at work at several kirana stores, ensuring their survival even if in a new
form. Adaptations include:
1. Becoming specialist stores: we see more chemist, food and lifestyle/beauty
stores.
2. Switching to exclusive brand outlets (from multi-brand ones): many are
evolving their relationships with brand owners.
3. Providing new services suited to their location and size advantage. For
instance, some convenience stores are following their counterparts elsewhere
in the world; internationally, some convenience stores make 50 per cent of
their profits by selling mobile telecom, travelling and ticketing services. In
India, the largest telecom player sells about 70 per cent of its pre-paid air time
through a large network of over 750,000 mom and pop stores.
This holds a clue for organised retailers: find out what fast-evolving Indians are
buying and how and discover how best to adapt to or shape this behaviour. The
next chapter describes the evolving attitudes of Indian shoppers, what shopping
baskets hold today and how their composition is likely to change in the coming
years.
Exhibit 1.10
EMPHASIS ON CONVENIENCE FAVOURS CONTINUED GROWTH
IN MOM & POP STORES, AS SEEN IN CHINATotal retail sales revenue; US$ billion
42%
58
2001
Organised
Mom & Pop
.
CAGR
23
5
Per cent
21% growth in
traditional
retail over 4
years
30058
500
42
2005
42
Per cent
Source: MGI; Euromonitor; Planet Retail; trade interviews; McKinsey analysis
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2. Indian Shoppers: Evolving in Stepwith the World, in Their Own Time
Organised retail will grow in India as retailers establish positions and start
shaping this market. But how well they do so will depend on their understanding
of Indian shoppers and what will make them shift their buying behaviour. So
far the hustle and bustle of bazaars, the home delivery and cottage industry
credit of the local grocer and the bargaining pleasure of mom and pop stores
have been attractive enough. What will attract shoppers in large numbers to
organised retail? And what will they buy when they get there?
To answer this question, we studied Indian shoppers in two ways: one, obtaining
a category view of their spending and how it is changing as they get richer; two,
getting a holistic view of their attitudes and behaviour as shoppers comparedwith their peers in other markets (see box Decoding the Indian shopper). Our
extensive study showed that:
Indian shoppers have some similarities to their peers in other markets, but
have also been shaped by a unique context and history and therefore differ
in ways that are important for retailers to understand.
Indians are experimenting with several categories as incomes rise. Non-food
categories, particularly apparel and electronics, are leading the shift to
organised retail.
25
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DECODING THE INDIAN SHOPPER
We used two different approaches to understand Indian shoppers. One,to obtain a category view of spending and how it is changing as incomes
rise, we used insights from our study of consumption in India, as reported
in The Bird of Gold: The Rise of the Indias Consumer Market, and from
the extensive work we have done in specific retail categories, both for
retailers and branded manufacturers.
Two, we built a more holistic view of the attitudes and behaviours of Indian
shoppers by comparing them with shoppers in other emerging markets,
including China, India, South Africa, Russia and Brazil. We called this effort
How Half the World Shops.1 Our hypothesis was that these shoppers
differ from those in mature retail markets and, as their incomes rise, they
will continue to show different shopping habits and preferences. Using
multiple techniques, from kitchen and wardrobe audits to shopping trips
with individuals, from qualitative and quantitative analysis to online survey,
we compared behaviour across emerging markets. Next, we compared
our findings with similar research among US and French shoppers. This
led us to a powerful set of insights on their overall shopping habits and
a detailed understanding of food, apparel and electronics, as presented
in this chapter.
INDIAN SHOPPERS DIFFER IN KEY WAYS FROM THOSE IN OTHER MARKETS
BUT ARE NOT DIFFICULT TO UNDERSTAND
Indian shoppers seem bewildering in their diversity and unique preferences. A
global luxury retailer is delighted that its first store in a luxury hotel in India broke
even in an incredibly short time. But a local lifestyle retailer bemoans the fact
that its store economics do not work on a high street like Connaught Place in
Delhi. Similarly, Indian shoppers will wait for the seasonal sales to buy branded
shirts, but are also buying more top-end mobile phones than shoppers in theUK are today.
Do these paradoxes indicate that the Indian shopper is intrinsically difficult to
understand? We believe not. As we conducted our research, we were conscious
of two lessons from our work with some of the most successful early entrants into
organised retail. One, it is not wise to think in terms of averages when catering to
Indian shoppers. Segments are as far apart from each other as can be imagined,
1 The first-ever quantitative global research on shopper behaviour and attitudes by
McKinsey & Company, covering 6,000 BRIC shoppers and 2,000 US and French shoppersusing focus groups, home audits and shopper diaries.
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in income, spending across categories and adoption of categories. The global
Indians are as different in their outlook and behaviour from the aspirers they live
close to as they are from shoppers in Singapore and Moscow.
