News: Indian retail industry - On the fast track
(FE 09/07/2006) Mumbai - The retail market in India, valued close to $250 billion, is abysmally under penetrated by the organised sector. The transformational investment by Reliance Industries Ltd (RIL) is expected to change the scenario completely. Pantaloon and Shoppers Stop too have extensive expansion plans on the cards to cash in on the expected exponential growth.
Currently, the retail industry is growing at a rate of around 40% and the industry is expected to grow at 2x-3x of the GDP growth in the next decade. While hypermarts continue to develop, departmental stores are also on a swing. Speciality stores offering products like jewellery, watches and footwear are also posting double-digit growth. However, it is interesting to address the impact that RIL's foray will have on the retail sector.
RIL’s blueprint
Mukesh Ambani has announced a separate company, Reliance Retail Limited, with an equity investment Rs 10,000 crore to focus on organised retail as an 'overarching theme'. The new company would be 100% owned and would invest Rs 25,000 crore in the retail business over years. The company will adopt a multi-format strategy to set up a chain of hypermarkets, supermarkets, discount stores, specialty stores, and convenience stores across India.
The stores will be set up in phases and around 1,600 stores will be in place by 2007.
RIL has no immediate competitors considering the proposed size of its investment. However, the business will take time to break even and make its presence felt in the market. Till then other retail players may have a smooth going and no adverse or immediate impact on their margins is expected. In the long run, the scenario might change and the industry could witness consolidation.
RIL's journey would not be smooth, and the challenge lies in acquiring land at suitable locations as the early entrants already occupy most of the centrally located lands. Incidentally, unlike its competitors, RIL has plans to open most of its retail outlets outside cities and on highways. Apart from lack of retail space, trained manpower has evolved as the key execution challenge. Besides this, the company expects to generate 40-45% of its revenues from the food segment. This looks favourable if the spending pattern of consumers is considered.
Competition
Other retail players like Pantaloon has set a target of increasing retail space to 30 million square feet with an outlay of Rs 3600 crore. Besides this it has plans to enter specialty segments and new formats. This target is dwarfed if compared to the three fold retail plans of RIL at Rs 25,000 crore.
Bharti also has announced its foray into retail. Recently, the company announced that telecom's contribution to the overall revenues would come down to 75% - 80 % by 2010 and retail and agriculture would acquire strategic importance in the Rs 11,000-crore group.
On the whole in terms of size Reliance will definitely affect the other industry players in the market. However considering the fact that 98% of the market is unorganised there is enough room for multiple players.
Rising rentals and FDI
A recent JM Morgan Stanley report suggests that rentals have increased by a whopping 80%-100% over the last one-year. On the wake of this it is getting difficult for retailers to get properties at reasonable prices. This ultimately affects the company's operating margins in an industry where maintaining margins is critical. Thus, this factor will gain further importance once competition intensifies. Wal-mart the biggest retailer in the world operates on a net profit margin of just 2%.
On the foreign direct investment (FDI) front, the government has allowed FDI only in single brand outlets. However, FDI in retail continues to be contentious. After single brand outlets, food retailing could be next on the agenda as development of cold chains and improved cultivation will finally benefit farmers. However, once FDI is allowed, Indian retailers may find it tough to keep their current market shares intact.
Multiplexes and retail
The bullish outlook on the retail industry is tended to have a spillover effect on multiplexes. Multiplexes are considered as one of the anchor tenants in shopping malls as they increase footfalls by around 30%-40%. Thus the expected growth in organised retail industry would result in significant jump in multiplexes across the country. It is important for multiplexes to be located in premium malls, which have presence of strong brands. The tenant-mix of the mall often decides the success of the mall and in turn the success of that multiplex. Branded retailers also offer opportunities of cross-pro motions, which helps both businesses.
Inox has entered into an alliance with Pantaloon. This alliance provides Inox with preferential access to all real estate developments that the Pantaloon group is involved with. The properties that will be offered to Inox through this alliance will be in addition to the properties that they have identified and locked in, thus increasing their reach across India.
Outlook
The retail business in India is still highly fragmented. However, more number of companies are attracted to this sector with aggressive expansion plans. The growth in organised retail may put pressure on margins, but it will also increase opportunities for newer categorical expansions. Moreover retail outlets are now coming up in Tier II cities, which till now were only restricted to Tier I cities. Over the next few years contribution to total organised retail sales from Tier II cities is expected to go up by 20%-25%. These small towns represent a very large base of consumers. On the whole the retail industry has a long way to go in India.
