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Winning in India’s retail sector Factors for success 2 PwC Foreword

We are delighted to launch our new thought leadership report, Winning in India’s retail sector: Factors for success. PwC research indicates that although the Indian retail sector is worth US$ 350 billion, it has a low organised retail penetration of 8%. Modern trade is growing between 15 and 20% per annum. India is becoming an exciting and dynamic retail destination due to the following: • A large market size • Low organised retail penetration • Strong GDP growth • Increasing personal incomes • Large number of aspirational consumers (middle-class, young Indians, rural population, etc.)

The Indian retail market is evolving rapidly and we observe the following features: • Previously, shopping was viewed as a functional activity. It meant buying only the essentials. In fact, unnecessary shopping or self-indulgence was frowned upon. However, liberalisation in the 90s, increasing incomes and foreign trips, exposure to the internet, growing confidence in one’s personal success, etc. are making it acceptable to not only buy non-essential products but also to splurge on luxury goods. • India’s retail sector is developing quickly and becoming more competitive. Retailers understand the importance of meeting consumer demands. • Supply chain mastery will be a driver of competitive advantage. As the retail sector becomes more crowded, the use of supply chain and logistics will enable retailers to become agile and cost-competitive.

In this report, we present the following: • An in-depth look at the main drivers, trends and issues in India’s retail sector • An overview of the key tax and regulatory issues • A discussion on the benefits of modern trade • Three factors for succeeding in the Indian market

We also present three key examples of retailers in value fashion, fashion jewellery and online retail, who have been able to achieve double digit growth. We hope that this report will provide you with a detailed view of the Indian retail sector.

Bharti Gupta Ramola Rohit Bhasin Executive Director and Leader Partner and Leader Markets and Industries Retail and Consumer Practice

Winning in India’s retail sector 3 4 PwC Contents

Executive summary 6 1. India: Economic growth and demographic dividends 10

Case example 1 Case example 2 E-commerce Value fashion Flipkart: Pioneering India’s online commerce market Max Retail: Offering value fashion at keen prices Customer service will be a critical success factor for online retailers. Succeeding at value fashion is a combination of Fashion and The customer Freshness Long-term pricing experience business model

2. Regulatory framework 22 3. The benefits of modern trade 32 4. Critical success factors 38

Case example 3 Fashion jewellery Swarovski: Providing Indian consumers with stylish jewellery Offering the best value proposition is key to long-term success.

Looking ahead 52

Winning in India’s retail sector 5 Executive summary

• India has a large and aspirational middle-class of 75 million households Indian consumers are driving or 300 million individuals. Middle-class purchases in: #1 consumers want products which are India is one of the most value-driven. • Two-wheelers • Skin care desirable retail destinations • India also has 500 million Indians • Hair care in the world. under the age of 25. Young Indians are driving purchases in mobile • Apparel India’s twin growth engines of economic phones, fashion, accessories, food and • Accessories growth and demographic profile set it apart beverages, quick service restaurants, • Mobile phones from other nations and present a compelling etc. Young Indians have access to more business case for global retailers looking to money than before and with this has come independence, aspirations and a enter the market. Strong GDP growth demand for products. Business and consumer • According to the 2010 World Wealth Report by Capgemini and Merrill Lynch confidence Wealth Management, the rise in the Capital markets buoyancy total number of millionaires (or Indians with investible assets, excluding main residence and consumer durables, of Since 2005-06, India has been growing at an more than US$ 1 million) grew almost average GDP of 8.6%. Foreign investment 51%, the second fastest in the Asia- into India is increasing, Indian companies Pacific region. are stepping outside their national borders • The 700 million Indians residing in to acquire companies overseas, incomes are rural India are an opportunity that increasing and capital markets are buoyant retail and consumer (R&C) companies reflecting the strength of the company. cannot ignore. Penetration levels for Studies have also ranked Indian consumers several products, such as personal care, as some of the most confident in the world. hair care, skin care, consumer durables The more confident consumers are about and electronics are low in rural India. the strength of the economy, their personal Retail and consumer companies who finances, their career growth, etc., the localise their products for this market, more they will increase their consumption, with regard to price points, packaging, purchase non-essential products, stock-keeping units (SKU) size, experiment with products, brands, promotion, will succeed. categories, etc.

