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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.

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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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23

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


26/80

24


27/80

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


28/80

26

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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27

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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28

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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29

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



32/80

30

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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31

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


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


We go for

pleasure -

its an

excuse to

go out

If its a

large

supermarket

we will stay

at least 3

hours.

Shopper

Quotes


Exhibit 2.3

DESIRE FOR FRESH PRODUCTS DRIVES SHOPPING FREQUENCY


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32

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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33

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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34

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


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



Exhibit 2.6


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35

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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36

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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37

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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38

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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39

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


100% = US$ 40 bn

Disproportionate share oftelecom/mobile phones

40

Tele-

com

38

Home

electronics

15

Consumer

durables3

Personal

electronics

Electronics, 2015


100% = US$ 20-25 bn

Source: McKinsey analysi s


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40

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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41

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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42


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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.


46/80

44

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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45

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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46

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

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