A young population, a growing middle class, massive investments in infrastructure in one of the world’s fastest rising economies are changing the retail landscape in India. Below, interesting facts and trends shaping the future of retail in India.
Demographic changes and per capita income growth
The India Retail Forum observes there are several macroeconomic fundamentals which continue to boost India’s “high-potential” retail market.
1. Fast-growing population
India has the second-largest population in the world (estimated as 1.35 billion for 2019) but is projected to overtake top-ranking China in the next 40 years. Currently, India accounts for 17% of the world’s population and 3% of global consumption.
2. Young population
While the rest of the world is struggling with the effects of an aging population, 47% of the population of India is under the age of 25. Moreover, India is slated to be the youngest country by 2020. The New York Times reports India’s youth were eager to embrace western brands like Benetton’s tee-shirts, Domino’s pizza, and Cadbury’s milk chocolates, as well as the shopping experience offered by American-style malls.
Young consumers are driving sales in fashion, food and beverage, quick service restaurants, and mobile phones. These consumers are willing to experiment and adopt new brands.
3. Growing per capita income
Per capita income quadrupled from $452 USD in 2000 to $1,593 USD in 2015. Consumers now have more disposable income. There is a growing trend among Indian consumers to purchase branded products as well as goods and services focused on convenience and healthier living.
It is important to remember that averages do not tell the entire story as there remains significant inequality in wealth distribution in India today. In reality, only about 6% of the population is a target market for major retailers looking to enter the Indian retail landscape.
Still, 6% of India’s enormous population represents about 80 million people, or roughly the entire population of Germany and more than France, England, Italy or Spain. The Indian market cannot be ignored by retailers or marketers.
4. Changes in household structure
Nuclear families have increased by 13% over the past two decades to comprise 70% of all Indian households. Nuclear families tend to spend 20-30% more than joint families.
Additionally, as more women participate in the workforce, there are new demands for services that help the consumer who is busy and short on time. This trend is only expected to continue. The World Economic Forum reports that 82% of female respondents to a recent survey said their ideal employment would be full-time outside of the home.
By 2025, 38% of India’s population will live in its cities. India’s urban per capita GDP has a projected growth rate of 6% between 2005 and 2025. This means the number of urban households with real discretionary spending power may increase as much as seven-fold to 89 million households by 2025. This also means there will be massive demands to upgrade India’s urban infrastructure.
India’s young population, increasing urbanization, and rising income means its retail market is projected to grow at 12% year over year, surpassing $1.1 trillion USD by next year. Currently, India’s retail industry makes up 10% of its GDP and about 8% of its employment (1.09 million people).
Unorganized vs. Organized Retail
India’s retail market is still dominated by “unorganized” retail. Street stands and small stores owned by a single person or family encompass 90-93% of the market. In comparison, in more mature economies, organized retail accounts for roughly 80% of all retail.
Keep in mind that before 2012, overseas investments were not permitted in multi-brand retailers. New investments by foreign brands continue to drive the transition to organized retail.
By category, food and grocery make up 60% of the retail market in India. Other prominent categories are consumer electronics at 10% and apparel at 8%. Apparel is expected to grow by as much 11% by 2021.
Indian consumers are becoming more aware of global standards and Western media. There is a steady trend among consumers to “uptrade” to branded products, search for better quality products, and pay for service and convenience.
Increasing digital penetration is partly responsible for the shift to organized retail and the desire for branded goods. In 2017, India evidenced an internet penetration of 37% and in 2018, 26% of the population used a smartphone. Internet penetration is expected to continue its growth trajectory at 31% Compound Annual Growth Rage (CAGR), which is substantially higher than China’s 8%.
Ninety five percent of all retail purchases in India occur in store, and organized retail is growing. As with the rest of the world, there is also no retail apocalypse in India. Physical retail is alive and well and even with the projected growth of e-commerce (see below), physical retail is in no danger of going anywhere on the subcontinent but continues to complement and drive sales for online retail.