Strong and stable economic growth Growth in percentage Growth GDP at current and market GDP at current prices (USD billion)

Source: Prime Minister’s Economic Advisory Council, Government of India

6 PwC Executive summary

We discuss the following aspects of India’s Most major global brands and retailers who tax and regulatory framework, which is are not yet in India are assessing the market #2 relevant to retailers either operating or with keen interest, recognising its strengths setting up presence in India: as a retail destination. India’s retail sector is Understanding the tax and • FDI policy framework not yet fully liberalised. That said, the entry regulatory framework is of single brand retail in 2006 is viewed as • Direct tax framework a major step forward towards liberalising essential to starting or • Transfer pricing framework the sector. Another development is the operating a retail business Committee of Secretaries’ recommendation, • Indirect tax framework in India. in July 2011, of allowing FDI in multi-brand • Tax issues faced by retailers operating retail, subject to conditions. in India

The benefits of modern trade to India will Farmers/producers positively impact several constituencies. Establishing an efficient supply chain that #3 What are the benefits of FDI? links farmers and small manufacturers directly with retailers, will maximise value FDI in the retail sector Consumers for stakeholders. Together with back-end will benefit several Modern trade allows for an explosion of infrastructure, this will minimise wastage constituencies and choice. Consumers can access products that (especially of fresh foods and vegetables), increase farmers’ realisations, encourage stakeholders. improve the quality of life. Modern trade will benefit consumers in several ways: best practices in crop management and improve food safety and hygiene. While • Avail rationalised prices that better inefficiencies increase consumer prices, reflect market value due to competition farmers suffer from extremely low • Access better quality food products realisations. resulting from knowledge transfer Unorganised trade regarding best practices in grading, sorting and processing techniques, the Kiranas (i.e., mom-and-pop stores) can exist establishment of a robust cold chain alongside modern trade players and can explore partnership models (e.g., sourcing, system, etc. franchise partners) in a rapidly changing Government exchequer retail environment. Modern trade players are tax-compliant and are large tax-payers. The organised retail sector also facilitates the generation of significant tax revenues through the building of a sophisticated supply chain. This impacts the logistics, transportation, warehousing, freight forwarding and other similar service sectors, all of which contribute to the exchequer through payment of indirect taxes, primarily the service tax.

Winning in India’s retail sector 7 Why should the retail sector be Strengthen India’s position as a sourcing liberalised? hub Reduce wastage across India’s food supply Global retailers have been sourcing from chain India for years and their retail presence When entering new countries, most major in the Indian market will enhance exports food and grocery retailers engage and work from India, as they develop and leverage with local farmers. Empirical studies in relationships with local suppliers. Most emerging market economies have shown global retailers who have entered India have that the growth of organised retail results in expressed their intentions to source and several eventualities: export a range of products from the country. The extent of sourcing from India will • Technology transfer increase when global retailers are allowed • Improvements to the quality of produce to operate in the Indian market. locally available • Boosts to local economy since local suppliers are engaged and integrated into global retailers’ food and grocery FDI creates better retail infrastructure, which helps to support procurement practices overall sector growth. • More competitively priced products Increase employment FDI in retail will generate employment since new entrants will need to hire staff. Access to funds Current employees of unorganised retail players do not receive healthcare or other Best practices transfer benefits. Once individuals become absorbed Supply chain mastery in retailer operations, they can access more equitable wages and benefits. Modern Reduced wastage in the food trade’s effect will be most apparent at the supply chain bottom of the population pyramid, as it More products, better prices will unleash opportunities such as non- agricultural employment for rural youth Boost to employment and a better quality of living for the existing Higher levels of sourcing and agricultural society. exports Higher tax revenues

8 PwC Succeeding in India’s retail market is not easy given the following: #4 • There is a large heterogeneous group of consumers who have significantly Key success factors are varying buying power. finding the right real estate, • The majority of Indian consumers are localising products and value-conscious. mastering the supply chain. • India-based retailers with a first- mover advantage have aggressive and ambitious expansion plans. • New brands are entering the Indian market Succeeding in India’s retail sector is a combination of the following factors:

When it comes to the retail sector, it is location, location, location! A fundamental aspect of retailers #1 operations is the availability of good quality retail real estate. Securing the right A few years ago, there were not enough retail real estate options and many retailers were forced retail real estate to rent (high-priced) space that skewed their profitability metrics. Today, the scenario is different in that there are more retail real estate options to choose from. Positive market and consumer sentiments, the entry of new foreign brands, incumbents’ expansion plans and increasing hiring needs are helping drive demand for retail space in Tier I cities. Industrial growth and expansion is also ensuring that several retailers are planning to expand operations to Tier II and Tier III cities given that there are aspirational consumers earning increased incomes who would like better access to products.

