“India is an emerging, vibrant market and an important next step in our global expansion strategy,” wrote Steve Sunnucks, the Global President of clothing retailer Gap, in August, following a series of particularly rosy results. “Gap is loved around the world for our American casual style and enduring value and quality, and we are so pleased to bring our brand and products to life for customers in India.”
On the face of it, Gap’s passage to India looks part and parcel of an unspectacular global expansion strategy – and the company was quick to say as much in its press release. However, the arrival of the American retailer comes at a key time for the country, as it prepares to enter into a full-fledged retail revolution.
Big opportunity
Home to over 1.2bn people, India is the second most populated country in the world, and, as a result, big western names like Gap are keeping a close eye on what they believe could be the next frontier for retail. With a growing middle class and an extremely young population, over half of which being under 25 years of age, astute names in retail are acutely aware of the fact that, though individuals’ spending power may not match up to their developed counterparts, spending, particularly among India’s youth, is on the up.
$520bn
The value of India’s retail industry in 2013
5th
India’s position on the list of the world’s largest retail destinations
52%
Of Mumbai’s shopping malls are estimated to be vacant
At $520bn in 2013, the Indian retail market has registered a compound annual growth rate (CAGR) of 6.1 percent since 1998. Today it is the fifth largest retail destination in the world, according to the India Brand Equity Foundation. At 10 percent of national GDP, the retail sector makes up eight percent of India’s total workforce, and remains a key part of the country’s continued social and economic development. “Consumerism in India is witnessing unprecedented growth driven by favourable demographics, a young and working population, rising income levels, urbanisation and growing brand orientation,” according to the PwC report Pulse of Indian retail market. And while impressive already, the rate at which the market is expected to grow is continually increasing – with a CAGR of 13 percent until 2018, at which time the market will reach $950bn – and PwC calculations expect it to tip the $1.3trn marker by 2020.
Broken bricks and mortar
In a time where retail sales are stagnating on home turf, big names on developed shores are attempting to curry favour among an emerging Indian middle class, whose income levels are today adequate enough to bolster their bottom lines. Here, an increasingly affluent Indian consumer and (as in China) an appetite for branded products are together driving western names, particularly those from the US and Europe, to improve their visibility in the country and capitalise on a wide supply of opportunities.
In a market still dominated by domestic names, international retailers are steadily gaining traction in the bricks and mortar space – though the immaturity of the market means that, for many, profitability is an uphill struggle. The country’s retail infrastructure, for example, is sorely underdeveloped, and consumer purchases are more often than not shared between a patchwork of far apart lesser-known retailers, as opposed to being made all under one roof.
On the outskirts of Mumbai stands the Centre One shopping mall, where most of the shops sit empty and footfall throughout the sprawling 150,000-square-foot complex is sparse. Not exclusive to Centre One, a report by the Associated Chamber of Commerce and Industry of India showed that 52 percent of the 40-plus malls contained in and around the city of almost 20m people are vacant. And though many insist that the reason for the inactivity is down to overdevelopment, another key reason is a distinct lack of recognised brands, which stands recent entrants such as H&M, Coca Cola and PepsiCo in good stead.
Shopping malls in the country’s major cities are taking pains to boost footfall by adding a greater number of leisure facilities and food outlets throughout. Yet poor planning and unreasonably high lease costs will keep international names away, and the poor correlation between the rate at which shopping malls are being built and consumers are calling for them will only continue.
The biggest fear for physical stores, both domestic and multinational, is the rise of digital retail in India and the way in which it is supposedly impacting the profit-making potential of the bricks and mortar market. In short, organised retailers have so far struggled to balance growth and profitability – though the lesser costs associated with ecommerce and such have started a conversation about whether bricks and mortar might in actual fact be an unnecessary middle step for the Indian market.
Western retail comes to India
Although the level of internet penetration pales in comparison to developed counterparts, India’s huge population means that the actual number of internet users is second only to China. At 243m as of July 2014 (according to Forbes), the country’s total number of users has doubled in the space of a year. And research conducted by McKinsey & Company since suggests that the same figure will climb to 330m come 2015.
Central to India’s digital revolution is the role of mobile technology in boosting penetration; particularly in the realm of ecommerce, where its success depends largely on internet literacy and, to a lesser extent, trust in online security protocols. “India is on many online retailers’ radars; after all, it is the second most populous country in the world, with an online retail market worth $1.5 billion,” reads AT Kearney’s 2013 Global Retail E-Commerce Index. “Yet it falls short of the Index’s rankings because of its low Internet penetration and significant infrastructure constraints.”
In a market still dominated by domestic names, international retailers are steadily gaining traction in the bricks and mortar space
As such, the country’s retail market is currently in the midst of a major paradigm shift, and as smartphone adoption continues to pick up in the years and months ahead, international and domestic names will be quick to capitalise on the switch to digital. According to research put together by Gartner, the India eCommerce market will cross the $6bn mark in 2015, marking a 70 percent increase on 2014 revenue of $3.5bn. “Digital commerce is at a nascent stage in India. However, India is one of the fastest-growing eCommerce markets in Asia/Pacific,” said Praveen Sengar, Research Director at Gartner, in a statement. “The digital commerce platform market is maturing; incumbent vendors are investing in building out their commerce platforms, and those in adjacent areas, such as [research], order management and marketing – both through organic development and acquisition.”
Regardless, ecommerce still occupies a meager four percent of the country’s retail market and, despite the fanfare surrounding mobile shopping, less than five percent of digital transactions conducted via the platform. Yet the country’s digital credentials are measured in terms of potential, which is in rich supply. Interestingly, whereas the model for retail expansion in the western world was – and still very much is – bricks and mortar first and digital second, India’s case could mark an important development for the way in which the sector matures in developing markets.
Virtual shop fronts
Returning to Gap’s decision to set up shop in India and considering India’s wealth of digital potential, the decision to focus on physical stores seems a strange one. However, boosting a visible presence in the market is a critical part of building renown among uninitiated Indian consumers, and so its strategy could be likened to setting up a shop front of sorts, with the ultimate intention being gaining traction online. For western names to really capitalise on what is fast-emerging as a huge retail opportunity, consumers there must first resonate with the brand and see it as a shopping opportunity whether they be on the high street or online. Put another way, although India is seen the world over as the next frontier for digital retail, international names that might not be familiar to the 1.2bn population are today planting the seeds for growth.
Whereas in years passed bricks and mortar sales have been front and centre of the conventional retail strategy, increasingly – and particularly in India – major names are beginning to rely on digital offerings for the vast majority of their business. And though the country’s modernisation has seen retailers much like Gap set up flagship stores in some of the country’s key markets, clearly the real growth opportunity is in the digital space.
