Analysis: Why the Indian retail market is back on the map

While that might be true, a quick look at the statistics reveals much about the opportunities this vast country now offers.

According to the World Bank, India’s economy, valued at $2trn in 2015, is experiencing the fastest growth of any worldwide this year. It’s set to outgrow beleaguered China by the end of this year and – if the pace of growth is maintained – should outstrip the joint economies of Germany and Japan by 2019.

65% of India’s 1.3 billion population is under the age of 35. The median age is 29

That economic growth has been fuelled by reform of Foreign Direct Investment laws and government policies aimed at promoting new business and furthering the tech industry.

And behind it is an unusual population dynamic: 65% of India’s 1.3 billion population is under the age of 35. The median age is 29.

Much of that youthful population falls into an aspirational bracket. While the development of India’s complex class system is difficult to predict, its “middle class”, across all ages, currently numbers between 250 million and 300 million – and is set to soar to 547 million by 2025, according to McKinsey.

Tech pull

That young, increasingly middle-class population is also ever more connected.

While internet penetration runs at only 25% – in contrast to the UK’s nearly 80% – the numbers are still dizzying.

The British 80% rate translates to around 51 million people, while the Indian 25% rate equates to 325 million. And that number is predicted to grow to 600 million by 2021.

What’s more, smartphone penetration is nearly as high as internet penetration – and it’s growing at a quicker rate.

At Apple’s shareholder conference this year, boss Tim Cook revealed Apple’s launch in India, saying that while iPhone sales in the developed world were flat during 2015, India saw a 76% rise.

And according to Retail Week sister company trend forecaster WGSN, more programmers moved to Bangalore than the San Francisco Bay Area in 2014.

Amazon chief executive Jeff Bezos said India was Amazon’s fastest-growing territory and that its investment was designed to help start-ups and accelerate India’s role as an innovation hub by driving digital entrepreneurship

Apple is not the only tech player to single out India. In June, etail giant Amazon unveiled its pledge to pump an extra $3bn into the country, aiming to capitalise on the growing number of internet users. That $3bn is on top of the $2bn already set out in 2014.

At the time chief executive Jeff Bezos said: “I can assure you it’s only the beginning and, as we say in Amazon, it’s only day one.”

He added that India was Amazon’s fastest-growing territory and that its investment was designed to help start-ups and accelerate India’s role as an innovation hub by driving digital entrepreneurship.

The country is on track to become home to the etailer’s largest software engineering and development centre outside of the US, in Hyderabad.

And Amazon’s interest in India is not limited to tech – it has sponsored India Fashion Week for the past two years.

’The new China’

But this international interest in the Indian market is nothing new. Before the global recession of 2007/08, many retailers looked to India as the new China, before turning away from the country.

Mary Turner, former Asos director and boss of one of India’s biggest fashion etailers Koovs, believes that India was not ready for international investment at that time.

“Five to 10 years ago, companies were coming in but, to be honest, the population wasn’t ready,” she says. “The infrastructure wasn’t there and neither was the understanding of ecomm. Even today, the [online] transacting population is only 50 million. That sounds big but for India it is a small number.

“In any emerging economy, whether it is in a mature or developing market, you see early innovators coming in and recognising that the population or infrastructure isn’t ready – it then learns what needs to be developed and it comes back and kicks off”

Mary Turner, Koovs

“In any emerging economy, whether it is in a mature or developing market, you see early innovators coming in and recognising that the population or infrastructure isn’t ready – it then learns what needs to be developed and it comes back and kicks off.

“It happened in the UK and US. Ecomm started and then fizzled out because the infrastructure wasn’t ready – broadband wasn’t up to scratch, payment systems were not sophisticated enough. I absolutely believe that is what is happening in India right now.”

The population’s attitude towards ecomm has developed, as has the tech. But another important factor has also developed during that time.

