India’s retail sector has been undergoing structural changes for the last two decades. Shopping malls, lined with specialty retailers, started dotting the retail markets of the country’s top cities during the mid-1990s. Since then, the ‘mall culture’ gradually pervaded the population, especially in the metros and mini-metros, heralding the beginning of the modern retail movement in India.
India modern retail evolution
The pace of mall construction was moderate during the first five to seven years and gained substantial momentum after that. The impact of the global financial crisis on the Indian economy in 2008 and 2009 checked this pace, and this trend continues today. The next big wave that has changed the skyline of the retail sector in India and accelerated the presence of modern retail is e-tailing, or the sale of products and services through the internet, telephone and television. This trend started in 2010 and has become prominent in the last three years. We believe that the modern retail segment in India will be driven by e-tailing as well as the brick-and-mortar modern retail format through an integrated approach.
Another trend that is becoming conspicuous since the last couple of years is the transformation of non-modern stores in shopping streets into modern formats. This trend is likely to gain momentum in times to come because of the prevailing consumer preference for a modern and organised shopping experience.India has gradually become one of the important retail markets for global retailers. Other than the fact that it is one of the biggest economies in the world, its demographics also work in its favour. Mumbai, Bangalore and the NCR are at the epicentre of this retail wave. The majority of the global retailers planning to enter the country are considering these three locations in the first phase.
Brands from more than 33 foreign countries have their representation in malls and high streets in India. This also exhibits the growth of the modern retail sector in India. USA contributes a massive 35 percent of all foreign brands present in India. This is followed by the United Kingdom, at 12 percent. While Italian and French brands account for an 8 percent share each, Japanese, Swiss and German brands represent 5 percent each. Nearly 400 international brands are already present in India; some of the recent entrants in the Indian market include, Ikea, H&M, Gap, Aéropostale and Massimo Dutti. Despite all these changes in the retail market towards modernisation, India still lags in the modern retail penetration.
MODERN RETAIL PENETRATION: EXISTING SCENARIO
Presently, modern retail penetration in India is abysmally low compared to the developed and emerging economies. While the share of modern retail is 84 percent, 71 percent, and 53 percent in the US, Singapore and Malaysia respectively, it is only 19 percent of the value of the total retail spending in the National Capital Region, Mumbai, Kolkata, Chennai, Bengaluru, Pune and Hyderabad (the top seven cities), cumulatively. In fact, the degree of penetration in the whole of India would be even lower, since the presence of modern retail in smaller cities and rural areas is not significant. However, this is changing considerably as evolving consumer spending patterns, increasing disposable income levels and preferences are redefining the country’s retail landscape. Currently, the total annual retail spending in the top seven retail markets of the country amounts to Rs 4,206 billion and this is projected to reach `7,650 billion by 2019. Going forward, a sizable portion of this retail spending will continue to take place in the non-modern retail segment as well.
The penetration of modern retail will also witness a substantial rise, from the current 19 percent to 24 percent in the next three years.
Currently, the per capita occupied modern retail space in the top urban cities stand at 833 sq.ft per 1,000 population. Bengaluru has the highest per capita penetration of modern retail space in India, at 1,323 sq.ft per 1,000 population. This is followed by Pune and Chennai, at 1,002 and 1,001 sq.ft per 1,000 population respectively. Despite having the maximum occupied modern retail space in India, the NCR market ranks fourth among the top seven cities in the country, at 933 sq.ft per 1,000 population. Clearly the penetration of modern retail spaces is not adequate, and Mumbai, Kolkata and Hyderabad rank lower than the average of the top seven cities, in terms of per capita modern retail space. These figures will be even lower for the rest of India, as the shopping mostly happens on unorganised streets in smaller towns and rural markets.
The National Capital Region ranks first in terms of mall space per capita in India, at 536 sq.ft per 1,000 population. This is followed by Bengaluru and Pune in second and third place respectively. Mumbai fares poorly in terms of mall space penetration per capita, at just 350 sq.ft per 1,000 population.
This is much lower than the average penetration in the top seven cities. Hyderabad is ranked last when it comes to per capita mall space penetration in India,with just 193 sq.ft per 1,000 population.
It’s interesting to analyse the split of occupied modern retail space in malls and shopping streets. Most of the cities have a good proportion of both. Distribution of modern retail space is skewed towards malls in Mumbai, as 59 percent of the total modern retail space in the city is represented by malls only.This is followed by the NCR and Pune. The modern retail space in Pune is represented fairly by malls and shopping streets, at 48 percent and 52 percent respectively. This is very similar to the mix observed at the level of the top seven cities. The share of mall space is the lowest in Hyderabad, as more than 70 percent of the total modern retail space is present in the various shopping streets of the city.