R&D, innovation and new product development are emerging as key drivers of success. As part of #2 this effort, product localisation has emerged as a driver of sales, customer excitement, customer Localising interest, etc. Indian consumers, while they want access to products available overseas, also want to products to delight feel that a product has been created especially for them. and excite Indian Localisation can take several forms which include but are not limited to the following: consumers • Creating and launching products specifically for Indian consumers • Making changes to store layout to appeal to Indian consumers • Customising production or food preparation practices for cultural sensitivities and local palettes

Mastery of supply chain dynamics is a critical enabler for the growth of modern trade. India is a #3 large and fragmented country and the absence of strong infrastructure and logistics systems make it Mastering the challenging to reach consumers located across vast distances. With the Indian government making supply chain investments into state highways, an overall decline of logistics costs is bound to occur. Studies as a driver of suggest that logistics costs are between 10 to 12% of total GDP. competitive Creating efficient supply chains and achieving competitive advantage for retailers is a function of advantage the following: • Integrating vendor-managed inventory programmes with planning and forecasting processes • Integrating components of the value chain • Using a multimodal transport network • Encouraging skill development • Using innovative techniques such as use of voice-based solutions in retail logistics • Leveraging technology

Winning in India’s retail sector 9 The Indian retail sector is one of the most exciting 1 and underpenetrated markets in the world

Economy and demographics The Indian economy was liberalised in the of the country is reflected in its growing 1990s and since then, the country has seen personal income. The Indian government make India the envy of many booming capital markets, the emergence of is supporting this growth through reforms nations. new industries, an evolution in consumer and by improving the state of infrastructure shopping habits, the entry of global (roads, highways, ports, airports, special companies, etc. India is a vibrant economy economic zones, etc.). and since 2005-06, has been growing at Powered by strong internal demand, the an average gross domestic product (GDP) country has displayed robust growth which of 8.6%. The six core industries of crude is likely to be sustained in the coming oil, petroleum refinery products, coal, years. A large and educated middle-class electricity, cement and finished carbon steel and young consumers are helping drive grew by 6.8% in February 2011 as compared demand across categories. Studies have also 1. According to to 4.2 % in February 2010 ranked Indian consumers as some of the the Centre for Monitoring Indian Economy, most confident consumers in the world. This private final consumption expenditure is is based on the strength of the economy, projected to grow by 7.5%2. personal finances, career growth, increase While the influx of foreign capital is in consumption, purchase of non-essential increasing, Indian companies are also products, brand awareness, etc. acquiring assets overseas. Also, the strength

Indian economy displays resilience in the midst of global crisis (GDP, %)

Source: Prime Minister’s Economic Advisory Council, Government of India

India—macro-economic details

Indicator Unit 2010 2011 2012 2013 2014 GDP, purchasing power International 3453.826 3777.925 4103.794 4434.577 4819.58 parity (per capita) dollars GDP, purchasing power % 12.013 9.3838 8.6256 8.0604 8.6819 parity (per capita growth) Gross disposable income per USD 5295.26 6151.04 6867.1 7627.55 84 47.77 household, USD(absolute) Gross disposable income per % 16.3786 16.1612 11.6413 11.0738 10.7534 household, USD (growth) Rural population as % of % 70.2085 69.9835 69.7581 69.5317 69.3049 total population (absolute) 1 http://www.ibef.org/india/economy/ Urban population as % of % 29.7915 30.0165 30.2419 30.4683 30.6951 economyoverview.aspx total population (absolute) 2 http://www.ibef.org/india/economy/ economyoverview.aspx Source: Datamonitor Country Insight, 2011