Two, its better toshape not predictthe behaviour of Indian shoppers. The bulk
are new to organised retail and their attitudes and preferences are evolving so
fast that what is a buying factor today is taken for granted tomorrow. A recent
attitudinal survey we conducted revealed that almost half of Indian shoppers do
not have clear preferences as they are either frustrated with what is available to
them or are not served by modern retail and dont care. As a result many of the
attitudinal segments we see in other markets are yet to be seen in India. The
segments are clearly to be seen in Brazil, the US and France, and are starting to
emerge in China. But in India shoppers are still quite undifferentiated, whether
its the rich, the young or shoppers in metros. Again, this is a sign that it is early
days for organised retail in India.
We have assessed Indians shopping attitudes as a snapshot restricted to 13
million seeker and striver households, falling in the middle of the consumption
classes described in chapter 1. To avoid the trap of averaging, we have left
out the 1 million global households (who shop differently) and the shopping
behaviour of the 91 million aspirer households (whom we view as the shoppers
of tomorrow). We studied these shoppers across six cities in India and compared
them with 8,000 of their counterparts in Brazil, Russia, China, South Africa, the
US and France.
The resulting photograph is revealing, although we recognise that it captures
an Indian shopper who is evolving very fast. It shows that some Indian shopping
habits are universal, i.e., they are more or less the same as those in the rest of
the world, some are similar to those of other BRIC shoppers but different from
those in more mature retail markets, and some are unique.
Some shopping habits are universal
Indian shoppers are very much the same as their global counterparts in four
critical attitudes. First, they will not travel for more than 15 minutes for regular
shopping (for food and other standard purchases). Second, they like to see the
best brands, even if they are not yet ready to buy them. Third, they want to be
able to choose from a range of products. Fourth, they need to check prices
within and across stores. Let us look at two of these attitudes more closely:
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Shoppers follow a 15-minute rule.Shoppers do not travel long distances for
regular shopping. All those covered in our study, including Indian shoppers,
follow the 15-minute rule (Exhibit 2.1). In our survey, 64 per cent of respondents
said shopping locations should be within 15 minutes of travel from home, as did
fairly similar numbers in China (69 per cent) and France (70 per cent). In India,
this travel distance was defined as the journey time by autorickshaw2, in China
as a journey by bus or bicycle and in the US as a journey by car.
Exceptions are made only for high-value categories such as apparel, electronics
or jewellery and festive or wedding purchases. On these occasions, Indian
shoppers are willing to go across town or even to other cities (e.g., Kanchipuram
to buy saris for a South Indian bride).
Clearly, one implication of this is that traditional formats in convenient locations
are here to stay. Second, locations within neighbourhoods will be coveted and
real estate pricing for these locations will continue to remain strong. Finally, for
locations outside neighbourhoods and eventually in suburbs, which are likely to
see massive real estate investment, retailers will need to innovate to meet the
15-minute rule. One example of such innovation is by retailers in China, who
organise buses to take shoppers to stores outside their neighbourhood and who
are now developing tailored suburb formats especially those within townships
being built from new.
2 Motorised three-wheeled vehicle.
MOST SHOPPERS SURVEYED FOLLOW THE 15-MINUTE RULE
6469697074
78
Brazil US France China Russia India
Convenience is a must globally
% of people travelling less than 15 minutes
Measure and
forecast
catchment
density
Watch for
transport/
infrastructure
evolution
Key
Implications
although mode of 15-min travel differs
Auto rickshaw
Walking Bicycling Driving
.
Source: How Half the World Shops (2006)
Exhibit 2.1
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Shoppers are highly value and price conscious.Shoppers choose stores they
perceive as offering value. This is especially critical in emerging markets, where
shoppers often believe that retailers increase prices to recover store rentals
and overhead costs such as air conditioning and security. To find out which
stores price right and which at a premium, shoppers regularly compare
prices. Our research showed that price checking is common across markets.
An equivalent number of Indian and US shoppers (39 per cent) reported this
behaviour, exceeded only by French shoppers (43 per cent).
How it is done is fairly simple. Indian shoppers use Key Value Items (KVIs)
to quickly check if the store is pricing at a premium or otherwise, but their
list of items is small3.4 in India versus 6.4 in Brazil (Exhibit 2.2). For daily
purchases, they usually check a few unbranded items including (local) rice,
pulses and wheat flour and a few branded products that vary across regions in
India3and include a malted beverage, a tea or coffee brand and a soap brand.
Prices are checked for other categories as well. For jewellery, the price of a
plain gold chain helps assess price, while for electronics the price of a colour
television or a 165-litre refrigerator meets the same purpose. Interestingly, this
behaviour is of a milder degree than in other countries. As can be expected, this
complexity is increasing as more competitors enter and organised retail begins
to play a bigger role in shoppers lives.
3 It is notable that the list was equally small but slightly different for the aspirers segment ofIndian shoppers. They checked prices for cooking oil, sugar and wheat.