Increasing penetration of modern retail through e-tail, transformation of existing shopping streets and development of more malls is going to change the modern retail skyline in the next three to five years.
CRYSTAL GAZING: MODERN RETAIL IN INDIA
E-tailing - Until a few years ago, shopping meant a visit to a mall or high street. With the advancement of technology and its increasing usage by consumers and retailers, shopping options are not restricted to physical stores anymore. E-tailing is not only a reality; it is evolving constantly to create synergies with other retail channels. High-speed internet connections have become more affordable and within reach. Interestingly, India is the second largest smartphone market globally, and is expected to witness fast-track growth in the next five years.
More consumers are connected and socially active with the use of such technology. E-tailing is much more convenient through smartphones, and is accessible to all age groups across all geographies. In fact, e-tailing is opening doors for modern retail in tier-II and -III cities,where the brick-and-mortar format has limited viability. The growth of e-tail has expanded the retail market by increasing the impulse to purchase and reaching out to the most remote rural customer, who would otherwise have no access to any modern brand. Consumers are now becoming aware of various modern products. Hence, when brick-and-mortar modern retail enters these markets, it will find the consumers of these smaller towns higher up on the learning curve.
Although it may seem like e-tailing is the new way of shopping, brick-and-mortar is also here to stay. Indian consumers continue to find physical stores appealing, and shopping is a form of recreational activity for them. Brick-and-mortar stores provide consumers with a physical experience that allows them to touch and feel the products. Retail stores also employ personnel to attend to customer requirements and suggest options, which is important to a high percentage of consumers even today. So, an integrated approach of brick-and-mortar and digital is the need of the hour.
Omnichannel Retailing- Our interaction with retailers across all product categories reveals that the e-tailing versus brick-and-mortar debate is not relevant anymore; both have to be integrated seamlessly to create a satisfying shopping experience. Lenskart, Pepperfry, Freecultr and Firstcry are some of the e-tailers that have opened physical stores to showcase their products and service to online customers.
Similarly, e-tailing giant Flipkart has also launched physical stores, where customers can collect the items ordered online at their convenience. These stores will act as experience centres in the future and will offer value-added services, such as trials, instant returns and product demos. On the other hand, a number of traditional brick-and-mortar players have gone online, either with their own websites or by tying up with already existing e-tailers, such as Amazon, Snapdeal, Jabong or Myntra. Mahindra Retail, Shoppers Stop, Jack & Jones and Aditya Birla Group are some of the retailers that went online in 2015. The figure is set to increase further in the coming years as more retailers understand the importance of offering multiple touch points to consumers. Several brands are bringing technology into their physical stores, with kiosks to showcase products and provide customer support. Virtual trial rooms have also been introduced in stores, wherein customers can try out any number of outfits available with just a click. Jealous 21, Nike, Levi’s, Arrow, and Satya Paul already have stores that use this technology. Some of these stores also allow customers to check the availability of a product across all brand outlets and order home delivery.
Consumers have already experienced the convenience of e-tail and expect improved integration in the future. Hence, an omnichannel strategy is the only way for retailers to perform in the coming years. The key is to get connected with consumers through various channels, such as websites, mobile apps, social media, kiosks and many more. A consumer should be able to shift seamlessly between various media during a shopping journey.
Reinventing the Brick-and- Mortar Space - The omnichannel retail model is bound have an impact on the brick-and-mortar retail space. Malls and stores within will have to adapt to the changing consumer requirements. Shopping at a mall may not be a necessity in the coming years. Purchases can be made anywhere and at any time with ease and at the consumer’s convenience. This change will be a bigger challenge for the existing malls, and the fact that the number of successful malls is much lower than those that are under performing indicates that these centres could not keep pace with the changing consumer preferences. Hence, malls have to provide much more than shopping to be able to attract customers.
Shopping malls will have to be remodelled or rearranged into recreation centres, offering more spaces to socialise, host events and concerts, and provide ample F&B options. The e-tail wave had hit other countries before India and there are several examples wherein malls have been repositioned to cater to the evolved needs of the consumers. Enlarged and evolved spaces for entertainment and F&B are the trend consistent across all countries.
