The retail sector in India is emerging as one of the largest sectors of the economy and one of the top five retail markets in the world by economic value.
India has replaced China as the most favorable market for retail expansion, supported by a fast-growing economy, increasing consumption rates, rising urbanizing population and a burgeoning middle class.
The total market size of Indian retail sector was estimated to be around US $641 billion in 2016, thereby registering a compound annual growth rate (CAGR) of around 7.5 percent since 2000. The retail industry is expected to grow to US $1.6 trillion by 2026, registering a CAGR of about 10 percent. However, modern trade is expected to grow at a rate of 20 percent per annum and traditional trade is expected to grow at a rate of 10 percent per annum.
Of the overall retail industry, food and grocery accounts for the largest share in revenue in India. India is the world’s second-largest producer of food. Food and grocery retail in India exceed US $294 billion representing 16 percent of India’s GDP. By 2020, food and grocery segment is estimated to constitute 66 percent of the total revenue in the Indian retail sector, followed by the apparel segment.
Food Retail Formats
The Indian retail market is still in its nascent stage. The organised retail market is valued at US $60 billion, which constitutes about 9 percent of the total retail sector and the unorganised retail market represents the remaining 91 percent of the sector. The same is the case with the food retail market where the organized market constitutes only 3 percent in comparison to the unorganized segment that forms 97 percent of the food retailing market. The organized retail in India is growing at a CAGR of 20-25 percent per year, which is a strong indicator of its growth potential in the years to come. The unorganized sector in food retail is predominantly dominated by general stores, kirana stores, convenience stores and street markets. There are more than 15 million mom-and-pop stores. On the other hand, the organized sector includes gourmet stores, department stores, discount stores, supermarkets and hypermarkets, e-tailers and cash-and-carry formats.
The two most significant trends emerging rapidly in the Indian food market are:
• The expansion of imported food categories and products
• The incremental popularity of gourmet food market amongst Indian consumers
Imported Food Market
Imported food constitutes about 15-20 percent of the total organized retail space. Vegetables, fruits, and nuts are the major imported categories contributing 80 percent of the total food imports in India. The imported food market in India is growing at a rate of about 30-40 percent per annum from the last 4-5 years.
Rising urbanization, changing lifestyles, increased foreign travel, increasing health awareness and the boom in organized retailing have resulted in increasing the demand for imported food products. Relaxed import regulations and reduced import duties have further increased the demand for imported food products.
The categories showing growth in the imported food segment are dairy items such as cheese, creams, chocolates and dips followed by wine and packaged food. However, the imported food business is subject to severe competitive pressure – with the power shifting to retailers from manufacturers/ importers, resulting in shrinking margins at the back-end.
Gourmet Food Market
The gourmet food market has witnessed a major transformation in recent years and is expected to grow at a CAGR of 20 percent in the coming years. Prominent players like Godrej’s Nature’s Basket, Le Marche, Foodhall, Nuts & Spices, Brown Tree are very positive about the ongoing trend. The segment offers high margins to retail for high-end products as it caters to premium customers who look for quality and variety and are willing to pay a premium price.
The young urban Indians aged 16 to 40 years constitute the major segment of this market. They spend over 40 percent of their income on food, are ready to experiment, and are willing to pay a premium for better quality, variety, and taste.
Chocolates, cookies, juices, honey, sauces and certain fruits are the major categories constituting the bulk of the gourmet market in India. Also, products such as truffles, artichokes, asparagus, Australian lamb and Norwegian salmon have also found their way into the gourmet food and beverage space.
According to a report jointly published by property consultant Knight Frank India and lobby group Retailers Association of India (RAI), modern retail in India is estimated to double in size in three years to Rs. 1,718 billion from the current Rs. 871 billion across the top six retail markets of the country, primarily driven by omnichannel retailing.
The emergence of digital platform and the increased use of plastic money and mobile wallets after demonetization have been the key drivers behind the growth of Omnichannel retailing. Today’s time constraint customers want seamless navigation across different retail channels.
As previously highlighted, Food & Beverage (F&B) accounts for over 60 percent of customer spend and is growing at the rate of about 30 percent per annum. In F&B, penetration of organized retail is only 3 percent of the total market. Indian customers visit both traditional (kirana) stores and modern stores in the ratio of 5:1 times per week. The number of modern retail stores has grown more than four times since 2006 and is currently estimated to be around 50,000 in the country and expected to reach 100,000 by 2020. Modern retail is seeing a fast growth in Tier-II and Tier-III cities but the challenges for organized retail players include brand building, pricing, logistics, trained workforce, hygiene concerns, rental costs, etc.
Modern trade is now being used by many food processing companies to introduce new products, build brands, improve customer awareness, etc. This could be followed by volume ramp up from the general trade channels, which shows the companies’ belief and vision in this channel for their growth.