10 PwC 1

India’s two decades Also, India’s unique demography makes it an attractive market for companies of growth operating across categories. These include GDP per capita (PPP basis) Middle-class consumers (million people) apparel, footwear, accessories, mobile phones, personal care, food and beverages, hair care, etc. • India has a large and aspirational middle-class of 75 million households or 300 million individuals. Often referred to as the growth engine of the Indian economy, the middle-class wants products which provide value for money. • India has a population of 500 million Foreign investment (USD million) Forex reserves (USD billion) under the age of 25. These young Indians are independent, have high aspirations and access to money. Therefore, they drive purchases in mobile phones, fashion, accessories, food and beverages, quick service restaurants, etc. • According to the 2010 World Wealth Report by Capgemini and Merrill Lynch Wealth Management, the rise in the total number of Indian millionaires Literacy (%) People below the poverty line (%) with investible assets, excluding main residence and consumer durables of more than US$ 1 million, grew almost 51%. This is the second fastest in the Asia-Pacific region after Hong Kong. • India’s rural population of 700 million presents an opportunity for R&C companies, which they cannot ignore. The agriculture sector has been witnessing record foodgrain output, giving a boost to agro-industries and Average age of house-owner (years) Cellphone subscribers (million people) rural incomes. But, penetration levels for several products, such as personal care, hair care, skin care, consumer durables and electronics are low in rural India. However, R&C companies, who are localising products for the Indian market (price points, packaging, SKU size, promotion, etc.), will succeed.

Winning in India’s retail sector 11 Number of Indians with investible assets of over US$ 1 million Ownership of consumer durables by households in rural India

All states* DVD Electric Computer TV Fridge Washing Digital player iron machine camera Penetration 3 12.7 0.3 34.9 5.4 0.8 0.1 %

Source: Capgemini, Merrill Lynch Wealth Management *Estimated households (000s) 157,454. Source: IRS, 2009 R1, Hansa Research, The Marketing Whitebook 2010-2011 (Businessworld)

The power of India’s consumer groups

Major demographic groups are driving purchases across categories

• Shampoo, toothpaste • Some electronic products • Food and beverages • Two-wheelers • Mobile phones • Apparel and accessories • Apparel • Consumer electronics • Personal care

• Luxury cars • Luxury products • Homes and apartments

Rural Indian Young Indian Middle-class USD consumers consumers consumers millionaires

Equivalent to almost Larger than Equivalent to half the size of the combined almost the size of Chinese population populations of the US population Sources: PwC analysis * Capgemini, Merrill Lynch Wealth Management (1.3 billion people) Brazil, Russia, (312 million) **Income levels for middle-class consumers, Germany and the according to the NCAER, range from INR140,000 UK (484 million) to 780,00o, which using a conversion rate of USD1 equivalent to INR45, is IUSD3,111 to 17,333.

12 PwC India’s evolving retail sector Whether global or domestic, retailers Supply drivers want to capitalise on the India growth is exciting and dynamic. story. An aspiring middle-class of 300 Expansion: The growth of modern trade and PwC research indicates that India’s retail million consumers, a large demand-driven expansion plans are enabling consumers to easily access retail products and services across sector is worth US$ 350 billion and has a population of 500 million young consumers urban, Tier II and Tier III cities and towns. low organised retail penetration (ORP) of and a relatively untapped rural population 5 to 8%. Modern trade emerged during of 700 million people constitute the growth New entrants: Some of the world’s largest and the 90s, primarily in the food and grocery story. Besides, a strong GDP growth, rising most prestigious brands and retailers have a sector, and is now growing at a CAGR of 15 consumer confidence, consumption-based presence in India. Most global retailers believe that the next wave of growth will come from to 20%. behaviour, increasing incomes and a the emerging market economies. Those who A large market potential for a range large pool of consumers have made India have not yet entered India are assessing the of categories is indicated by low ORP, one of the world’s most attractive retail market with interest. destinations. increasing urbanisation, growing incomes, Growth opportunities: Some high growth increasing consumer confidence, etc. categories in the retail sector include the India’s retail fundamentals India’s retail sector comprises organised following: Market size US$ 350 billion • Children’s wear and unorganised participants. Given the • Accessories size of the country’s retail market, PwC CAGR 15-20% • Consumer durables research and other reports suggest that the Unorganised retail 12 million mom- • Leisure 12 million mom-and-pop stores comprising and- pop stores • Apparel India’s unorganised market can co-exist Organised retail 5-8 % • Footwear with modern trade players. penetration Recognising the long-term growth Retail density 6% potential of India’s retail market, some of Contribution to GDP 14% India’s retail sector is an evolving the country’s largest conglomerates have allocated billions of dollars to launch large Drivers fuelling the growth of the retail market. The sector will grow scale retail initiatives that span cash-and- sector are below: and develop over the next four carry, food and grocery, books, music and to six decades, since consumers leisure, gems and jewellery, footwear, Demand drivers will earn more, those below the apparel, accessories, etc. India-based retail Demanding consumers: Indian consumers are poverty line will cross over, the incumbents are expanding their presence demanding access to products and services that gains from economic growth across a range of categories, experimenting delight and excite them, are of good quality, will be felt more inclusively, with formats, launching private labels, and provide value for money. etc. As more retailers enter the strengthening supply chain systems Increasing incomes: Strong GDP performance, market and expand operations, and more. capital market growth and the emergence of consumers’ buying patterns and Global retailers are also assessing the new industries are creating new millionaires and boosting income levels. This acts as an shopping habits will also evolve. Indian market with keen interest. They have Retailers currently operating in recognised that the next wave of growth in incentive for consumers to spend more on products. They are also experimenting with the market, and those who plan terms of generating revenues, reaching new brands, trying new products, etc. customers (including the large number of to enter the market, will have middle-class consumers) and harnessing Evolving consumption patterns: Traditionally, enough time to understand local research and development (R&D) and the focus of Indian consumers was on market dynamics, develop robust innovative skills will come from emerging saving. However, positive macro-economic supply chains, establish formats fundamentals, an evolving retail market, markets. PwC’s 14th Annual Global CEO lifestyle influencers, etc. are ensuring that and choose the right product Survey indicated that 93% of retail CEOs consumers spend more across categories. Other assortment to meet the needs of believed that they will expand their Asian aspects, like the emergence of double-income diverse Indian consumers. operations over the next 12 months. households, easier access to credit and society’s acceptance of self-indulgence, are changing purchasing habits.