Similar changes are taking place in the Indian market as well. The share of entertainment and F&B in the overall mall space previously ranged between 8–9 percent and has grown to 15–20 percent. A number of existing malls, such as Inorbit and Oberoi Mall in Mumbai, have strategically carved out more space for entertainment and F&B. Similarly, a number of new malls in Bengaluru, such as Brigade Orion and Phoenix Market City, have allocated substantial space for family entertainment centres (FECs). One of the latest additions to India’s mall list is DLF Mall of India, Noida, where the share of these two categories is as high as 40 percent.
Entertainment and F&B can be defined as the new anchors that attract the maximum footfall and generate consistent revenue. R City, Mumbai, houses an indoor theme park—KidZania—which attracts patrons from across the city. According to a recent study by FICCI and KPMG, films and the gaming industry are expected to grow at a CAGR of 10.0 percent and 14.3 percent respectively, in the next five years, presenting big opportunities to retailers.
Another change that is evident across all cities is the resizing of stores. Traditionally, an anchor tenant in a mall was categorised based on the size. The store size was thought to be of utmost importance when defining an anchor, followed by the product category. The majority of the malls had planned department stores as anchors, with areas ranging between 60,000–70,000 sq.ft. However, this trend is changing, and a number of successful malls are modifying their strategy, either reducing the size of the existing anchors or identifying new anchors based on the brand’s attractiveness. International brands are gaining importance, as their average trading densities are also relatively higher. The size of anchor stores has now reduced to 20,000–25,000 sq.ft. This downsizing is improving the retailers’ average trading densities while also creating more space, giving the mall management an opportunity to rope in more brands and enhance revenues.
Considering the impact of e-tail, transformation of shopping streets and changing consumer preferences and spending pattern backed by growth in income levels, the requirement of brick-and-mortar modern retail space in the top seven cities is projected to grow at the rate of 5.6 percent annually in the next four years. These cities will require an incremental modern retail space of 4.3 million sq.ft per annum during 2015–2019.
NCR will require the maximum amount of incremental space, at 1.4 million sq.ft per annum during 2015–2019. This will be followed by Bengaluru, at 0.9 mn sq.ft per annum.
A quantum shift in the Indian modern retail sector will only be possible with the concerted efforts by all retail stakeholders, including the government and the right infrastructure support by a series of government policy interventions.
Government as a facilitator The government has to facilitate growth by preparing clear policies for the retail sector and creating proper retail zones through a comprehensive planningprocess, thereby reducing infrastructure bottlenecks.
Currently, the urban planning process in India does not have a well-defined place for retail and recreation use. The Government of India’s Urban and Regional Development Plan Formulation and Implementation (URDPFI) Guidelines 2015 identify retail as commercial use. The guidelines also provide norms for the hierarchy of commercial centres, based on population and a detailed list of activities that can be part of the retail development. The state governments are expected to incorporate these guidelines in the urban planning process while preparing a regional or master plan. Since there is no clear demarcation between commercial and retail use, the respective city master plans have no space earmarked for retail development – it is often included in commercial use. As a result, retail development takes place in a haphazard manner, with commercial and retail often competing for the same space. Office projects get priority because of the sector going from strength to strength in the last couple of years.
Recent initiatives, such as the FDI retail policy and state level retail policies, are a step in the right direction. The government is taking up the role of a facilitator to create an environment conducive to the retail business.
FDI Policy in Retail - In 2006, the Indian Government allowed a 51 percent FDI in single-brand retail, with the aim to attract investments. This was subject to prior government approval and the guidelines issued by the Department of Industrial Policy & Promotion (DIPP), as follows:
- Products to be sold should be of a single brand only - Products should be sold under the same brand internationally - Single-brand product retailing would cover only products branded during manufacturing
In 2012, the government relaxed the 51 percent cap and allowed up to 100 percent FDI in single-brand product retail trading, under the government approval route, subject to specified conditions. Apart from the conditions set in 2006, the government stipulated certain other conditions, which are as follows:
- Only one non-resident entity, whether the owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country for the specific brand through a legally-tenable agreement with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought.
- In respect of proposals involving an FDI beyond 51 percent, sourcing of 30 percent of the value of the goods purchased (taking an average of a five-year total value of the goods purchased), will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors.
In 2012, the government went a step further and also allowed a 51 percent FDI in multi-brand retailing, subject to certain conditions, as follows:
- Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.
- The minimum amount to be brought in as FDI by the foreign investor would be $100 million. At least 50 percent of the total FDI brought in shall be invested in ‘back-end infrastructure’ within three years of the first tranche of the FDI.
