India’s Retail Market at Tipping Point?
All the signs are there but will it happen and when?
Issue: Sep 2011
Though the size of India's consumer market is hard to ignore, street scenes like this might show international fashion retailers that it might not be the right time to enter the market yet
Walking through the streets of India, you might not get the sense that it will be the next international retail mecca. Unlike the women of New York, London and Paris who look as if they've stepped out of the latest fashion magazines, the majority of women in India parade the streets in traditional saris, which though timeless, serves as an indication to many international fashion retailers that it might not yet be the right time to enter the market. Combine that with infrastructure challenges and regulatory barriers, and it is no wonder that India has been sitting on the verge of a retail boom for many years now. But when will it actually happen? Well supported by economic growth which averaged 8.4 per cent per annum over the past five years, India's retail market was estimated at US$380 billion in 2010 and is forecasted to more than double to US$785 billion by 2015. While this may appear significant, the size of India's consumer market pales in comparison to that of China's, whose retail market was valued at US$2.3 trillion in 2010. So why then do international retailers and foreign investors remain intoxicated over the promise of a retail revolution in India?
The Demographic Advantage
While majority of countries in the West, as well as in China, are faced with falling birthrates and a rapidly ageing population, India is at a demographic sweet spot. India is one of the fastest growing nations with a 10-year compounded average annual growth rate at 1.5 per cent (Figure 1). With a total population of
1.2 billion, India is roughly equal to the combined populations of the United States, Indonesia, Brazil, Russia, Japan, Mexico, Germany and France. The United Nations' projections suggest that India could overtake China to become the world's most populous nation by 2030. Furthermore, India is not only one of the largest countries in the world, it is also one of the youngest. With 30 per cent of its current population under the age of fifteen (as compared to 18 per cent in China), India is set to see a substantial group of new consumers coming on-stream in the next 10 to 15 years.
Figure 1: Average Population Growth Rate, India vs. Select Countries (2001-2011)
Source: OECD World Factbook 2010
Rising Income Levels to Drive Consumption Growth
Over the past decade, India's overall income levels have been rising steadily on the back of its strong economic growth.
Forum Value Mall, Bangalore is CapitaLand’s its first shopping mall in India
What is most remarkable is that the percentage of low-income households have halved while the number of high-income households have nearly tripled (Figure 2). Just in the past two years, the population of High Net Worth Individuals (HWNI) has grown by 51 per cent in 2009 and 21 per cent in 2010. According to McKinsey Global Institute, Indian incomes are set to triple over the next two decades. With such strong growth in income levels, we can expect household consumption to soar, thus paving the way for tremendous growth of India's retail industries.
Figure 2: Indian Income Levels (2000 vs. 2010)
Source: Images India Retail Report 2010
Organised Retail Still in its Infancy
India's retail market is also at a nascent stage of growth with organised retail (referring to large retailers and chain stores) accounting for only 5 per cent of its total retail market (Figure 3). This is exceptionally small when compared to more mature retail markets like US and Singapore with an organised retail penetration level of 85 per cent and 66 per cent respectively. Unorganised retail, which refers to mom-and-pop shops, currently makes up majority of India's retail market and is, hence, an integral part of shopping culture of consumers. However, the transition from unorganised to organised retailing is rapidly taking place. India's two largest cities, Mumbai and Delhi, will see a proliferation of new shopping centre supply of 13.4 million square feet in 2011-2012. This is not too far behind Beijing and Shanghai, which will see the addition of 17.9 million square feet over the same period. According to McKinsey Global institute, the share of organised retailing in India is expected to grow steadily and rise to between 14 per cent and 18 per cent by 2015.
Figure 3: Comparison, India vs. Select Countries (2010)
FDI Policy Reforms are Coming
Perhaps the largest catalyst of growth in the retail sector could be the relaxation of regulations on foreign direct investment (FDI) in retailing. FDI in retailing has been a political hot-button issue for many years since the government has attempted to limit overseas investments in order to protect the interests of home-grown mom-and-pop shops. At present, India's retail sector is largely closed with 51 per cent of FDI allowed in single-brand retail (ie. Nike Inc.), and 100 per cent in wholesale cash-and-carry formats (ie. B2B). But this may soon change. In July 2011, an Indian government panel cleared a long pending proposal to allow FDI into multi-brand retailing, marking an important step for the entry of multinational retailers such as Walmart, Carrefour and Tesco into India. This policy change means that foreign multi-brand retailers may start selling directly to Indian shoppers through local joint ventures where they will be allowed to own up to a 51 per cent stake, but under the proposed conditions that they invest a minimum of US$100 million in only establish operations in cities where the population exceeds one million. The proposal is currently under review by the Indian federal cabinet, though some analysts believe that the Indian government is likely to pass this proposal by end of 2011. If passed, analysts expect there to be additional conditions attached for compulsory contribution to back-end infrastructure investments and absorption of rural workforce, which will have positive impacts on the whole retail business chain. While this policy reform does not represent a complete opening up of India's tightly regulated retail sector, it is a significant step forward. To fully appreciate how significant this could be, consider how the complete liberalization of China's FDI policies in 2005 has boosted retail sector growth to a compounded annual growth rate of 19.1 per cent over the past five years (Figure 4). If China serves as any indicator to the benefits of opening FDI in retailing, then India could be on the cusp of a retail explosion in the near future.
Figure 4: China's FDI Liberalisation has Driven Retail Sector Growth – Could it do the same for India?
Source: CEIC, AT Kearney
It is without a doubt that there is tremendous potential in the Indian retail market. Many facts and figures suggest that India's retail tipping point is just inches away, which is subsequently keeping international retailers and foreign investors in anxious anticipation. But when will it actually happen? That is difficult to predict, but one clear signal of any thriving retail market are the women who shop there. Since women are the driving force of retail industries, look to the India's city streets for the answer. When you begin to see women put aside their traditional clothing for the latest fashion and designer accoutrements, you will know that India's retail market has arrived.
Article contributed by Anna Chew, Manager of Research Unit at CapitaLand.