India briefing: The changing landscape of food retail
By Michelle Russell | 31 October 2013
Big Bazaar owner Future Group is India's largest retailer
India has an estimated population of 1.24bn and has become one of the most attractive emerging markets. The country's retail scene is still dominated by smaller, traditional outlets but, with incomes rising, Western-style modern chains are growing. Indian grocers lead that segment, with recent changes to rules on foreign investment so far failing to attract overseas companies. Michelle Russell reports.
By 2016, India is expected to have overtaken Japan to become the world's third-largest grocery market, generating sales worth just over US$566bn, according to IGD forecasts. The shift, which will see India behind only China and the US, respectively, suggests the country's grocery market provides long-term growth opportunities for both domestic and international investors.
Like most emerging markets, India's middle-class is experiencing growth. It is currently estimated at around 50m people, or 5% of the population, according to IGD analysts, and is expected to continue growing steadily over the next decade, reaching 200m by 2020.
After that date, growth is expected to accelerate at a faster pace, reaching 475m by 2030, the analysts predict.
Tally this with data from Euromonitor, which reveals India's grocery retail market is experiencing CAGR year-on-year growth of around 12-13%, and you can see why the country may be seen as an attractive growth market for grocery retailing.
Traditional outlets still account for 80% of sales in India but the retail sector is undergoing a transition with the rise of modern retailing. High economic growth, increasing incomes, the proliferation of brands, and the introduction and improvements in card payment technology have all contributed to this growth.
Previously, the main priority of consumers was to buy fresh food at the best price possible, according to Euromonitor. However, due to changing lifestyles, the priority for grocery shopping is now changing among shoppers. Urban consumers with higher disposable incomes are preferring to visit supermarkets and hypermarkets where the products sometimes are priced slightly higher than the traditional market but are available in a much more hygienic environment and in one location.
"The growth right now is primarily being driven by modern grocery retailing, which is expected to grow at a rate of around 3% this year," Euromonitor retail analyst, Shabori Das, tells just-food. "This includes hypermarkets, supermarkets, convenience stores and similar formats.
"This is basically fuelled by the use of cards, which is increasing quite strongly in the country. India used to be a cash-driven economy. However, in metropolitan areas like Delhi and Mumbai, consumers are starting to use cards."
Das suggests mom-and-pop stores, and other traditional stores, are unable to adapt to evolving payment technology, resulting in a move by consumers toward modern grocery retailers. "It's easier, it's more convenient and people don't have to carry around cash," Das says.
Nonetheless, this transition only appears to be taking place in major cities at present time. According to Das, rural India is still ruled by traditional grocery retailers for fresh foods due to per capita income being "considerably lower" than in urban areas.
The modern grocery retail channel is dominated, at present, by domestic players. It has previously been a difficult market for foreign players to enter due to government regulations on foreign direct investment. Recent reforms by India's government on FDI have, politicians hope, make it easier for international players to invest in the market. With overseas investment and expertise, comes, the Indian government hopes, investment in India's under-developed supply chain and agriculture sector, necessary to combat food waste and inflation.
However, the new rules have not yet been exploited. India's government, to placate fears over the impact on traditional stores, placed conditions on foreign retailers looking to invest in multi-brand outlets and it seems that, so far, these conditions have been seen as too onerous.
Therefore, at present, the top five grocery retailers in India are all domestic players. The top spot is held by Future Group-owned Future Value Retail (FVR). Its Big Bazaar hypermarket format is its most popular and benefited from a revamp last year, which involved a new look, more billing counters, and a change in software tools for billing. FVR also announced plans last year to merge with Future's smaller retail group Pantaloon.
Reliance Retail is the second largest grocery retailer in India. It has managed to maintain its position due to the low prices of its grocery items. Its primary source of profit is from its 'value and other' segment, which comprises its Reliance Fresh, Reliance Super and Reliance Hyper chains.
Behind these two retailers are Mother Dairy Fruit & Vegetable, Aditya Birla Retail and Spencer's, respectively. That FVR's share of the total Indian grocery retail market stands at 0.5% demonstrates the dominance of traditional outlets still persists in the country.
However, modern formats are taking hold in India. The hypermarket is the frontrunner. In 2012, hypermarkets witnessed the fastest growth at 20% in terms of value sales, according to Euromonitor. FVR's Big Bazaar, Bharti Retail's Easy Day Market, and Aditya's More Mega Market are some of the most popular hypermarket chains.
Supermarkets witnessed growth of around 16% and 15% in terms of value sales and selling space, respectively.
While convenience has become an increasingly important format in Europe, in India this is not so, with the growth of hypermarkets having impacted the growth of convenience stores. According to Euromonitor, convenience stores had value sales growth of 6% in 2012, which was "substantially" lower than the growth rate experience by the channel in 2011 of 27%. This was attributed to the fact that hypermarkets and supermarkets offer a much larger variety of food items compared to convenience stores and, in India, the latter tend not sell fresh products.
Another trend in Europe and North America that appears to have not yet taken off in India is the presence of discounters. They are, however, expected to enter the market by 2017, Euromonitor predicts.
Grocery online retailing, also unlike the more developed economics, has remained negligible in India with consumers preferring to purchase fresh food and vegetables in store. While the middle class is certainly growing, infrastructure is improving and the country's use of technology becomes more sophisticated, there is unlikely to be a change in the popularity of this format in the near term, analysts believe.
According to Pinakiranjan Mishra, partner and national leader for retail and consumer products at Ernst & Young in India, online grocery retailing is still "in the early stages" in India and "may take some time to evolve into a major trend".
Euromonitor's Das concurs. "In India the penetration of internet is still quite low. Only 12% of the population uses the internet, so internet grocery retailing in India is still extremely small; close to negligible.
She adds: "The concept of buying fresh food is very strong in India, especially in rural areas, it is a very common sight that people will go to work and buy their groceries on their way in the morning. But the concept of buying fresh foods through online grocery retailing is very small."
Nonetheless, several internet grocery retailers have launched over the past few years and there is a growing presence for consumers in major cities like Mumbai and Delhi with firms such as Ekstop.com, Localbanya.com, and Eemli.com all having a presence. And an increase of 24% in internet users last year suggests this could potentially be an increasingly popular channel in the longer term. But for now, competition with more traditional stores that offer quick home delivery and credit to neighbourhood consumers, long delivery times due to poor infrastructure and traffic issues, still present a barrier to growth.
There are other challenges, however, that both domestic and potential international retailers face in the Indian grocery retail market as a whole, according to Mishra.
"Lack of infrastructure and the limited availability of prime retail real estate hampers speed to market. India is also a very value conscious market and due to MRP laws (products need to display the maximum price to consumers), retailers often struggle to balance margins with costs as they cannot price the products above the MRP on the packs. There is also diversity among Indian micro markets, requiring players to often customize their offering based on local preferences."
However, the view is India offers a plethora of opportunities for those willing to invest.
"India is among the largest retail markets in the world. In 2012, the Indian retail market was valued at $500bn and is expected to grow at a CAGR of over 10% till 2016. Organized retail which was valued at $35bn in 2012, is expected to grow at a CAGR of over 20%, offering significant potential for retailers across all formats and categories," Mishra says. "Food and grocery has over a 50% share of the retail market ... the opportunities to expand the pie are very high."
Companies: Reliance Retail
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