- At least 30 percent of the value of the procurement of manufactured/processed products purchased shall be sourced from Indian ‘small industries’.
- Retail sales outlets may be set up only in cities with a population of more than 10 lakhs as per the 2011 Census, and may also cover an area of 10 km around the municipal/ urban agglomeration limits of such cities. In states/union territories that do not have cities with a population of more than 10 lakhs as per the 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city, and may also cover an area of 10 km around the municipal/ urban agglomeration limits of such cities.
- The government will have the first right of procurement of agricultural products.
In 2013, the government relaxed the FDI conditions in single-brand retail even further. FDI in single-brand product retail trading has been allowed up to 100 percent, wherein 49 percent would be through an automatic route and the rest, through the government route. Until then, the entire 100 percent FDI in single-brand retail was allowed only through the government route. In the case of multi-brand retail, an FDI cap has been retained at 51 percent.
In November 2015, the Department of Industrial Policy and Promotion (DIPP) announced a string of FDI reforms across 15 sectors, including retail. It states that manufacturers are permitted to sell their products manufactured in India through wholesale and/ or retail, including e-commerce, without government approval.
Thus, single-brand retail companies with stores will be allowed to sell online, using the e-commerce platform with certain conditions. Where a retailer is allowed to trade online, an Indian manufacturer would be the investee company and the owner of Indian brand manufacturing in India, with at least 70 percent of its products in-house, and sourcing not more than 30 percent from Indian manufacturers. The government may relax sourcing norms in the case of companies engaged in single-brand retail trading and having state-of-the-art, cutting edge technology and where local sourcing is not possible.
State governments are also introducing state-specific retail policies to improve the ease of conducting business in the retail sector. Andhra Pradesh and Maharashtra are the first states to create a draft retail policy.
- Some of the key highlights of the Andhra Pradesh state and Maharashtra retail policy are: - Inclusion of food and grocery retailing in essential services - Single-desk clearance of business plans - Easier land acquisition for retailers to build warehoues - Tailor-made incentives for mega retail enterprises with investments of at least Rs 1 billion or that employ at least 2,000 people - Simplified labour laws - Relaxed stocking limits for essential commodities
One of the additional inclusions in the Maharashtra retail policy is the development of retail entertainment zones (REZs). The concept of an REZ is to create a separate zone for retail and recreation with direct access to mass public transport systems. This will be included in the master plan of various cities in Maharashtra. These zones would have large land parcels for mall development. Since, the use is already identified as retail/entertainment, the land prices will be rationalised for this particular use. Physical infrastructure, such as roads, public transport and power, which comprise the backbone of a successful retail centre, will also be planned in advance within the master plan. The relaxation in the development control norms will be favourable to mall developers. Additionally, to enhance the viability of retail development, up to 50 percent additional floor space index (FSI) will be admissible over the base FSI.
In a nutshell, these reforms are a welcome move and will enhance India’s attractiveness in the global market. The relaxation in the FDI policy to sell products manufactured in India through e-commerce marketplaces without government approval will be a great impetus to online retailing in the country. This initiative is in line with the recent transformation in the country’s retail market, wherein brands are either already using or considering multiple channels for sales.
India’s modern retail market is expected to grow manifold in the next five years. With the right support from the government, modern retail will witness tremendous growth and move up the growth curve. The Omnichannel model, which focuses on the customer, will have to be adopted by retailers and mall developers. Innovation will be the key, as customer awareness leads to higher expectations, convenience being the requisite factor. Retailers need to innovate in order to cater to the shopping needs of the new-age consumer who has limited time and a plethora of options to choose from. The retailer strategy has also to take into account the opportunity for partnerships – the entire industry needs to work as an ecosystem. Some of this is already being done – Shoppers Stop realised the need for an online presence and enhanced it by entering into a partnership with Snapdeal to reach to more consumers. Collaborative working among the leading players will be the key to success. It could be in the form of partnerships, or mergers and acquisitions. Brick-and-mortar spaces will have to reinvent, with a focus on consumer experience. The existing malls, which are either facing challenges or were shut down recently, can be revived if the basic fundamentals are in place, i.e. a good location, design and appropriate size. Some of the international funds are looking for lucrative deals in this sector as well. In the short term, they are considering malls that have been performing steadily since the last three years. In their mid-term outlook, they would consider malls with the basics in place but who failed due to management issues such as strata sales, lack of funds or other leasing model failure. However, these funds are currently not considering greenfield projects, which could have been a big opportunity for mall developers and a substantial value addition to the modern retail sector in India.