In an interview with Catherine Roche, BCG partner and coauthor of the firm’s 2011 report on consumer sentiment, an expert on retail in India focuses on the competition between the unorganized and organized players in the subcontinent’s retail-food sector, which accounts for approximately two-thirds of India’s total retail market.
How would you describe the retail sector in India today?
Indian retail is characterized by two types of participants. On the one hand, we have the mom-and-pop stores (also known as “traditional trade” or the unorganized sector), which make up 90 to 95 percent of sales. That shows you how nascent the market is. On the other hand, we have a number of large Indian business houses (“modern trade” or the organized sector). Most of them have tie-ups with large international retailers such as Tesco and Wal-Mart. They represent the direction that the industry will most certainly head toward. We have about eight of these national players and also a handful of regional players that are looking to become more national.
What are the growth prospects for the market?
The Indian retail market is very interesting for both Indian and international retailers to enter, primarily because of growth opportunities but also because of the absolute size of the market: approaching $400 billion and growing at double digits. Organized retail is actually growing at 20 percent, and market share is shifting away from unorganized to organized retail. International retailers find this very attractive and want to get into the market for that reason.
How easy is it for international entrants?
There are some very strong regulatory restrictions for international retailers—for instance, they are not allowed to open their own multibrand stores. They can enter the market through cash-and-carry shops or through franchising. Single-brand retailers, such as Gucci or adidas, are allowed to have a 51 percent stake in a joint venture with an Indian partner.
What opportunities do you see for the retail food category?
The retail food sector—which is the largest category in the overall retail market and accounts for approximately two-thirds of the total retail market—poses some interesting challenges. About five years ago, organized retailers placed a large bet on the assumption that Indian consumers were deeply unhappy with the store experience and service levels in mom-and-pop stores and that they would flock to their organized retail stores. But that hasn’t happened as rapidly as they expected. This is partly because they underestimated consumers’ loyalty to the mom-and-pop stores, which have very close relationships with the customers who live near them. And because there are so many mom-and-pops, any consumer can find one around the corner. They also provide free services, such as delivery and credit, that organized retail cannot match in a cost-efficient way. Unorganized retailers, however, can’t match the product assortment and selection or the shopping experience that organized retailers can offer. Organized retailers in India are also rising to a scale where they can more effectively negotiate with suppliers and get better terms. This will increase their pricing power over unorganized retailers and thus increase their appeal to Indian consumers.