The Hindu Business Line : For that winning feeling

A multi-country research report on consumer and retail markets by PricewaterhouseCoopers says that India could be right up there as a winning proposition for global retailers.

DO you know that Indian consumer spending has been growing at 11.5 per cent for more than a decade, way ahead of the economic growth rate? Are you aware that food, beverages and tobacco account for half our spending? Or, that PFCE, short for private final consumption expenditure, rose by 8.3 per cent, during 2003-04, the highest growth rate in 23 years?

These are only a few of the facts that jump from the latest report of PricewaterhouseCoopers (PwC): `From Beijing to Budapest - Winning Brands, Winning Formats'. The publication is a `thought leadership study... of the structure and potential of the retail and consumer market in each country, as seen from a local perspective,' writes Jacques-Etienne de T'Serclaes, Global Retail & Consumer Leader of PwC in his foreword. The fourth edition of the `regional research project' covers 20 countries `with the highest growth potential.' These are China, India, Indonesia, Korea (South), Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam, in Asia; and that in Central & Eastern Europe, Bulgaria, Czech Republic, Hungary, Lithuania, Poland, Romania, Russia, Slovak Republic, Slovenia and Turkey.

Three main investigation topics discussed for each country are: Economic overview and regulatory environment; demographics and consumer behaviour; and retail and consumer goods sector: performance, challenges, opportunities and emerging trends. Let us look at the India report, which runs to 16 pages.

Economy numbers and regulatory milieu

Banking on EIU (Economist Intelligence Unit) projections of 7.1 per cent growth in 2005 GDP, the PwC study sees continued growth in services, industry and infrastructure. Thankfully, unemployment rate may return to a single digit percentage by 2007. The discussion of regulatory scenario `prior to 1997' mentions: "FoodWorld, which is a 51:49 joint venture between RPG group and Dairy Farm International of Hong Kong, was established during this period." But that may not match with the `August 1999' timeline you see on www.rpggroup.com for the venture. (Earlier this year, both the RPG group and Dairy Farm broke up, with the RPG group selling its 51 per cent stake to an Indian partner of DFI).

Quite anxiously, the report mentions that the PMO is "directly monitoring an initiative to open up the retail sector to FDI soon." Elsewhere in the report, you'd read that the Indian Government is at an advanced stage in making amendments to the current policy regarding FDI in retail, and that a host of leading global retailers have started preliminary groundwork to evaluate an Indian market entry.

"It is most likely there would be a calibrated opening (up to 51 per cent equity permitted to the foreign partner), and collaterals/ conditions of investment such as minimum investment, size of stores, locations, local sourcing, and so on," are conjectures in the report best counted as eggs on the backburner rather than chickens on the grill.

Real estate for retail

The majority of new shopping malls in development are `fragmented and sub-optimally planned,' says the report. "It is difficult to find suitable properties in central and downtown locations for large-format retail stores in most metros, primarily due to fragmented private holdings and infrequent auctioning of large government-owned vacant lands," rues PwC.

One salutary effect is the attraction of suburbs for retail. But negative points are many. One, `cycle time' is long, 18 to 24 months, `between identification and possession of ready-to-move-in retail property.' Two, distortion owing to land ceiling, rent control and the pro-tenancy laws. Three, high stamp duty and problems with titles. And four, service tax. To implement VAT (value added tax) successfully, it will be necessary to develop the organised retail sector, argues PwC, though tax experts may see VAT compliance and organised retail as two independent issues.

Demographics & consumer behaviour

Dependency ratio, a proportion of non-working population, is set to decline in the coming few years; and about 60 million people will be joining the ranks of `the consuming age class' of 15-64. To help the retail sector, there is also the ascent of urbanisation (from 27.8 per cent in 1998 to 31.8 per cent in 2008). And, "upper-income classes are rising faster than the lower-income ones and the lowest segments are shrinking," going by CAGR or compounded annual growth rate.

What should ring sweet for marketers is a line like this: "With growing disposable income and the highest ever consumer confidence levels, Indian consumers propensity to spend is soaring... Indians' purchasing power is further fuelled by easy availability of finance in the form of loans". A different kind of poverty is creeping in, though: that of time.

Challenges

Key challenges that PwC advises marketers to handle `appropriately' to unleash `the vast potential of the Indian market' are: urban-rural divide, strong local companies, cultural preferences and tastes, fluctuations in commodity prices, cold chain distribution, and high real estate costs. Sixty-five per cent of the 12 million mom-and-pop retail outlets are in rural areas and any CPG (consumer product goods) company has to address this issue, reminds the report.

To emphasise the importance of cultural preferences, PwC cites examples such as pizza majors introducing `pizzas with Indian cuisine toppings', McDonalds including `vegetarian and non-beef burgers,' and Hindustan Lever offering `soaps based on sandalwood and Ayurvedic ingredients.'

How do some companies handle fluctuations in commodity prices and oil costs? By backward integration of procurements from agricultural producers, answers the report. "The beer industry is encouraging farmers in Haryana to produce barley."

To achieve supply chain efficiency, FoodWord sources 40 per cent of its merchandise from 500 local small-scale industries, says the report. However, limited cold chain distribution network takes the blame for "the lack of organised growth in branded and packaged fresh fruits, vegetable, milk and confectionery businesses".

Opportunities

Given that only 3 per cent of the total retail market is organised, there is "ample space and time to experiment with innovative formats and value propositions," propositions the report. There is "enough room for many new players to co-exist," it assures. A few tips to make your brand win are: to leverage on alternative media as ITC and Coke do; to create buying power through credit; to price competitively as in the case of Ruf & Tuf; to exit unsustainable non-core business; to focus on power brands as HLL does; and to think of alternative distribution models for a wider reach.

Outsourcing is more talked about, though `sourcing from India' has been silently happening. "For some years now, multinational retailers, like Wal-Mart, GAP, Carrefour, Li & Fung, JCPenney, Tesco and Nike, have sourced apparel and lifestyle products from India," points out PwC. "Some of these retailers are looking at India to increase their sourcing commitments and are moving from third-party sourcing offices to establishing their wholly-owned/managed sourcing or buying offices." Add to this the trend of making India an export hub. Do you know that "Sara Lee plans to set up a wholly-owned subsidiary that will source, manufacture and export undergarments, casual wear and footwear from India"?

Emerging trends

The report speaks of six trends. One, aggressive pricing strategies are coming up because "the pricing of international products in India in relation to the per capita GDP is much higher compared with other countries in the Asia Pacific region". Two, product variants such as `sachet packs' aren't anathema; and re-launches, promos, discounts and freebies are seen as ways to put life into sluggish brands. Three, competition and price wars rage even as "regional players are also holding their own against international brands due to the scalability of their operations." Four, with the erosion of margins after price wars, the beaten companies now bet on market growth through improved infrastructure.

Five, third-party sourcing is relied on for better logistics and `flexibility in production, inventory planning and control of labour costs'; and "tax incentives in backward areas have helped Colgate, Britannia, Dabur, Godrej, HLL and Marico set up manufacturing facilities in Uttaranchal and Himachal Pradesh". And six, `homegrown CPG majors' venture into foreign markets, even as domestic demand turns sluggish; they see the West Asia, Bangladesh, Nepal and Pakistan as high growth potential markets "due to the large Indian population living in the region, similarity of lifestyle and consumption habits."

On the whole, the report is a productive exercise that is worthy of attention, though you may find it liberally tilting towards the biggies in the retail sector.

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