Winning in India’s retail sector 13 Opportunities exist across retail categories in India.

Selected high demand categories Apparel Demand for: Demand in Asia Demand in India • Branded apparel The Asian fashion market will witness a healthy Compared to other Asian countries, the Indian • Children’s wear average annual demand growth of approximately apparel market is significantly smaller. However, • Club wear 5% through 2014. over the past few years, clothing sales have Private label apparel been increasing steadily. This is supported by Among global fashion retailers, China evokes • Uniforms a growing market of young consumers and an confidence. • Women’s professional attire increasing interest in western fashion. The Indian apparel market is relatively untapped across categories. Consumer durables and electronics Demand for: Demand in Asia Demand in India • Air-conditioners In 2010, Asian countries witnessed an increase in Most consumer durables sold in India are • Cameras sales of consumer durables. manufactured in the country. • Laptops China, India and Hong Kong will drive growth in Cost is an important factor that determines the • Media tablets Asia in the appliance and houseware category. sales of consumer goods. Production capabilities • Mobile phones for budget models are also well developed. • Refrigerators • TVs Food, beverage and tobacco Demand for: Demand in Asia Demand in India • Cooking Demand for food, beverage and tobacco in Asia is Beer, processed foods, fast food and coffee will be • Energy drinks expected to increase in the next two to four years. strong sellers during the forecast period. • Frozen foods In value terms, food sales are set to almost double Groceries account for two-thirds of India’s total • Noodles from US$ 2.7 trillion in 2010 to US$ 4.6 trillion in retail sales and were a driver of growth in 2009. • Ready-to-eat foods 2014. The growth in demand will be the strongest • Value-added dairy in China, with an average of 5.7% in the forecast Innovations in packaging are making products • Non-carbonated beverages period of 2010 to 2014. India will witness a 3.2% more affordable. average annual demand growth.

Source: PwC analysis. Strong and Steady 2011 Outlook for the Retail and Consumer Products Sector in Asia

14 PwC Sector snippets Retailers are using a mix of formats which consider availability of the right real estate, fundamentals relating to the catchment area, value propositions, etc. A relatively new but rapidly growing retail format is the online channel, which offers consumers convenience, price benefits and the ability to shop 24 hours a day.

India’s modern trade category comprises global and domestic participants

Food and grocery Consumer electronics/durables Apparel

Global Carrefour Global Bang and Olufsen Global Diesel Max Hypermarket-SPAR Bose Esprit Metro LG Levi’s Tata Tesco Samsung Mango Sony Marks & Spencer Whirlpool Indian Bharti-Walmart Indian Croma Indian Chemistry Food Bazaar eZone Dolphin More Pai Electronics Lilliput Nature’s Basket Reliance Digital Mustard Seed Reliance Fresh The Electronics Store Provogue Spencer’s Vivek’s Wills Lifestyle

