Trends in retail trade

Overall Retail Trends

In the current business environment a confluence of market forces has createdan extremely complex climate in the global retail industry. In mature markets,retail sector is challenged by its inability to grow and maintain profit margins as a result of a constrained operating environment, market maturity &saturation, slow population growth, and more demanding consumers as well ashighly volatile consumer behaviour. Apart from these there are concerns ofrising competitive pressures, transformation of alternative sales channels-including "Bricks (stores), Clicks (web), Rings (call centers), and Knocks(services to the home), a blurring of roles between suppliers and retailers."

Also, as consumers have become empowered through access toinformation, wherever and whenever they want it, retailers have become morerelevant to the consumer at the point of purchase and hence a shift in thebalance of power to the retailers.

As an outcome, the strategic focus of the entire retailsector is moving towards the emerging economies of Asia and Central &Eastern Europe- China and India in particular. These economies offer expandingconsumer markets with new opportunities for growth through global sourcing,off-shoring and the huge potential for development of modern/ organizedretailing.

Trends in major markets

US

Retail is the second-largest industry in the United States both in number of establishments and number of employees. The U.S. retail industry generates $3.8 trillion in retail sales annually ($4.2 trillion iffood service sales are included), approximately $11,993 per capita. The retailsector is also one of the largest worldwide. Wal-Mart is the world's largestretailer and the world's largest company with more than $312 billion (USD) insales annually. Wal-Mart employs 1.3 million associates in the United States and more than 400,000 internationally. Retail trade accounts for about 12.4percent of all business establishments in the United States. In USA, Single-store businesses account for over 95 percent of all U.S. retailers, but generate lessthan 50 percent of all retail store sales.

UK

In UK, 11% of all VAT-registered businesses are retailers;with the total number currently at 180,875.UK retail sales were 265 billion in2007, which is much larger than the combined economies of Denmark and Portugal. The Retail sales of the country account for 1/5 of its total economy. Theretail sector generates almost 8% of the Gross Domestic Product of the UK. More than a third of consumer spending goes through shops. The Sales over the internetaccount for less than 4% of total retail sales, despite there being a stronggrowth in recent years. Over 3.0 million people were employed by the retailindustry by at the end of December 2007 which is almost 11% of the total UK workforce.

India

The Indian retail market is the fifth largest retail destination globally. The current size of the Indian retail industry stands at $511 billion in 2008. Simultaneously, modern retail is likely to increase its share in the total retail market to 22 per cent by 2010. Organised retail in India raked in US$ 25.44 billion turnover in 2007-08 as against US$ 16.99 billion in 2006-07, a whopping growth rate of 49.73 per cent (according to the Credit Rating and Information Services of India). Organised retail has increased its share from 5 per cent of total retail sales in 2006 to 8 per cent in 2007. India has one of the largest numbers of retail outlets in the world. Of the 12 million retail outlets present in the country, nearly 5 million sell food and related products. Though the market has been dominated by unorganised players, the entry of domestic and international organised players is set to change the scenario. Per capita retailing space is about 2 sq. ft (compared to 16 sq. ft in the U S). India's per capita retailing space is thus the lowest in the world. Around 7% of the population in India is engaged in retailing, as compared to 20% in the USA.

Statistically, the global retail industry is witnessing a CAGR of 5.5% is slated to grow at the same rate till 2009. The following graph shows an overall trend of the global retail revenues.

Fig: Region-wise growth rate Global Retail Sales

Interestingly, there is a negative correlation between overall market size and the average annual growth rate. This means that the regions with high revenue contribution are low in growth (US, Western Europe & Japan) whereas the regions which are low in contribution to global sales are experiencing a high growth rate (Africa/Middle East, Latin America, Asia/Pacific). The reasons for this change are:

• The changing economic conditions and a tougher operating environment in the mature and saturated developed markets is forcing retailers to move to newer avenues
• Despite the setbacks in the US and Europe, GDP growth across India, China and Russia is still expected to top 8 percent in 2008. This makes the retail opportunity in these emerging economies more compelling (less than 10 percent of these markets are well-organized).
• Operating in emerging markets create a powerful incentive for large retailers to further diversify their customer and operations bases, deliver continued growth, reduce risk, realise economies of scale and building a global brand name.

The Indian retail market has grown at 10 percent per year over the past 5 years. According to the A T Kearney Global Retail Development Index (GRDI) India has retained the number one position as the most attractive emerging country for retail till from 2005 till last year. Now, According to the GRDI 2008, India has slipped to number two positions losing to Vietnam.

Indias retail market is at its pinnacle and is drawing huge attention from both global and local retailers. Reasons for Indias high growth rate in the retail sector are:

• High growth rates- Indias GDP is projected to grow by more than 8 percent in fiscal year 2008, projections for 2009 are a more modest at about 7 percent
• Untapped growth potential- Organized retail, which still accounts for less than 5 percent of the market is expected to grow at a compound annual growth rate (CAGR) of 40 percent to $107 billion by 2013. Indias overall retail sector is expected to rise to $833 billion by 2013 and to $1.3 trillion by 2018, at a CAGR of 10 percent.
• Growing Purchasing Power- Consumer spending is on a sharp rise. In the last four years the consumer spending has grew by astounding 75 percent. This can be attributed to the significant rise in the disposable incomes of Indias young population. It has to be noted that more than 33 percent of Indian population is below the age of 15.