Exhibit 2.2
INDIAN SHOPPERS CHECK FOR PRICES, BUT IN LESS STORES AND
FOR FEWER PRODUCTS
I often check prices between stores
Per cent agree/strongly agree
Average
number of
stores
checked 2.7 2.4 1.9 2.4 2.6 2.7
20
33373939
43
France India US Brazil Russia China
Typical reference products differ by
income
Strivers, seekers: Rice, pulses, flour
Aspirers: Wheat, sugar, oil
Average number of products checked in a visit: 3.4 in India vs. 6.4 in Brazil
Source: How Half the World Shops (2006)
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A clear implication for retailers is that they need to pay careful attention to the
pricing of these KVIs. We also observe the critical importance of range in setting
price perceptions. While these are early days for private label in India, several
retailers are experimenting with larger ranges that include exclusive and private
label brands which are proving popular with cash-constrained consumers.
Cheaper alternatives to mainstream brands (in the form of B brands or private
label products) are likely to grow within organised retail as they have in both
BRIC and developed markets.
Notably, our research also showed that not all retailers are getting value for their
pricing. For example, retailers pricing low across the whole range but not getting
KVIs and their entry price points right can be perceived as higher priced. We will
discuss this further in the next chapter.
Some Indian shopping attitudes are like those of other BRIC shoppers (although
different from shoppers in developed retail markets)
As with their counterparts in Brazil, Russia and China, the Indian shoppers
covered in our survey enjoy shopping, distrust retailers, want to see top brands,
treat quality and safety as a major decision factor, shop frequently for fresh food
and are highly open to credit. The most notable of these tendencies are their
attitude to shopping as an activity, to fresh products and to credit.
Love for shopping.About two-thirds of shoppers surveyed in India and about 40
per cent of those surveyed in China said that shopping is a favourite leisure activity
for the family (Exhibit 2.3). This is in marked contrast to the mature shopping
markets such as the US and France, where it is considered a chore. Indians
(and Chinese) see shopping as family entertainment, spending hours together in
a mall or a store. For many of them it is a window to the world, filled with the
excitement and pleasure of discovering new things and a new way of living.
This has important implications for retailers. First, this is an opportunity to
create exciting retail formats that help retain this attitude to shopping. Clearly,as the Indian market and retail networks grow, retailers need to ensure that
the magic of the front-end does not diminish as they look for efficiency at the
back-end.
Second, retailers need to be able to design their layout and operations to
cope with many shoppers who are essentially browsing or window shopping
for pleasure. It is critical not to drive these shoppers away as they will shortly
become bigger spenders when their incomes rise. But managing the implication
for basket size and store footfall is an intriguing challenge.
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Preference for fresh.Indian and other BRIC shoppers place a high premium on
freshness. Over 70 per cent of shoppers surveyed in all BRIC countries prefer
fresh products. Equally importantly, over 40 per cent shop for fresh food every
day, with the Chinese shopping even more frequently. The Brazilians and Russians
surveyed shop for fresh food every day of the week while Indians do so six days a
week; the Chinese reported 11 shopping trips a week for fresh food (Exhibit 2.4).
Fresh categories bought include fruits and vegetables as well as meat.
DESIRE FOR FRESH PRODUCTS DRIVES SHOPPING FREQUENCY
Shopping
trips/week
7
7
6
11
Brazil
Russia
India
China
Source: How Half the World Shops (2006)
ILLUSTRATIVE
Mom & pop store visit Modern retail visit
Exhibit 2.4
14
2223
33
41
63
India China Brazil US Russia France
SHOPPING IS THE WINDOW TO THE WORLD
Shopping is one of my favourite leisure activities
Per cent agree/strongly agree
We go for
pleasure -
its an
excuse to
go out
If its a
large
supermarket
we will stay
at least 3
hours.
Shopper
Quotes
Source: How Half the World Shops (2006)
Exhibit 2.3
DESIRE FOR FRESH PRODUCTS DRIVES SHOPPING FREQUENCY
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This preference for fresh products has a lot to do with cooking styles, availability
and trust in retailers. Brazilian, Indian and Chinese shoppers usually cook fresh
food at home every day, most of the time from scratch, using fresh ingredients.
This makes freshness very important. Second, they are used to having fresh
produce at hand throughout the year (It is only in Russia that winter brings a
lack of fresh products.) In India, in addition to the habits of hot cooked food,
low refrigerator penetration and poor power stability have further contributed to
this attitude.
But what connotes fresh in India is different from other markets. In India, fresh
implies unpacked fruits and vegetables and meat freshly cut from a butcher. In
China, fresh connotes live seafood while in South Africa, it has to be packed or
frozen to be considered fresh! This makes it critical to understand the preference
for fresh food and how it will evolve.
