Retail Sector in India
Tue, 22 August 2023
The Indian e-commerce sector is set to achieve a significant milestone by 2030, surpassing USD 350 billion in Gross Merchandise Value (GMV). This growth will be fueled by urbanization, rising incomes, and changing family structures. Currently valued at over USD 55 billion in GMV for 2021, the sector is projected to maintain a robust Compound Annual Growth Rate (CAGR) of 23% until 2030.
E-commerce and consumer internet companies are also witnessing substantial funding, with USD 15.4 billion raised in PE/VC funding in 2022, indicating strong investor confidence. This expansion is expected to reshape India's retail landscape, with modern retail, including e-commerce, projected to hold a 30-35% share within 3-5 years, while traditional retail's share is anticipated to decrease to 65-70%. These shifts position India to become the third-largest global online retail market by 2030.
Recent Trends
- Rapid adoption of digital technologies, like Virtual Reality and Augmented Reality, enhances online shopping with virtual product experiences, bridging physical and digital realms.
- Green-conscious consumers value eco-friendly practices, influencing brands to adopt ethical measures like eco-friendly materials and fair labor, boosting reputation and competitiveness.
- Utilizing data analysis, businesses offer tailored product suggestions, promotions, and recommendations, enhancing customer satisfaction and loyalty through personalized experiences.
- Data-driven insights optimize supply chains, from inventory to logistics, ensuring efficiency and customer service, facilitated by real-time data and interconnected networks.
Market Overview
India has surged as a top retail hub, set to reach a retail market worth USD 1.1 trillion by 2027 and USD 2 trillion by 2032. Fueled by a sizable population, a growing middle class, and urbanization, India stands as the 4th largest retail market globally. The retail sector holds 10% of India's GDP, employs 8% of its workforce (35 million jobs), and is projected to create 25 million new jobs in the next decade. With major segments like Food & Grocery, Apparel & Footwear, and Consumer Electronics dominating, the Indian retail market is shifting towards organized retail spaces of around 120 million square feet. E-commerce is surging, targeting USD 350 billion GMV by 2030, driven by a projected 500 million online shoppers, and India's digital economy is set to expand to USD 800 billion by the same year. Digital payments like UPI are on the rise, with 62 billion transactions in 2022. Rising incomes will elevate India to a middle-class-led economy, boosting consumer spending to nearly USD 6 trillion by 2030. Recent policies allow 100% FDI for single-brand retail trading and offer flexibility in starting e-commerce operations before brick-and-mortar outlets. The Indian retail landscape projects steady growth, contributing 10% to GDP and employing 8% of the workforce, with organized retail holding 12% market share from 2022 to 2032.
Key Forms of Retail Business in India
- Brick & Mortar Stores
- E-Commerce
- Mobile Commerce (M-Commerce)
- Direct Selling
- Franchise Retail
- Online Marketplaces
- Pop-up Stores
- Hypermarket and Superstores
- Online Subscription Services
- Specialty Stores
Evolution in the Indian Retail Sector
- Pre-1990s: Local stores dominated, lacking modern retail exposure.
- 1990s: Organized chains like Shoppers Stop emerged, standardized shopping.
- Early 2000s: FDI opened, Nike and Ikea entered, global brands reached Indians.
- Mid-2000s: E-commerce surged with Flipkart, Snapdeal, offered convenience.
- Consumer Shift: Growing middle class sought branded goods, enhanced experiences.
- Digital Shift: Mobiles, internet transformed retail, m-commerce trend.
- Omni-Channel: Seamless online-offline shopping bridged by omni-channel.
- Govt Initiatives: "Make in India," "Digital India," GST streamlined retail.
- Sustainability Focus: Eco-friendly products, support for local artisans.
- Future Growth: Rising middle class, urbanization, e-commerce, tech advancements drive retail evolution in India.
FDI in Indian Retail Sector
Foreign direct investment (FDI) holds potential to address challenges in India's retail industry, fostering competition and productivity. Allowing FDI in food-based retail can elevate farmer incomes, agricultural expansion, and mitigate consumer price inflation. Successful FDI inflow in various sectors, as reported by the DPIIT, demonstrates India's ease of doing business improvements. With promising projections, India's GDP growth, increased FDI, and sustained investor interest even amid COVID-19 underline FDI's role in economic growth. India's FDI-focused measures, regulatory reforms, and increased FDI share showcase its position as a top host for FDI inflows, driven by sectors like IT and construction.
Impact of FDI
- Competition Boost: Organized retail improves cost efficiency and competitiveness, aligning with India's growth potential.
- Inflation Control: Global retail models can stabilize India's economy, addressing food inflation concerns.
- Enhanced Supply Chain: Global practices can optimize supply chains, enhance cold storage infrastructure, and reduce pricing time-to-market.
- Technological Advancements: FDI introduces advanced tech, improves customer experience, and extends global market reach.
- Impact of GST: GST implementation streamlines operations, logistics, and interstate goods movement, benefiting retail FDI.
- Scaling Challenges: FDI encourages tech investment for better quality products and supplier scalability.
- Sector Transformation: FDI brings competition, technology, and infrastructure investments, transforming small retail businesses.
