India continues strong growth ahead, says A T Kearney study

The latest edition of A T Kearney's Global Retail Development Index (GRDI), once again confirms India’s growing economic clout. India now ranks 15th backed by strong growth in retail sales. GRDI has guided global retailers with strategic investments since 2002. This is the period when the retail environment in developing markets underwent massive transformation. The GRDI focuses on the fact that retailers' increased understanding of developing countries is more important today than ever before, as these markets struggle with shifting economic and political trends—sometimes in an extremely short timeframe.

Bright future GDP growth path

As per GRDI India position improved due to good retail sales growth and strong prospects for future GDP growth. India's retail market is expected to grow to 1.3 trillion dollars (over Rs eight thousand billion) by 2020, and GDP is expected to grow at 8 percent over the next three years, making India the world's fastest-growing major developing market. Consumer and investor sentiment have seen an uptick, as the pro-reform government under Narendra Modi sets out on an ambitious goal of improving its ‘Ease of Doing Business’ ranking from 142nd to 50th in the next two years, the report observes.

India represents a good opportunity for international retailers in single-brand retail, cash-and-carry, and e-commerce, as the country is on the cusp of a strong growth phase over the next five years. The tipping point for brick-and-mortar retail continues to be the opening up of FDI norms in multi-brand retail, a move that is not expected in the near-term, the index points out.

Ecommerce on the other hand recorded impressive 27 percent growth in 2014 to reach 3.8 billion dollars (over Rs 24,000 crores), led by online retailers such as Amazon, Flipkart, and Snapdeal. However, this market still has a long way to go, says the report, as online remains just 0.5 percent of the total retail market, Internet penetration is just 20 percent of the population, and infrastructure needs to improve significantly. Indeed, the Associated Chambers of Commerce and Industry of India estimates that companies will spend between one billion dollars (over Rs 6,500 crores) and two billion dollars (over Rs 13,000 crores) on ecommerce-related infrastructure over the next five years.

Global brands bullish on India

For now, international retailers continue to focus on the cash-and-carry and single-brand formats, where 100 per cent FDI is allowed. After two years of dormancy, Walmart opened a new outlet in Agra in 2015 and plans to add 50 wholesale stores to its existing 20 in the next five years. Germany's Metro will triple the number of wholesale stores to 50 by 2020. Many single-brand retailers such as Japan-based Asics, Danish retailer Bestseller, and French fashion brand Sisley are breaking away from franchisee tie-ups with Indian partners to go solo. Nike, which has about 400 franchise locations in India, filed an application in September to open company-owned stores.

Meanwhile many new entrants remain undecided between partnerships with local companies versus company-owned stores. IKEA, which also sources locally, plans to open its first solo store in Hyderabad. H&M has already entered India alone with plans to open an initial 50 shops. In contrast, Gap and The Children's Place have chosen to partner with Arvind Lifestyle Brands.

As retailers continue to expand, real estate availability could be the biggest barrier. India has four times the population of the United States but just one-tenth of the mall space. Many malls are also of poor design and lag behind global standards. The dearth of quality space in core areas is prompting some retailers to look online instead.

The GRDI indicates that in mid-tier markets such as India, global luxury players need to actively build their brands and be ready to pounce once luxury real estate becomes available. For those that are more intrepid, breaking ground in new frontiers could pay off big in the long run if they can get past the initial challenges.