What does this mean for retailers? For one thing, Indian shoppers will buy only a
small share of fresh food from organised retail. This is so in China where, even
after a decade of organised retail, less than 10 per cent of fresh produce and
an even smaller per cent of meat are sold by organised retailers. According to a
recent study by Neilsen, shoppers in Wuhan (a tier I town in China), make about
21 shopping trips a month to wet markets, about 10 a month to traditional
retail stores, and less than 20 to all other organised retail formats including
supermarkets, hypermarkets and department stores (Exhibit 2.5). This has
prompted some notable innovations. Even global retailers have added a live
market feel for these categories in their stores, with live snake and fish displays
and a wet floor that makes fresh produce shoppers feel at ease.
Distrust of retailers.In general, BRIC shoppers do not trust retailers much. Over
60 per cent of shoppers in Brazil and Russia and 25 per cent in China said they
do not trust their retailers. But the highest distrust is found in India, where 67
per cent reported lack of trust in retailers. Indian shoppers expect the retailers
they use most frequently to try to cheat them on prices in a small way (in fact,
some shoppers told us that they prefer shopping at a store where they know the
storeholder personally, because he is likely to cheat them the least).
Building trust quickly with modern shoppers is therefore critical for organised
retailers, particularly in the prices they charge. Our research suggests that
exposure to modern formats such as hypermarkets will help. However, given the
strong suspicion among most shoppers today, how retailers gain trust will be a
key differentiator in the retail market of tomorrow. The good news is that this
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can be done through simple mechanisms, e.g., price and quality guarantees that
can build trust among Indian shoppers. We have seen some emerging market
retailers use this as a way to win the loyalty of core customers.
Openness to credit.Shoppers in BRIC countries are very open to credit but not
all find it easily available. While a third of shoppers surveyed in India agreed
that they would like to have credit for shopping, only 7 per cent said they use it
regularly (Exhibit 2.6). The young in India seem even more open to credit than
older shoppers: 45 per cent of surveyed shoppers aged 25 years and below said
they would like to have credit, compared to 30 per cent aged 25 to 34 and 28
per cent aged 35 and above. In Brazil, close to two-thirds of surveyed shoppers
said they were open to credit and over two-thirds reported using it. This is easy
to believe as retailers have led the retail financing revolution in Brazil. Indeed,
retailers in apparel, electronics and furniture have innovated to lock in shoppers
through credit. In India, a similar revolution is imminent as most financing till
now has been geared to serve the salaried employee. This is surprising in a
country where, of the 400 million working citizens, only 13 million are salaried
employees with unorganised labour and the self-employed (117 million) and
farmers (270 million) making up the rest. A consumer finance company aiming
to finance consumption for non-salaried households has met with remarkable
success, entering over 100 cities in India in under two years.
IN CHINA TOO, FRESH PRODUCTS ARE BOUGHT MAINLY
IN WET MARKETS
Source: Nielsen Shopper trends 2004
Trade sector, average number of visits per month: Wuhan example
0.600.660.931.121.391.50
5.33
7.50
10.84
21.72
Online
shopping
Personal
care
Confect-
ionery
shops
Wholesale
market
Traditional
grocery
Super-
market
Super-
market in
depart-
ment
stores
Depart-
mental
stores
Hyper-
market
Wet
markets
Ref: Q6
Exhibit 2.5
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Uniquely Indian shopping habits
In at least six respects, Indian shopping behaviour is quite different from that of
shoppers elsewhere in the world. Our survey revealed that Indians are currently
the most promiscuous in their shopping between stores, dislike pre-packaged
goods, are willing to pay for service and convenience, favour ethnicity in womens
apparel and jewellery, are very occasion-oriented in their purchases and use
brands as proxies.
Least loyal to stores.While Indian shoppers clearly enjoy shopping, they are also
much less loyal to a single retailer. Indeed, over 60 per cent of Indian shoppers
covered in our survey say they buy at more than one retailer compared to 10 per
cent of Brazilian and 24 per cent of Chinese shoppers. This is likely to change as
stores get bigger and offer more range, shopping baskets grow and Indians get
more used to shopping for many items at once. But for now, retailers will need
to find a way to create loyal shoppers among the current flirters.
Dislike for pre-packaged fresh.As mentioned earlier, pre-packaged implies a
lack of freshness for Indians. What is startling is the extent of this attitude.
As many as 65 per cent of Indians surveyed said they would never buy pre-
packaged fruits or vegetables. In contrast, just 24 per cent of Chinese and 6
per cent of Americans surveyed have this preference. The attitude is common
in India across income categories, age groups and types of cities. Notably, it is
SURVEYED SHOPPERS ARE EXTREMELY OPEN TO CREDIT BUT FIND
IT HARD TO COME BY
The young are even more open to credit
Age groups
Openness
Usage
Openness to credit versus usage
Per cent agree/strongly agree
58
20
25
60
18
30
18
31
40
65
9
7
Highly open to credit but constrained by availability
28
30
45Less than 25
25-34
35 and above
Per cent agree/strongly agree
Source: How Half the World Shops (2006)
Exhibit 2.6
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less entrenched for meat, poultry and seafood: 41 per cent of Indians surveyed
dislike pre-packaged products in these categories.
