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Organic Growth Opportunity

With regards to the consumer profile, the personal disposable income rose by 9. 7% a year between 2001 and 2005 in local-currency terms. Demand for consumer goods has consequently increased, resulting in a similar increase (9. 1% a year) in retail sales over the same period. Rising incomes, low inflation and low interest rates have supported consumer sentiment and spending in recent years. Importantly, inflation expectations are well anchored, unlike in the past, when bouts of high inflation led to a sudden erosion of purchasing power (EIU Viewswire, 2 March 2006).

Low interest rates and competitive lending by commercial banks have encouraged a major shift in Indian consumer behavior. The easy availability of finance and improving employment opportunities have led consumers to borrow against future income—a relatively new phenomenon in India. Thus, income in India is highly skewed between rich and poor and between urban and rural populations. This has resulted in the emergence of two separate consumer segments with different demands. Independent retail outlets, handcarts and kiosks serve rural areas.

In cities, independent retailers, retail chains (including shopping malls), department stores and supermarkets are becoming increasingly common. The middle class—as defined by India’s relatively low-income standards—is large and growing rapidly. There

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were nearly 50m households (24% of the total) with an income of more than US$3,000 in 2005. These “well-off” households already own relatively expensive consumer durables, such as air-conditioners and refrigerators. Beyond this affluent group, another 50 million households are approaching income levels that would support the acquisition of consumer goods.

With regards to the consumer goods, food, beverages, tobacco, white goods, clothing and personal computers (PCs) constitute the main categories of consumer items in India. Greater competition and lower prices have led to annual double-digit volume growth in white-goods sales in recent years. Driven by a growing youth population and greater awareness of Western fashions, clothing sales have been rising steadily. The growing use of credit and debit cards has supported this trend, although card penetration remains low in many urban areas and is nearly non-existent in rural areas (Euromonitor International, 12 November 2006).

Moreover, another major influence on the retail market is product customization. Similar with many non-Western markets—Japan most famously—Indian consumers have special requirements for their consumer durables, and manufacturers who try to sell US- or European-style products in India may be disappointed. Refrigerators that can keep cool even after a power cut, for example, are especially popular in India. So are washing machines with extra rinse cycles. With regards to possible competitors in India, Pantaloon, with sales equal to US$235m in 2004, is India’s biggest retailer and one of its fastest-growing chains.

The company currently operates 82 stores: 18 Pantaloon department stores, 24 Big Bazaar department and variety stores, and 37 Food Bazaar locations, and three Central Malls in Bangalore, Hyderabad and Pune. Pantaloon department stores are positioned towards mid- to upper-market consumers, and each outlet is significantly smaller than those of most other department store chains. Its Big Bazaar hypermarkets aim to serve the lower end of the market. Another competitor would be the RPG Enterprises, which is the second largest retailer in India and is now venturing beyond its base in southern India.

Its chains of supermarkets, hypermarkets, health and beauty stores and music shops had estimated sales equal to US$167m in fiscal year 2004-05. One of the first modern retailers, it operates on the basis of a “hub and spoke” delivery model, with a hub feeding many stores. The hub structure has allowed the company to negotiate bulk prices from suppliers and keep retail prices low. Moreover, RPG’s FoodWorld supermarket chain has grown rapidly, and in 2001 RPG opened Giant, its first hypermarket, a 50,000-sq-ft store located on a 120,000-sq-ft site, stocking over 20,000 products.

RPG’s two smaller retail businesses are the Health & Glow chain, selling health and beauty products, and MusicWorld, selling compact discs, digital versatile discs (DVDs) and cassettes (EIU Viewswire, 2 March 2006). Although India has yet to tackle the country’s infrastructure needs and social problems, bright future lies ahead for its retail market and Wal-Mart should seize this opportunity in the current economic growths in India. In fact, the government indicated that it would allow retailers selling a single brand, such as Nike, to own 51% of their operations.

Previously, such groups had only been able to enter through franchise agreements. However, the government stated that it would continue to disallow foreign direct investment by retailers of multiple brands, keeping out the big hypermarket groups and discounters (BusinessWeek, 3 February 2006). This is a carefully crafted decision, designed to cause minimum political damage domestically, while showing foreign investors that liberalization remains on track Until the Indian government lifts this policy, Wal-Mart could penetrate successfully into its market like what they did in China.

References

Bhatnagar, P. (2005, June 6). Wal-Mart’s Hot on India: No. 1 Retailer Sings Nation’s Praises to Analysts; Calls Market a ‘Huge Organic Growth Opportunity. CNN Money. Retrieved online 22 November 2006 at http://money. cnn. com/2005/06/06/news/fortune500/walmart_india/. BusinessWeek. (2006, February 3). One Brand, No Waiting in India. Retrieved online 22 November 2006 at http://yahoo. businessweek. com/investor/content/feb2006/pi2006022_1223_pi015. htm EIU Viewswire, (2006, March 2). India: Consumer Goods and Retail Profile. Retrieved online 22 November 2006 at http://www. viewswire. com.

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