Luxury products Footwear Watches

Global Chanel Global Aldo Global Baume & Mercier Christian Dior Bata Cartier L’ladro Charles & Keith Chopard LVMH Hush Puppies Citizen Mont Blanc Nike Longines Nine West Omega Indian Amrapali Indian Catwalk Indian Ethos Manish Arora Inc. 5 Fastrack Rohit Bal Reliance Footprint Helios Ritu Kumar Woodland Titan Tarun Tahiliani Watches and More Titan Nebula

Since the mid-to late 2000s, some of India’s Retailers use a mix of formats that include • Hypermarkets largest conglomerates set aside billions of the following: • Malls dollars to launch large-scale retail initiatives • Cash-and-carry • Shop-in-shop spanning food and grocery, cash-and-carry, • Convenience stores • Specialty retail apparel, footwear, gems and jewellery, etc. • Department stores • Supermarkets • Discount or value • Rural retail • E-commerce

Reliance Retail Bharti Retail AV Birla Retail Projected investment of US$ 5.5 billion in food Projected investment of US$ 2.5 billion in Projected investment of US$ 2.5 billion in food and grocery, leisure, apparel, accessories, gems cash-and-carry and food and grocery. and grocery. Market rumors suggest that the and jewellery, hypermarkets, home and living, retailer may launch an offering in specialty retail. eyewear, etc.

Winning in India’s retail sector 15 Category: Online commerce Flipkart: Pioneering India’s online commerce market

Sector snapshot

Online retail is nascent in India and will over time, evolve and …resemble E-commerce markets in mature retail environments. more closely… PwC’s thought leadership report Strong and Steady - 2011 Since 2007, PwC has been conducting surveys on online shopping, Outlook for the Retail and Consumer Products Sector in Asia in the UK, examining new and emerging retail developments predicts online commerce to be the next major area for retail growth in the digital space. Since then, the value of online retail has in Asia. Though nascent, India’s online retail market is growing at increased to almost eight percent of the total retail market, with double-digit rates and is likely to be the next format that retailers growth expectations of 10% per year. Interviews with more than will incorporate into their array of channels. 1,000 consumers in the last quarter of 2010 revealed that we are witnessing a new pattern in consumer behaviour. When PwC began Growth drivers include the following: this series in 2007, only 63% of the people we spoke to were actually • Internet penetration, the use of broadband, etc. are making it using the internet regularly to shop. In 2010, things had changed. easy (and quick!) for consumers to shop online at home, at the • Nearly 20% of respondents were spending more than half their office, etc. disposable income online. • Global and local E-commerce participants have launched • Fourteen percent were buying on the web every week. websites that offer Indian consumers a range of products (apparel, baby products, electronics, etc.). • Fourteen percent were doing it more often—a figure that was four percent only two years ago. • The market has seen the emergence of a range of buying propositions, such as group buying sites, direct sales sites, etc. • Consumers are more willing to experiment with new forms of retail purchase and feel confident to search for and buy goods online. • Convenience, speed and 24-hour accessibility in purchasing products is being valued increasingly. Source: Pick ‘n’ Mix - Meeting the Demands of the New Multi-channel Shopper, PwC Company profile Flipkart: Offering new categories, reaching more customers, expanding operations

India’s E-commerce market is growing at 20 to 30% CAGR and… …online retail players have aggressive growth plans. Flipkart offers a range of goods online, including books, music, By 2013-14, Flipkart plans to: consumer electronics, etc. Several factors are driving the growth • Offer new categories on its website of India’s online retail market, including internet penetration, the convenience of purchasing products online, etc. Senior management • Increase its footprint of warehouses at Flipkart believes that consumer behaviour is changing and in a • Expand operations into new cities few years, “Everyone will be buying everything online, just like they buy only their tickets online today.” As the market evolves, so will • Increase staff size from 2000 to over 10,000 the consumer. • Grow revenues 10 to 30 times over

Customer insights Indian consumers are generally perceived as price-driven and value-conscious. While that may be true, senior management at Flipkart believes that their online consumer is driven by both price as well as a minimum level of quality (in terms of the end-to-end experience). As the economy grows, incomes rise and aspirations increase, the Indian consumer will evolve into a more quality-conscious consumer.

16 PwC Customer service will be a critical success factor for online retailers.

Customer service is important for online customers since it builds trust and comfort. When online customers have a positive experience with Flipkart’s customer service, they convey this to their friends (word-of-mouth).