Convenience and service matter. Travel is difficult and expensive in India.
We have seen shoppers costing a store visit with the approximate savings
expected from additional travel. As a result, as many as 64 per cent of Indians
covered in our survey say they are willing to pay a little more for conveniently
located stores compared to just 31 per cent of Chinese and 19 per cent of US
shoppers surveyed. Services such as home delivery are common, with even
hypermarkets providing home delivery. Additionally, in electronics, 65 per cent of
Indian shoppers surveyed said that they were willing to pay for good after-sales
service and for product warranties.
Ethnic apparel and accessories.Ethnicity remains the dominant preference in
womens apparel and jewellery in India. Today, more than 75 per cent of womens
apparel sold in India is ethnic in style and the majority of jewellery sold (85 per
cent) is traditional in design. This is driven by a strong local culture and heritage
in apparel and accessories, combined with a social ethos rooted in arranged
marriages. This social context is reflected in the fact that apparel purchases
for occasions such as weddings or festivals account for nearly 37 per cent of
shopping trips in these categories.
But this does not imply this behaviour will last forever. With over 350 million
Indian citizens below the age of 18 and another 350 million between 18 to
40 years of age, how long will ethnicity rule? We believe that two contradictory
forces are at work.One, the traditional importance of ethnic styles might get
stronger as pride in being Indian increasesleading perhaps to hybrid fashion
trends, currently termed as fusion-wear. Two, the Indian wardrobe will get more
varied as Indian shoppers get richer and start buying different clothes for party,
formal and sports wear. These categories might be less ethnic in nature, even
though the ethnic styling will not disappear.
Occasion-oriented shopping.Indian shopping especially in categories such as
apparel is heavily oriented towards special occasions such as weddings and
festivals. Thirty-eight per cent of Indians claim that special occasions drive
most apparel purchases, compared to 6 per cent of Chinese and 3 percent of
Russians. This attitude again cuts across income groups and cities.
Brands as proxies.In the absence of adequate information, quality control and
trust in retailers, Indians use brands as a proxy for all these. In apparel, brands
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serve as a proxy for the latest fashion as well as the right quality. In food and
grocery, Indians seem to be willing to live with a little less. For example, in
shampoos, 57 per cent of shoppers surveyed said that buying a well-known
brand is important while as many as 49 per cent were willing to buy lesser
known brands. The only exception to this is electronics, where as many as 85
per cent of shoppers stated that they always want a well known brand. The
risk of a high-cost purchase is mitigated through the trust offered by a reputed
brand.
Clearly, not thinking in terms of averages provides a more accurate assessment
of how Indian shoppers think and how they are likely to evolve. The key is to keep
refreshing these insights as these shoppers are evolving very rapidly.
In view of these shopping habits and preferences, what products are Indians
buying now and which are they likely to favour in the future?
INDIANS ARE STILL SPENDING MAINLY ON BASIC GOODS AND SERVICES
BUT THIS IS CHANGING RAPIDLY
For retailers in India there are two big questions: What will Indian shoppers buy?
How much of this will they buy from organised retail? The answer to both will be
determined by income increases as the economy grows and the actions of retailers
(and brand manufacturers) in shaping consumption. Our study shows that:
The consumption basket in India is changing and will be very different across
income segments
Popular categories will reflect current preferences unique to India
Non-food products will lead the shift to organised retail, especially in apparel
and electronics. However, organised food will be the largest category in
absolute terms, although with a much smaller share of total food spend.
Consumption in India is changing significantly and will differ across income
segments
Today, household income primarily determines the retail categories Indian
shoppers buy. With incomes still relatively low for the vast majority, food forms
the bulk of purchases, although apparel and electronics have also become
popular categories. But as incomes rise, people will have more money to spend
on things other than food, even while the absolute spend on food is likely to
double at a per capita level (Exhibit 2.7).
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Today, the amount of discretionary spending by consumers varies widely by
income segment, driven both by affordability and openness to new categories.
The differences can be extreme. Our research identified a five-fold difference in
the per capita spend on apparel between different categories even within the
top income segments (Exhibit 2.8). Clearly, not all shoppers are equally valuable
to retailers.
Exhibit 2.7
Food, beverages, and tobacco
Apparel
Housing and utilities
Household products
Personal products and services
Transportation
Communications
Health care
Education and recreation
56
42
34
25
5
6
5
5
14
12
12
10
8
9
11
11
17
19
20
6
6
9
7 913
4
15
3
34100%
2025F
248
3
2015F
60
1995
2
2
82
2005E
3
140
3
Share of average household consumption
%, thousand, Indian rupees, 2000
SHARE OF WALLET IN INDIA IS SHIFTING FROM FOOD TO MORE
DISCRETIONARY SPENDING
Non-food spending
Food spend
Note: Figures are rounded to the nearest integer and may not add up to 100%.