Currently, the retail industry is growing at a rate of around 40% and the industry is expected to grow at 2x-3x of the GDP growth in the next decade. While hypermarts continue to develop, departmental stores are also on a swing. Speciality stores offering products like jewellery, watches and footwear are also posting double-digit growth. However, it is interesting to address the impact that RIL's foray will have on the retail sector.
RIL’s blueprint
Mukesh Ambani has announced a separate company, Reliance Retail Limited, with an equity investment Rs 10,000 crore to focus on organised retail as an 'overarching theme'. The new company would be 100% owned and would invest Rs 25,000 crore in the retail business over years. The company will adopt a multi-format strategy to set up a chain of hypermarkets, supermarkets, discount stores, specialty stores, and convenience stores across India.
The stores will be set up in phases and around 1,600 stores will be in place by 2007.
RIL has no immediate competitors considering the proposed size of its investment. However, the business will take time to break even and make its presence felt in the market. Till then other retail players may have a smooth going and no adverse or immediate impact on their margins is expected. In the long run, the scenario might change and the industry could witness consolidation.
RIL's journey would not be smooth, and the challenge lies in acquiring land at suitable locations as the early entrants already occupy most of the centrally located lands. Incidentally, unlike its competitors, RIL has plans to open most of its retail outlets outside cities and on highways. Apart from lack of retail space, trained manpower has evolved as the key execution challenge. Besides this, the company expects to generate 40-45% of its revenues from the food segment. This looks favourable if the spending pattern of consumers is considered.
Competition
Other retail players like Pantaloon has set a target of increasing retail space to 30 million square feet with an outlay of Rs 3600 crore. Besides this it has plans to enter specialty segments and new formats. This target is dwarfed if compared to the three fold retail plans of RIL at Rs 25,000 crore.
Bharti also has announced its foray into retail. Recently, the company announced that telecom's contribution to the overall revenues would come down to 75% - 80 % by 2010 and retail and agriculture would acquire strategic importance in the Rs 11,000-crore group.
On the whole in terms of size Reliance will definitely affect the other industry players in the market. However considering the fact that 98% of the market is unorganised there is enough room for multiple players.
Rising rentals and FDI
A recent JM Morgan Stanley report suggests that rentals have increased by a whopping 80%-100% over the last one-year. On the wake of this it is getting difficult for retailers to get properties at reasonable prices. This ultimately affects the company's operating margins in an industry where maintaining margins is critical. Thus, this factor will gain further importance once competition intensifies. Wal-mart the biggest retailer in the world operates on a net profit margin of just 2%.
On the foreign direct investment (FDI) front, the government has allowed FDI only in single brand outlets. However, FDI in retail continues to be contentious. After single brand outlets, food retailing could be next on the agenda as development of cold chains and improved cultivation will finally benefit farmers. However, once FDI is allowed, Indian retailers may find it tough to keep their current market shares intact.
Multiplexes and retail
The bullish outlook on the retail industry is tended to have a spillover effect on multiplexes. Multiplexes are considered as one of the anchor tenants in shopping malls as they increase footfalls by around 30%-40%. Thus the expected growth in organised retail industry would result in significant jump in multiplexes across the country. It is important for multiplexes to be located in premium malls, which have presence of strong brands. The tenant-mix of the mall often decides the success of the mall and in turn the success of that multiplex. Branded retailers also offer opportunities of cross-pro motions, which helps both businesses.
Inox has entered into an alliance with Pantaloon. This alliance provides Inox with preferential access to all real estate developments that the Pantaloon group is involved with. The properties that will be offered to Inox through this alliance will be in addition to the properties that they have identified and locked in, thus increasing their reach across India.
Outlook
The retail business in India is still highly fragmented. However, more number of companies are attracted to this sector with aggressive expansion plans. The growth in organised retail may put pressure on margins, but it will also increase opportunities for newer categorical expansions. Moreover retail outlets are now coming up in Tier II cities, which till now were only restricted to Tier I cities. Over the next few years contribution to total organised retail sales from Tier II cities is expected to go up by 20%-25%. These small towns represent a very large base of consumers. On the whole the retail industry has a long way to go in India.
posted by InCar Group Press Room at 12:31
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