Indian consumers want the opportunity to touch and feel a product. Even with more digital access, only 25% of internet users made a purchase online in 2018. They also like to know they are purchasing a quality product. Makers India reports 75% of consumers continue to prefer shopping in-store to ensure their money is well-spent.
India’s delivery infrastructure is still behind. It’s simply easier, faster and more gratifying for Indian consumers to shop in-store.
This is why Amazon recently opened a physical store and bought stake in India’s retailer Future Retail to boost its performance across India. Amazon plans to take advantage of Future Retail’s extensive brick-and-mortar network of 1,500+ stores including the hypermarket Big Bazaar.
Retail e-commerce in India is growing at a steady pace of 20% year over year. As internet users, the demand for convenience, and network infrastructure all increase so does expected e-commerce sales (predicted to reach $220 billion USD with 530 million shoppers by 2025). The most prominent categories are fashion and consumer electronics.
More than 90% of relevant e-commerce in India occurs on marketplaces like Snapdeal, Amazon, and Flipkart. Flipkart operates both Jabong and Myntra. These marketplaces target younger, wealthier, brand conscious consumers. International fashion brands use marketplaces as their primary route into India, and the sales growth is staggering. International sales on Jabong grew by 145% between 2016-17.
Consumer Packaged Goods
Population growth, the rise of the middle class, and awareness of American media and brands is also driving sales in CPG categories. CPG sales are expected to reach $110.4 billion in 2020. Grocery again captures the largest share of the market as the CPG sector divides between four categories:
- Food and beverage (41%)
- Personal care (22%)
- Household care (9%)
- Other (28%)
Hindustan Unilever Ltd, a subsidiary of Unilever, has the largest number of CPG sales across India with Sunsilk shampoo, Fair & Lovely skin cream, and Brooke Bond teas. Other popular foreign CPG companies include Nestle (dairy and instant noodles), Procter & Gamble (Gillette and Tide), and Colgate-Palmolive (dental care and moisturizer).
CPG companies wanting to make inroads into Indian should know that health and wellness is becoming a major trend. The Indian government is pushing for nutritionally fortified food and a reduction in fat, salt, caffeine, and sugar due to chronic nutritional deficiencies and rising rates of diabetes and obesity.
While the retail market in India is poised for growth across categories, there are several pain points of which retailers who want to operate in India need to be aware.
Foreign Direct Investment Policy (FDI)
FDI requires foreign companies to invest directly in private Indian businesses, and the rules of investment were once very stringent. Recent policies changes have relaxed some of the investment restrictions. For instance, in 2012 the government loosened the policy on single brand retail trading to increase the FDI cap from 51% to 100% (with certain conditions).
Lack of available real estate in large cities, storage facilities, and sound transportation infrastructure continue to be an issue. Retailers who struggle are those who failed to properly plan for infrastructure challenges.
For instance, a survey by PwC India’s Retail and Consumer practice in 2017 found that 75% of retailers felt their growth was constrained by lack of available space or poor quality space. Others did not plan for the cost of reaching a geographically dispersed population as the distribution structure is fragmented at a pan-India level.
India plans to invest $1.39 trillion USD in infrastructure projects over the next five years. In October 2019, Saudi Arabia announced an investment of $100 billion as a way to diversify its own economy and reduce dependence on oil. Japan is an ongoing active investor in India’s north-eastern states with road, electricity, water supply, and biodiversity projects. To speed up construction of highways and airports, the government plans to lease major projects to private companies.
One of the most ambitious projects is the Delhi Mumbai Industrial Corridor. The Corridor is designed to connect the capital city to India’s financial hub in Mumbai. The freight corridor will pass through 7 states and cover 1,500+ km. The corridor will help with transportation, and also take pressure off overcrowded cities with 24 planned manufacturing cities along the route.
Indian’s retail economy is among the fastest growing in the world. Urbanization, a young and technology embracing population, and improving infrastructure all indicate that India is poised for growth and global influence.