Source: McKinsey Global Institute
EVEN WITHIN THE TOP INCOME SEGMENTS, THERE IS A FIVE-FOLD
DIFFERENCE IN PER CAPITA SPENDING ON APPAREL
Rs per capita per year, apparel spend
300
780
22,250Globals
9,200Strivers
4,400Seekers
Deprived
Aspirers
2008 2013
350
950
24,750
10,500
5,0005X
Market for
modern retail
Source: McKinsey Global Institute 2007; How Half the World Shops 2006
Exhibit 2.8
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While income is a primary driver of consumer choices, a key insight from our
research is that the average household does sample most categories and the
width and depth of category consumption is increasing as Indian households
get richer.
For the (near) future, retailers should remember that Indian shoppers are now
sampling different categories very early in their shopping histories. Shopping for
a new category or a premium brand can celebrate the ability to indulge or signal
increased status. This is true of shoppers in Brazil, India and China. So a shopper
in a favela or a slum in Rio De Janiero buys only limited types of processed
foods but buys the best brands within them as these are her little indulgences
in life. A shopper in a Mumbai slum buys foreign brands as a way of signalling
that she can afford these things. For weddings, many shoppers in India will buy
branded His and Her watches for the bride and groom, ensuring that over 40
per cent of that brands sales are now linked to the wedding season.
Retailers need to catch these customers early, and shape their buying behaviour
as the leaders in the telecom and financial services industries in India have
done over the past three years.
Popular categories will reflect current preferences unique to India
Our detailed study of total category spending by Indian shoppers reveals amarket structure that is uniquely Indian, with fresh food, apparel and electronics
emerging as key categories for organised retail (Exhibit 2.9). This is based on a
category (and sub-category) assessment of the market in India as well as drivers
of growth in the future. Our current estimates suggest the following:
Food:Given the preference for fresh products and the relative lack of concern
about top brands among Indians, fresh, staples and basics will remain the
largest segment in total food consumption.
Apparel: India is the only market in the world where mens apparelaround
40 per cent of spendingis a much larger category than womensaround 30
per cent (Exhibit 2.10). This of course does not include the huge spending on
jewellery in India. Also, in womens wear, ethnic apparel (salwar kameez and the
saree) constitute around 90 per cent of total spending.
Mens apparel will likely continue to account for 40 to 50 per cent of the apparel
market in 2015. At current rates of adoption, non-ethnic apparel for women is
likely to comprise less than 10 per cent of the market in 2015.
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Electronics:Mobile phones are likely to have a disproportionate share of the
market, accounting for 40 per cent of sales in 2015. Indeed, more homes will
have mobile phones than television sets in India. Home electronics will come
a close second, with a 38 per cent share. This is partly driven by demographic
INDIAS APPAREL MARKET IS DOMINATED BY MENS WEAR
Apparel market size and growth rate by demographic and occasion-based categories
US$ billions, per cent, 2005
0.7
5.8
Mens wear
1.3
4.6
1.4
0.4
4.6
Unisex**
0.4
1.5
Womens wear
0.4
2.5
1.70.6
6.37.2
Kids wear
Other*
Casuals
Formals(includingethnic)
100%=
00-05CAGR
Revenue
9% 12% 10%8%
0.5
* Includes innerwear, nightwear, jackets, socks etc.** Unisex formals: wollens, unisex casuals: jeans, unisex other: scarves, ties etc.
Source: Images Fashion report 2006
Exhibit 2.10
Exhibit 2.9
FRESH FOOD, ETHNIC APPAREL AND MOBILE ELECTRONICS WILL BEKEY CATEGORIES FOR ORGANISED RETAIL
~30% share of fresh fruits, vegetables andperishables
38
Fruits,
vegetables &
perishables
38
Staples
25
FMCG
& foods
Food, 2015
Per cent share of consumption
100% = US$ 252 bn
One of the only marketswhere mens apparel ismuch larger than womens
Womens ethnic is 3x non-ethnic
20
9
26
45
Mens
wear
Womens
ethnic
Womens
non-ethnic
Children
and
infants
Apparel, 2015
Per cent share of consumption
100% = US$ 40 bn
Disproportionate share oftelecom/mobile phones
40
Tele-
com
38
Home
electronics
15
Consumer
durables3
Personal
electronics
Electronics, 2015
Per cent share of consumption
100% = US$ 20-25 bn
Source: McKinsey analysi s
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trends. The vast majority of young Indians live with their parents and so already
have access to many consumer electronic products such as TVs and DVD players,
whereas a phone remains an individual purchase and a statement of arrival. It
also reflects the tougher choices consumers make when their spending power
is limited.
Non-food categories will lead the shift to organised retail
Our study also shows that a smaller share of spending on food will switch to organised
retail while that on non-food categories will switch a lot faster (Exhibit 2.11).