Apparel Retail Industry

The recently released A T Kearney Apparel Retail Index evaluates more than 30 emerging markets in the apparel segment of retail industry and further identifies the top 10 countries in terms of market size, growth prospects and consumer affluence.

A.T. Kearney retail apparel index, 2008

As per the Index, Brazil leads the pack as the most attractive emerging apparel retail destination in the world. It is the fastest growing market growing at the rate of 7% p.a. The positive trend has been mainly due to the dominant young population in Brazil- almost 60% of the total population is under 29 years of age. Also, the per capita spending of $402 which is almost six times what a Chinese individual spends on apparel. Like India, Brazils domestic retail is highly fragmented. The market is dominated by small local retailers which constitute about 60% of the total market share. This makes it an unexploited market for the international retailers.

Figure: Composition of average household expenditure in Brazil

Indian Apparel Retail Market

India has positioned itself strongly as the third most attractive apparel retail market after Brazil and China. Apparel is the second largest contributor to the overall retail revenues in India. Apparel retail represents 10% of India's total retail market. The market size is expected to reach to a massive $37 billion in 2008. Whilst the overall retail industry is expected to grow at 10 per cent, the apparel industry is expected to experience a growth rate of 12-15 per cent per annum. The footprint of the organised retail the apparel retail sector versus the overall retail market represents an interesting scenario. While organized retail forms only 5 per cent of the total retail industry, it contributes close to 20 per cent in the apparel market. This reflects that the apparel market is by far one of the most mature and dynamic sectors of the Indian retails story.

India's apparel retail scenario is upbeat because of various reasons. Some of them being:

1. The consumer spending is rapidly increasing at a rate of 8% which is much faster than the traditional retail giants viz. USA, United Kingdom and Japan and emerging countries like China. This can be attributed to a steady growth rate of 6 per cent in the middle class income, thus giving a boost to the purchasing power of bulk of the consumer segment.
2. There has been a unprecedented      rise in the number of apparel focussed shopping malls in India
3. Changing consumer behaviour, penetration of credit cards and popularity of fashion wear clothing in tier-2 and tier-3 Indian cities is driving the growth in the sector
4. Market is still immature and fragmented. This makes the sector attractive for new entrants.
5. There is a huge market potential for both private labels as well as branded apparel
6. Diversity in the socio-economic clusters opens the market at all price points and brands with diverse positioning
7. Indias laws and FDI regulations are slowly and steadily opening up for global retailers and there is a huge opportunity for apparel brands to join the Indian apparel retail bandwagon.

Growth Prospects

According to a study by Technopak (Management Consulting firm), the market size of apparel will jump to US$ 92.8 Billion from US$ 25.9 Billion in 2006. (Refer to the table below)

Source: Technopak Retail Outlook, vol-1

In the coming years, new retailing formats will emerge in the India markets giving it a total new design, for example the Cash & Carry format, which is being introduced by the Metro group of Germany, which will revamp the wholesale format. This format supports the need of the small mom and pop retailers in India. Since 100% FDI is allowed under this format, it offers a very lucrative mode of entry for the international retailers. According to the management consulting firm, Technopak, 6% (est.) of total investment in retail over the coming five years is expected to happen through this channel. Secondly, Super-Specialty Formats through which retailers will target a specific customer group. In India, currently, retailers like Giny&Jony and Lilliput (kids-wear), Mothercare (expecting mother), Mustard (plus-sized women wear) etc. are prevalent which cater to specific needs of their respective target group. These formats are basically designed on different categories or demand of the customer.

Own Label branding

Indian Market is a price sensitive market but the consumer doesn't want to compromise on the quality either. In such a scenario, 'own label branding' is taking its place in the market. Retailers engaged in own label branding or private label get high margins as compared to branded items. For private labels to be at par with the branded goods, retailers employ aggressive marketing campaigns. The private labels not only get higher margins but these labels prove to be a competitive advantage for them over the branded goods. Globally, the demand for demand for private labels is increasing and they contribute an overwhelming 17% of the total retail sales and continue to grow at a rate of 5% p.a. which is very appreciable.

In India, Local retailers such as Ebony promotes its own label by the name of etc, which is at par with the other apparels or garments being showcased at its outlets. Not only Ebony but retailers like Shopper's Stop, Westside have also come up with their own label brands like Wal Mart in USA has almost 40% of their own label brands and TESCO in U.K. has 55% of their own label brands being sold at their retail outlets.

Retailers have as much as 65% of the sales accounting from the own label brands. Own Label brands are steadily gaining position in the retail market with largely increase in the categories of clothing, home, groceries.

Prospects for apparel retail

World retail trade is expected to touch US$ In terms of absolute 13.57 trillion in 2009. Apparel retail is around 7% o 9% of the retail business. Thus it would be worth around US$ 1.08 bn. As indicated in studies detailed above, India has the brightest prospects, in terms of absolute market size and growth potential, two major drivers of the business of apparel. Even consumer affluence, another important determinant, is on the rise. Indian apparel sector is surely the lifeblood of the overall retail industry and is a sector to be watched closely for its dynamics, huge growth potential and diversity.

Compiled by Economic Cell, AEPC

Source: AEPC newsletter