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India consumer market_2005

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Consumer Markets in India – the next big thing? CONSUMER MARKETS

India consumer market_2005

Contents Executive summary Introduction India‘s retail market The distribution challenge Advertising and marketing Food, beverage and consumer goods Gemstones and jewelry 1 4 8 13 15 17 20 Recent times have seen an awakening of interest in what India has to offer to global businesses. With the increased sources of information available, it can often be difficult to base business decisions on any information whose veracity is questionable. The KPMG firm in India together with the Indian Market Research Bureau (IMRB) undertook some research focusing on the opportunities and challenges for consumer markets companies doing business in India. The original research for this study followed a dual approach: • identifying a select number of decision makers and opinion leaders across the leading companies of the country; and • taking qualitative and quantitative inputs from these industry leaders. In addition to the first-hand opinions of leaders and executives from leading Indian and multinational companies, the report includes research from trusted sources like industry bodies and the government, as well as data from other sources in the public domain.

India consumer market_2005

Consumer Markets in India – the next big thing? 1 Consumer Markets in India – the next big thing? Executive summary India represents an economic opportunity on a massive scale, both as a global base and as a domestic market. Regulatory controls on foreign direct investment (FDI) have relaxed considerably in recent years. However, while retailing currently remains closed to FDI, this is an area of ongoing debate. This means that foreign retailers and consumer goods manufacturers can only participate in the retail market through indirect access strategies, such as wholesaling, franchising or licensing, or by having a manufacturing base in India, or in businesses upstream of retailing. However, the Indian government has indicated in 2005 that liberalization of direct investment in retailing is under active consideration. Price controls have been progressively liberalized since 1992, but a small number of items remain fully controlled. There are also extensive controls on packaging, labeling and certification. Many of the companies surveyed believe that the potential size of this market is underestimated. Estimates of the size of the retail sector vary, with recent calculations putting the annual value of Indian retailing anywhere between US$180 billion and US$292 billion in 2003 .1 The retail sector is largely made up of what is known in India as the unorganized sector. This sector consists of small family-owned stores, located in residential areas, with a shop floor of less than 500 square feet. At present the organized sector (everything other than these small family-owned businesses) accounts for only 2 to 4 percent of the total market although this is expected to rise by 20 to 25 percent by 2010. Many of the companies surveyed believe that the potential size of this market is underestimated. They consider that there are considerable opportunities for organized retailers in the kind of rural territories that many companies have failed to address. A critical issue is how fast and how far the consuming class will grow. This depends both on the growth of personal disposable income and the extent to which organized retailers succeed in reaching lower down the income scale to reach potential consumers towards the bottom of the consumer pyramid. Companies expect retail growth in the coming five years to be stronger than GDP growth, driven by changing lifestyles and by strong income growth, which in turn will be supported by favorable demographic patterns. The structure of retailing will also develop rapidly. Shopping malls are becoming increasingly common in large cities, and announced development plans project at least 150 new shopping malls by 2008. The number of department stores is growing much faster than overall retail, at an annual 24 percent. Supermarkets have been taking an increasing share of general food and grocery trade over the last two decades. 1Source: EIU Country Briefing on India, 2005.

India consumer market_2005

2 Consumer Markets in India – the next big thing? Consumer credit will also grow, assisted by the likely fall in retail lending rates and more efficient and consumer-friendly lending practices. Distribution continues to improve, but it still remains a major inefficiency. Poor quality of infrastructure, coupled with poor quality of the distribution sector, results in logistics costs that are very high as a proportion of GDP, and inventories which have to be maintained at an unusually high level. Marketing and advertising are of increasing interest and concern to consumer companies. Indian consumers are becoming increasingly sophisticated and knowledgeable about products; media channels that allow companies to communicate with consumers are growing in diversity and reach. Foreign brands remain very powerful in India, especially in clothing and personal care products, but increasingly brands have to be associated with value. Advertising is becoming a bigger part of the marketing mix – companies are concerned about identifying consumer insights and the profusion of media channels. All companies agree: Indian consumer markets are changing fast, with rapid growth in disposable incomes, the development of modern urban lifestyles. Food and beverage offer the greatest organized retail growth opportunities, say companies. The main growth opportunity in the segment is in processed foods: rapid growth in the processed food segment is already apparent, changing lifestyles and food habits are resulting in the rapid expansion of branded food outlet and café chains. Gemstones and jewelry represent the most significant specialist segment of Indian retailing. Organized jewelry retailers are increasingly offering brand solutions to the demand for quality and value, as consumers move away from traditional retail settings reliant on family retailers. All companies agree: Indian consumer markets are changing fast, with rapid growth in disposable incomes, the development of modern urban lifestyles, and the emergence of the kind of trend-conscious consumers that India has not seen in the past. “Indians are traveling abroad a lot more,” says a representative of an industry association. “They get exposed to what is happening in other markets, they bring back new attitudes and preferences.” But with those changes, companies are adamant that while there are growth opportunities for consumer companies, there are few easy pickings. “You can’t sell junk in India,” says a senior manager in a leading fashion company. “It is not like worldwide fashion, where people might wear a garment three or four times and then discard it. In India you have to give value.”