Food:In food retail, we believe that price and convenience will be key factors of
success. We expect that organised food retail will amount to only 5 to 15 per cent
of total food retail by 2015, limited by its inability to match kirana (convenience)
stores in providing fresh goods on a daily basis, offer home delivery and be
located close to home. Packaged food will do much better, with organised retail
accounting for as much as 20 to 30 per cent of total retail in the sector by
2015. The categorys advantage will be an ability to offer prices lower than the
maximum retail price and to create private labels. In some of the top 10 cities
where real estate is available, share of organised retail in food could be as high
as 20 to 30 per cent as seen already in Bangalore, Hyderabad and Chennai.
Exhibit 2.11
0
5
10
15
20
25
30
35
40
45
50
55
Food and grocery
ApparelElectronics
Jewellery
Watches
Footwear
GM
Share oforganised retail
0
5
10
15
20
25
30
35
40
45
50
55
Food and grocery
ApparelElectronics
Jewellery
Watches
Footwear
GM*
Share oforganised retail
NON-FOOD CATEGORIES WILL LEAD THE SHIFT TO ORGANISED RETAIL
2015average
Share of wallet (overall)
HighLow
Per centOrganised
retail size in 2015
2005
average
* General merchandise: includes home utility categories such as cutlery, cleaning products and buckets
Source: McKinsey analysis
Organised
retail size in 2005
GM*
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Apparel:Price and authority/range will be crucial in apparel retail, where organised
retail is likely to account for 20 to 30 per cent of total garment retail in 2015.
Since shopping is occasion-oriented, convenience is not as important. Retailers
will need to create their own occasions to drive consumption and build core
franchises. Knowledge about fashion cycles and quality must be built. Offering
markdowns in a controlled way will likely be a key driver of price perception, as
will broadening the range through expanded use of private labels.
Electronics:Already fairly organised in India, the electronics market is likely to
see 40 to 50 per cent of sales through organised retail in 2015. Large format
retailers will use electronics as a loss leader and to increase basket size.
Price will be even more important than other categories given the high levels
of involvement. Shoppers surveyed exhibited a desire for better shopping
ambiencefrom good lighting and cleanliness in stores to range and brand
availability as well as credit and after-sales service. All of this will offer organised
retailers a chance to win by providing a premium look and feel in their stores.
Shoppers do trust in sales peoples advice but, overall, trust in local stores
is low. Half the surveyed shoppers said they find it difficult to find the right
products. Organised retail should be able to fill these gaps.
Some product categories such as furniture are largely sold through carpenter
orders and are as yet an insignificant par t of retail. These categories could move
directly to organised retail. In fact, players will attract more and more shoppers
towards organised retail as they address the current deficiencies of Indian retail.
But their job will not be done until they know how to turn these volumes into
profits, the subject of the next chapter.
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3. Retail Economics: Innovation atEvery Step
As we have seen, India is an exciting high-growth market with millions of new
consumers whose behaviour is being shaped every day. But retailers cannot only
grow volumes; they must also make money. The graveyards of several emerging
markets (and even markets such as Korea and Japan) are filled with retailers
who could not build a profitable business.
Talk to anyone about retail in India and, after the enthusiasm about the retail
opportunity, the discussion quickly moves to how making money is difficult
in Indian retail. Several factors are responsible: sky-high rentals, increasing
talent retention costs, stretched supplier financing, rising operating costs and
pressure on prices (except for food). Many existing players are suffering from
poor profitability and we expect to see some changing ownership, especially
once regulation allows foreign players to enter.
This is before real competition has emerged. As competitive intensity increases,
retailers will have to live with an annual 1 to 2 per cent price squeeze each year.
So can retailers make money in India? We believe they can. We do see successful
retailers in India, who have built winning formats for this country. But successful
formats from developed countries may not suffice here. Profitable retailers will
innovate both on earn and turns of the retail ROCE tree.1We believe winning
retailers will offer a compelling format to shoppers. This might require that they
evolve their formats more quickly than they have done in other markets. Early
evidence suggests that the life of a format in India is much shorter than the
usual five to seven years in developed markets, and that winners will have to
redesign formats frequently to keep pace with the fast-evolving shopper. This is
not new. We have seen similar innovations and tailoring in other sectors in India.
We believe the winners in India will be those who recognise that making profits
will require a different approach since this is a market of millions of small
transactions and rapidly evolving customers, whose spending across categories
43
1 Return on Capital Employed; the ROCE tree framework disaggregates retail performance onvarious indicators of profitability.
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is different from that of shoppers elsewhere and whose shopping habits vary
across clusters. Also, cost drivers in India may differ since it is early days of retail
evolution here. Models imported as is from other countries will not work in India.