Business Models for Operating Business in Indian Retail Sector
- Licensee/ Distribution
- Micro-Franchisee
- Master Franchisee
- Joint Venture with Indian Company
- 100% owned Subsidiary
- Limited Liability Partnership
Challenges faced by Organized Retail Sector in India
The Indian organized retail sector faces several challenges: a talent shortage, inefficient supply chains, quality concerns, intermediary proliferation, complex regulatory processes, inadequate infrastructure, lack of industry recognition, and restrictions on FDI. These issues hinder growth, operational efficiency, and the sector's ability to attract investments and expand.
Growth Drivers
The Indian retail landscape is shaped by factors like rising consumer spending due to a growing middle class, the e-commerce boom, urbanization influencing preferences, expansion into tier 2 and 3 cities, omnichannel strategies, rural market potential, specialty and private label brands, technological adoption, government initiatives, sustainability focus, increased income, online spending surge, rural consumption growth, and the impact of young millennial households. These dynamics create diverse opportunities for retailers to tap into evolving consumer trends and market segments.
Single Brand Retail in India
Single-brand retail in India involves foreign companies retailing products under the same brand name, subject to specific regulations. These encompass 100% FDI allowance, mandatory local sourcing norms, government approval for ownership exceeding 51%, permission for online retail, and brand ownership requirements. These measures aim to attract foreign investment while ensuring a balance between global participation and safeguarding domestic interests. Some examples include – Apple Inc., Zara, H&M, Starbucks and Nike.
E-Commerce Industry
India's rapid increase in internet and smartphone usage, driven by initiatives like 'Digital India,' has resulted in 830 million internet connections, with a growing smartphone base projected to reach 1 billion by 2026. This digital advancement has fueled the e-commerce sector, encompassing B2B, D2C, C2C, and C2B commerce. Notably, the D2C market is set to surge to USD 60 billion by FY27, contributing to the e-commerce market's projected growth to USD 350 billion by 2030.
Market Overview of the E-Commerce Industry
India's online grocery market is set to reach USD 26.93 billion by 2027 at a CAGR of 33%. The consumer digital economy, driven by e-commerce and edtech, is projected to hit USD 1 trillion by 2030 from USD 537.5 billion in 2020. B2C e-commerce is expected to grow steadily with an 8.68% CAGR from 2023-2027. India's e-B2B market could achieve a GMV of USD 100 billion by 2030. The country emerged as the 8th largest e-commerce market globally in 2020, poised to grow to USD 200 billion by 2026 from USD 38.5 billion in 2017. Online shoppers are predicted to reach 350 million by FY26. Smartphone and 5G adoption is significant, with 169 million units shipped in 2021 and 5G seeing a 555% YoY growth. The internet user base is estimated to reach 900 million by 2025 from 622 million in 2020, growing at a 45% CAGR.
Government Policies and Support
Recent government initiatives and regulatory changes have significantly impacted India's retail and e-commerce landscape:
- Textile PLI Scheme: A INR 10,683 crore PLI scheme for textiles was introduced to strengthen manufacturing and exports.
- Retail Digital Payments Framework: RBI's new offline digital payments framework aims to accelerate digital payment adoption.
- FDI Rules in Food Processing: Potential changes in FDI rules could permit E-commerce firms to sell Made in India products.
- 100% FDI in Online Retail: Government allowed 100% FDI in online retail through the automatic route.
- Government e-Marketplace (GeM): GeM exceeded INR 2 lakh crore procurement, enhancing transparency in public procurement.
- National Retail Policy: A proposed national retail policy aims for ease of business and integration of offline and e-commerce retail.
- Consumer Protection (e-commerce) Rules: Mandated display of country of origin and listing parameters for e-commerce products.
- Digital India Initiatives: Initiatives like Umang, BHIM, and Start-up India Portal promote digitization.
- Equalization Levy Amendment: Foreign e-commerce operators face a 2% tax and PAN requirement.
- FDI Boost for E-commerce: FDI limit in E-commerce marketplace models increased to 100%.
- 5G and E-commerce: Government's 5G infrastructure investment is set to enhance E-commerce prospects.
Regulatory Framework
The Indian retail industry operates under a comprehensive regulatory framework designed to ensure equitable practices, consumer safeguards, and sustainable growth. This framework encompasses vital aspects such as Foreign Direct Investment (FDI) policies allowing entry routes for foreign retailers, the Goods and Services Tax (GST) simplifying taxation, and Consumer Protection Laws establishing mechanisms to address grievances. Specific guidelines for e-commerce, Intellectual Property Rights (IPR) protection, food safety standards, and adherence to labour laws ensure compliance and fairness. Retailers also navigate land zoning regulations, competition laws, and packaging requirements, all aimed at fostering a balanced, competitive, and consumer-friendly retail environment.
Key Players in Indian Retail Sector
- Reliance Retail
- Future Group
- Tata Group
- Aditya Birla Retail
- D-Mart
- Spencer’s Retail
- Shopper's Stop
- V-Mart Retail
The pandemic has reshaped consumer behavior, blurring lines between offline and online shopping. Retailers are adapting by creating seamless experiences across channels. E-commerce's growth is transforming retail, offering choices and competitive prices. India's online retail market is predicted to reach USD 350 billion by 2030. Despite challenges, India's retail outlook is positive due to rising incomes, urbanization, and foreign investment. Adapting to digital transformation and delivering a seamless shopping experience across online and offline channels is crucial for retailers to thrive in India's evolving retail landscape.
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