In September 2014, the Indian government launched its Make in India policy, a slick national initiative which aims to “facilitate investment; foster innovation; enhance skill development; protect intellectual property, and build best-in-class manufacturing infrastructure”.

This policy represented the relaxation of Foreign Direct Investment (FDI) rules for 25 sectors – many with links to retail such as the textile industry and ports and shipping.

Previously, India’s investment regulations had been restrictive. Ikea, for instance, had been present in India in a sourcing capacity for over two decades but throughout that period had found it unfeasible to open stores. Thanks to the new directive, it aims to open a store in 2017.

Infrastructure challenges

Despite this major policy change, challenges still exist. Two of the big concerns for international retailers revolve around infrastructure challenges: payment and delivery systems.

“Cash is still king in India. People usually pay cash on delivery for goods bought online”

Gaurav Sawhney, Planet Retail

“Cash is still king in India,” says Planet Retail analyst Gaurav Sawhney. “People usually pay cash on delivery for goods bought online. There are two main reasons for this.

“One, Indians usually pay cash for buying goods [via bricks-and-mortar channels] and the other is that they don’t trust payment methods – there is a lot of black money in India and concerns over fraudulent activities.”

When it comes to fulfilment, the good news is that the Indian population is already used to the concept of home delivery, thanks to its tiffin culture.

The startlingly successful regional delivery system is designed to transport workers’ home-cooked lunches from their homes in rural areas to the cities in which they work.

Many Indian workers leave home early in the morning to commute long distances and are unable to take food with them. So food is cooked at home, delivered to train stations later in the day and then picked up by tiffin wallahs (servers) to be delivered to workers.

The century-old system has, according to The Guardian, a staggering 99.99% success rate, which would put most logistics firms to shame. 

India’s vast size coupled with its historic lack of resources have resulted in poor transport networks: in 2012 it was ranked by the World Economic Forum as 89th out of 142 countries for its infrastructure

However, while this logistical feat runs like clockwork, India’s wider networks suffer from many issues that might be expected from a developing economy.

India’s vast size coupled with its historic lack of resources have resulted in poor transport networks: in 2012 it was ranked by the World Economic Forum as 89th out of 142 countries for its infrastructure.

In the same year, however, after decades of under-investment which meant that railways, roads and ports were underfunded and inefficient, the Indian government put in place a huge infrastructure investment programme.

As a result, infrastructure has improved – as is evident in Amazon’s decision to open 16 distribution centres dotted around the country – although it still has some distance to go.

New beginnings

Turner remains confident. “I am absolutely certain that once Indian ecomm gets more mature, we will see same-day delivery happening,” she says.

Challenges around infrastructure and payment still exist, but they are not putting all retailers off. 

One of the biggest launches of the past few years is that of H&M. The fashion behemoth opened its first Indian store last October and has since opened six more, including its Indian flagship in Delhi – which is also its largest store globally at 40,000 sq ft – in April.

H&M has already said that it wants to be the country’s number-one fashion retailer. And it’s off to a good start – the first customer through its doors in Delhi queued for 36 hours

Benefiting from 100% FDI approval from the government, H&M has already said that it wants to be the country’s number-one fashion retailer. And it’s off to a good start – the first customer through its doors in Delhi queued for 36 hours.

And according to WGSN, Inditex’s Zara, which opened its first Indian store in 2010, became the first Indian fashion company to cross the $100m sales milestone – less than five years after its launch.

Mango and Gap have also made inroads in the Indian market, while Topshop and Forever 21 are currently testing the market, with Topshop partnering with etailer Jabong late last year.

In grocery, Tesco has a joint venture with Trent – a retail arm of Indian giant Tata – while at the time of publication, there was speculation that Walmart might expand its Indian operations in response to the change in FDI rules. 

While India has some way to go before it becomes a must for expanding global retailers, far-reaching policy changes coupled with an increasingly young, wealthy and urban population means that opportunities for retailers will get ever greater.