It has been a decade-and-a-half since India embarked on an ambitious economic liberalisation programme. Over the last five years, many of its benefits have manifested themselves and one of the areas where growth is clearly reflected is retailing.
The latest pronouncements of Finance Minister P Chidambaram about the sector have fuelled interest in stocks from the segment. Let's turn the spotlight on the factors that triggered the exponential growth in the sector.
Primary reasons
The prime reasons that fuelled this boom include favourable demographics, rising consumer incomes, real estate developments, especially the emergence of new shopping malls, availability of better sourcing options - both from within India and overseas - and changing lifestyle.
These factors have transformed hitherto savings-oriented and conservative Indian consumers and made them akin to those in developed markets.
Organised versus unorganised
In a sharp contrast to the retail sector in developed economies, retailing in India - though large in terms of size - is highly fragmented and unorganised. With close to 12 million retail outlets the country has one of the highest retail densities worldwide.
Retailers include street vendors, supermarkets, department stores, restaurants, hotels and even two-wheeler and car showrooms.
Counter stores, kiosks, street markets and vendors, where the ownership and management rest with one person, are classified as traditional or unorganised retail outlets.
These formats typically require employees with low skills and account for around two-thirds of the sector's output. These are highly competitive outlets, with minimal rental costs (unregistered kiosks or traditional property), cheap labour (work is shared by family members) and negligible overheads and taxes.
However, unorganised retailers suffer due to poor shopping experience and inability to offer a wide range of products and value-addition due to lack of sourcing capabilities.
The modern Indian consumer is seeking more value in terms of improved availability and quality, pleasant shopping environment, financing options, trial rooms for clothing products, return and exchange policies and competitive prices. This has created a rapidly growing opportunity for organised, modern retail formats to emerge in recent years and grow at a fast pace.
Inefficiency in the existing supply chains presents further opportunity for organised players to draw on this large market even as lack of consumer culture and low purchasing power restricted the development of modern formats. Migration from unorganised to organised retail has been visible with economic development in most countries.
Changing age profile and disintegration of joint family
India is witnessing a change in the age and income profiles of its over 1 billion population, which is likely to fuel accelerated consumption in the years to come.
The country is believed to have an average age of 24 years for its population as against 36 years for the USA and 30 years for China. A younger population tends to have higher aspirations and spends more as it enters the earning phase.
Besides, the gradual disintegration of the traditional Indian joint family system has led to nuclearisation of families, which in turn has led to enhanced demand.
Add to this an increasing population of working women and new job opportunities in emerging service sectors such as IT-enabled services, retail, food services, entertainment and financial services.
With declining interest rates, the aversion of domestic consumers to taking loans is also fast disappearing. Growing media penetration is leading to a convergence of aspirations of various classes of consumers, bridging the rural-urban divide.
Growing disposable income
More Indian households are getting added to the consuming class with the growth in income levels. The number of households with income of over Rs 45,000 per annum is expected to grow from 58 million in 1999-2000 to 81 million by 2005-06.
This large base of households with growing disposable income is expected to drive demand for organised retail. Of this, 56 per cent (44. 8 million households) are expected to be concentrated in urban India.
Changing income demographics, age profile and macro environment are visible in the growth in consumption of durables. To cite live examples, the installed base of cars, cable TV subscribers and cellular subscribers has increased significantly over the last five years.
The author heads Lotus Knowlwealth, Mumbai.