Why is this level of tailoring required in India? The answer lies in the evolution
of various drivers of profitability here. The rest of this chapter discusses five
of these drivers and the likely imperatives for retailers in India. Assuming such
mechanisms are in place, we suggest five ways that will help retailers create a
profitable operating model:
Integrating real estate into the business model
Creating an effective and scalable supply chain
Increasing basket size by shaping consumption
Developing and retaining talent
Influencing regulation to ensure healthy development of the sector.
INTEGRATING REAL ESTATE INTO THE BUSINESS MODEL
As in retail anywhere in the world, rentals are one of the highest costs. That
they are much higher than expected is no surprise in a country where the realestate sector has just started to become organised. Today rentals as a share of
costs are twice as high as elsewhere. This situation will ease but high rentals
will remain a reality in highly desirable locations.
Retailers face two separate real estate challenges in India. The first is securing
retail space in Indias top-10 cities, where competition is high and focused
on a limited number of sites; rents here have already reached international
benchmarks. The second is in finding a viable business model for the remaining
200 cities (of the total 5,400 cities or towns), where land is available at low
rents but sales density is even lower.
Real estate players in turn face two retail challenges. The first is stabilising
rentals which tend to be riskier than in commercial development, depending
on location in the mall and success with shoppers. Secondly, successful malls
add a lot of value to surrounding real estate whether retail, commercial or
residential, creating the need to find successful anchor tenants that can help
drive footfalls and monetise the remaining real estate. While this effect is not
unique to India, the quantum of it is.
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Integrating real estate into the retail business model therefore creates huge
value in either business.
Securing space in the top 10 cities
Demand for retail space is high in Indias top-10 cities, which are currently the
focus of retail development. Unfortunately, restrictive land-use regulation, a lack
of effective city planning, and high demand for other forms of real estate (such
as commercial office space) have led to limited supply of retail space in many
of these cities. This combination of high demand and low supply has raised
rents both in absolute terms and as a percentage of costs and they are now
comparable to the worlds highest (Exhibit 3.1).
From the point of view of the developer, real estate parcels are small in these
dense cities, leaving little room for monetisation through a strong retail offering.
The ability to charge rentals varies drastically by floor and store location. Lastly,
malls take time to mature and even then risk being upstaged by the newest
mall on the block. Hence mall development is seen as riskier as compared
to commercial office and residential space, which translates into higher
expectations of retail rentals than of commercial and residential development.
Retailers hence end up paying high rentals which may not be sustainable as
RENTALS ARE VERY HIGH IN ABSOLUTE TERMS AND AS APERCENTAGE OF SALES
High street locations
in top cities
626
244
63
277
739
748
945
2,344Tokyo (Ginza)
2,188Hong Kong
(Causeway Bay)
1,500New York**
Singapore
(Orchard Road)
Taipei(Zhongxiao Road)
Shanghai
(Nanjing Road West)
Beijing
(Wangfujing)
Manila
(Makati CBD)
Jakarta
(CBD)
Bangkok
(Pratumwan)
Absolute retail lease rentals
Rs per sq.ft. per month; 2007
Delhi*
1,200
Indian retailer
Rent as per cent of sales (for top cities)
Per cent
1-5
5-10
Hypermarkets
10-12
15-30
Specialty retailer
International retailer
* Khan Market, Delhi
** SOHO-Upper Westside
Source:Real estate expert interviews, Cushman & Wakefield; LoopNet, CB Richard Ellis Asian Retail Property Review (200 6)
Exhibit 3.1
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illustrated in our projections for a Mumbai-based hypermarket (Exhibit 3.2).
Actual cases could differ from this illustration of store economics.
Compounding this problem is the uneven quality of mall space available. Malls
in India have suffered from a lack of clear positioning, and from unplannedtenant-mix and adjacencies. Variable design and low-quality construction have
further reduced their attractiveness. Since builders, not real estate developers,
have constructed most malls, mall management has often been haphazard, with
builders selling parts of the mall early or handing over its management to a third
party. These problems should ease over time as Indian developers learn from
their mistakes and as malls are managed better.
Retailers in India suffer from very high real estate costs, ranging from 5 to 12
per cent of sales compared with 1 to 5 per cent for an international hypermarket
retailer. For a specialist retailer, real estate costs range from an estimated 15to 30 per cent of sales compared with 10 to 12 per cent for a similar retailer in
other markets. In Delhis prime Khan Market area, for example, rentals in 2007
were Rs. 1,200 per square foot per monthnot much less than those in New
Yorks Soho or Upper West Side areas (Rs. 1,500 per square foot per month).
Rentals in prime locations in these cities will be high in the foreseeable future,
and will prove to be the biggest cost for retailers in the top cities.
Do such high prices pose a structural problem or are they merely a short-term
demand-supply gap? A bit of both, we believe. While India did start off with
a rather peculiar situation of very limited supply, retail space will increase as
RETAILERS MAY FIND IT DIFFICULT TO SUSTAIN HIGH RENTALS
ILLUSTRATIVE
2007 2015 conservative 2015 best-case
5,000
700
50