Online Retail (E-tail)
Online retail (E-tail) in India has grown immensely in the last five years. Mumbai tops the chart in online shopping followed by Delhi and Kolkata. Increased competition among top online players is forcing many physical retailers to have an online presence, and the trend is no different for the food industry. Online grocery is gaining acceptance in India since the past three years with a number of new companies coming up in the metro cities. Many venture capitalists are financing the e-grocers, which is a good sign for growth.
In Delhi, an e-grocer delivers approximately 20 orders a day. In Mumbai, about 40 percent of the groceries are bought through online or via phone. Some of the top e-grocers in the country are Bigbasket.com, ZopNow.com, MyGrahak.com, Aaramshop.com, Ekstop.com, AtMyDoorSteps.com and they are continually making people’s life easier.
Best price and on-time delivery, and other exciting features like goods delivered to neighbours after getting the consent from the customer, are giving consumers more and more reasons to shift to online channels.
Drivers of Food Retail Market
The food retail market is on a tremendous growth trend and the drivers that are set to take this market further can be broadly classified under three pillars:
1. Supply Side
2. Demand Side
Supply side features those factors that act majorly as change-driving agents. These include:
• Infrastructure development
• Multi-channel marketing
• Easy credit availability
• Private labeling
The first three listed factors are significant drivers of growth on the supply side. The fourth, i.e, ‘Private Labelling’ is a relatively recent trend, which is gaining popularity and has enormous potential to drive the market scenario further.
Demand side features those factors that are majorly consumer-oriented and are representative of the shifting lifestyles. These include:
• Increasing urbanization
• Increasing disposable income
• Growing middle-class population
• Increasing working women
• Inclination towards healthy lifestyle
• Consumer awareness and changing preferences towards international trends
• Increasing foreign travel
• International TV shows, food festivals and Internet penetration
All these factors majorly hint towards the changing lifestyle of Indian consumers, which translates into uptake of demand in this industry. These trends will continue to evolve and India being a very fragmented market, the penetration of these patterns deeper into the society will continue to take place, thereby confirming a sustainable growth trend in times to come.
The major features on the regulatory front are policy-driven factors initiated primarily by the Government to grow this industry. Two factors under this pillar to have contributed the most are:
• FDI policy in Multi-Brand Retail sector.
• Implementation of Goods and Services Tax to reform the tax rates and slabs for this industry.
Challenges Before Food Retail Market
The challenges restricting this industry can also be classified under three pillars – Supply side, Demand Side and Regulatory.
Challenges on the supply side include:
• Sourcing base and efficiency
• Real estate availability and increasing capital cost
• Workforce availability and incremental cost
• Poor distribution network
• Lack of cold chains (food wastages accounts around 20 percent)
• Changing political environment
• Currency fluctuation
Challenges on the demand side relate to consumer and lifestyle driven factors that hamper the growth of the industry. These include:
• Penchant for fresh/ home-made food and value consciousness
• Diversity of tastes and preferences
• Price sensitivity and change in food habits due to inflation
Challenges on the regulatory side are the stringent FSSAI norms and high duties and taxes. These are the two major factors that challenge the food retail market in India.
Emerging trends and scope of innovation in food retail market
• Big players of the industry are becoming bigger: This trend is helping the bigger players to innovate and create new markets opportunities.
• Rise of organic foods and health and wellness segment: To keep up with the changing lifestyle of the average Indian consumer, companies are pushing them more to satisfy the needs of their consumers, which open a whole lot of opportunities for product and market innovation.
• Increased focus on private labels: Following the trend of the Western world, private labels is something that everyone is banking on for the Indian market as well. Th e results are very positive in numbers and show a great potential and scope of improvement in the future.
As the organized food retail market matures in India, there would be an increased need for retailers to differentiate through innovation. Innovations would mostly come under two heads:
1. Innovation in the retail format: Players can innovate on retail formats in different ways:
• by targeting specific customer segments and serving their needs better; e.g. working women, single office goers, etc
• by changing the product mix; e.g. special private label stores, exclusively fresh produce stores, etc.
• by offering new forms of convenience and a broader range of products to the customer; e.g. Tele-retail and Internet retail
2. Technological innovation: By using advanced technologies like artificial intelligence and predictive analytics, retail players can gain a competitive advantage. Examples include:
• Self-scan checkouts have the potential of both decreasing check-out time and manpower cost.
• Web-enabled POS systems, e-Procurement systems, e-SCM systems, and advanced warehouse management systems can help food retailers in integrating the entire agri-value chain leading to efficient procurement and supply chain management.
• RFID tags can be used to track and reduce in-store inventory management costs and give retailers better insights into customer in-store movement patterns. This will also reduce the chances of stock-outs.
• Use of predictive analytics can bring insights into customer buying behaviour with implications on store layout, pricing, and promotions.