India consumer market_2005

Consumer Markets in India – the next big thing? 3 Companies are also increasingly keen to bring organized retailing to unvisited parts of the economy. “We think the best opportunities are in rural markets,” says a leading shoe retailer. “Our whole strategy is to penetrate the rural market.” Indian companies know Indian markets better, but foreign players will come in and challenge the locals by sheer cash power, the power to drive down prices. That will be the coming struggle. Distribution remains the biggest challenge companies face, not least because India’s transport infrastructure remains weak. “Understanding the consumer, understanding the marketing environment, these are challenges, but distribution is the biggest issue,” says a personal care products company. A leading watch and jewelry company agrees: “Distribution and marketing is a huge cost in Indian consumer markets. It’s a lot easier to cut manufacturing costs than it is to cut distribution and marketing costs.” Companies expect that the next cycle of change in Indian consumer markets will be the arrival of foreign players in consumer retailing. Although FDI remains highly restricted in retailing, most companies believe that will not be for long. “The very fact that politicians have left the issue open leads us to think the restrictions are going to be reviewed,” says a leading sportswear manufacturer. And if retailing is liberalized, say companies, growth will be boosted, but so will competition. Says a leading shoe retailer: “Indian companies know Indian markets better, but foreign players will come in and challenge the locals by sheer cash power, the power to drive down prices. That will be the coming struggle.”

India consumer market_2005

4 Consumer Markets in India – the next big thing? Introduction India is undergoing unprecedented change. It is one of the fastest-growing large economies in the world, with a population of around one billion people, with huge human and natural resources, and with costs that are at the very low end of the global average. India has its dominance in the IT industry with this being a base for almost all the leading IT companies in the world. India’s large English-speaking population certainly enhances it as an attractive business destination. India represents an economic opportunity on a massive scale, both as a global base and as a domestic market. It is also an opportunity that India is anxious to grasp. Emerging from decades of economic isolationism, India’s reform process is now bringing this billion-person economy into the global arena. In a recent interview with The McKinsey Quarterly, India’s Prime Minister Manmohan Singh said “If I have any message, it is that it is our ambition to integrate our country into the evolving global economy. We accept the logic of globalization.” 1 India has grown at over 5 percent over the last five years. In unadjusted U.S. dollar terms Indian growth dipped soon after the millennium, reflecting not only the world growth downturn that hit bottom in 2002 but also the exceptionally severe drought that hit India in that year. But it is estimated that the economy will expand by almost 7 percent in 2005 and by the same amount in 2006, with growth being driven primarily by improvements in infrastructure and increased private consumption. Compare that to European growth of less than 2 percent on a 10-year average, and U.S. growth of around 3 percent: on these trends India will be one of the world’s biggest two economies by mid-century. Yet despite this rapid growth, consumer markets in India remain largely untapped and relatively undeveloped, although that is changing fast. This is in part the legacy of 40 years of relative isolation from the global economy, as postcolonial India attempted to build a self-reliant economy behind high tariff walls that discouraged foreign investment. Much has changed since the government of Rajiv Gandhi began the long, slow and painful process of opening up the economy. Over the 1980s the average growth rate rose from 3.5 percent to over 5 percent, and a financial crisis in 1991 prompted a bigger and faster deregulatory reform package with cuts in trade taxes and sell-offs in the state-owned economy. Gradually, India’s consumer markets started to look a little more like world markets, as global brands became increasingly recognized and the share of organized retail in the market began to grow. In one respect, India has not changed: foreign direct investment (FDI) is still not permitted in retail businesses. However, foreign companies with manufacturing bases in India are allowed to retail their products manufactured in India. 1Source: The McKinsey Quarterly, September 2005.

India consumer market_2005

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