Customer service and satisfaction Social media Flipkart maintains customer service teams to manage customer As part of its efforts to enhance the customer experience, Flipkart queries, track the movement of goods ordered, ensure timely manages its social media presence carefully. A part of Flipkart’s delivery, etc. Providing good customer service enables Flipkart to customer support team manages the company’s presence on enjoy high levels of customer satisfaction, generate repeat business Facebook and Twitter. Only five or six of the 200 tweets each day and ensure positive word-of-mouth. are negative. The group’s SLA for responding to negative feedback on social media sites is one hour but on an average, customers are Senior management believes that as the retail sector evolves, responded to within 15 minutes. customer satisfaction will be a key driver of success for most brands and organisations.

Source: Discussions with senior management at Flipkart, PwC analysis

Winning in India’s retail sector 17 Sector snippets Indian consumers are value- conscious. Private labels offer consumers the twin benefits of quality and value for money.

Retailers are expanding operations. Increasing consumer confidence Workforce management

Key trends Reports suggest that Indian consumers are • Retail is a respectable career path some of the most confident in the world. that provides opportunities for Growth of private labels Buoyed by a sense of confidence in the advancement for men and women in Most retailers in India are bullish about economy, their job prospects, industrial rural, semi-urban and urban India. growth, capital markets, etc., they are the success of their private label products • The retail sector is relatively new more willing to spend across non-essential across food and non-food categories. PwC’s in India considering modern trade product categories. The increasing use of Strategic Issues for Retail CEOs indicates emerged in the 90s. Therefore, there is credit cards has enabled consumers to buy that retailers are launching new private an absence of retail training academies. products that may be out of their reach. label offerings, enhancing their private Some large modern trade players are label portfolios and will be launching Key issues to address either establishing their own retail robust promotional offers to quickly move academies or are partnering with their own brands. India’s major retailers Infrastructure and supply chain business schools to develop retail are expected to embark upon the following The absence of world-class roads, highways, accreditation programmes to develop strategies for their private label products: ports, etc. is a major challenge for retailers retail talent. • Increase the range of offerings who are looking to move goods efficiently • Increase share of revenue from private India’s retail sector is a study in evolution. from point of source or procurement label sales to the shelf. Related to this is the idea We outline the five forces shaping the Indian • Embark upon promotional offers and of supply chain, logistics, warehousing retail sector: sales and distribution. Indian retailers are 1. Splurging is pleasurable. • Increase the visibility of products in experiencing high levels of demand and store outlets Prior to the liberalisation policy, shopping need to deliver on time by managing • Offer selected products through other was viewed as a functional necessity stock keeping units (SKUs), maintaining retailers’ outlets i.e. buying only the essentials and not inventory, guarding against stock-outs, purchasing extra or unnecessary products. Experimenting with formats etc. The use of IT optimisation systems and In fact, unnecessary shopping or self- overall synchronisation from both suppliers Most of the large modern trade players are indulgence was frowned upon. However, and retailers will enable the latter to use experimenting with formats and launching increasing incomes, frequent overseas supply chain efficiency as a lever for success. hypermarkets, supermarkets, electronic travel, exposure to the internet, growing kiosks, shop-in-shops, etc. Retailers are A heterogeneous market confidence in one’s personal drivers, etc. are also experimenting with size even within • Indian consumers vary in terms of making it acceptable to: the same format category. For example, socio-economic grouping, education • Buy more non-essential products than instead of having one standard size for levels, attitudes, purchase drivers, before hypermarkets, some retailers are varying buying preferences, behaviours, etc. the size according to considerations like • Switch between products and brands, As a result, it becomes imperative for real estate rentals, the size of the catchment often making first purchases in new stores to stock a mix of merchandise. area, etc. The hypermarket is a popular categories • Indian consumers are often referred format especially for many of India’s • Splurge on luxury products like fine to as value-conscious. This does not food and grocery operators. According to wine and scotch, expensive handbags, necessarily imply that consumers ‘want PwC’s thought leadership report Strong branded jewellery, etc. and Steady 2011 Outlook for the Retail a steal.’ Instead, they want a well-made and Consumer Products Sector in Asia, product that is priced fairly, and that 2. Innovation is imperative. “Hypermarket expansion is sweeping across meets its stated promises. Today, the focus on innovation and R&D is Asia, with China in the lead.” • Indian consumers are demanding greater than before. R&C companies who access to more, improved and better want to assume leadership positions will use priced products. R&D and innovation as a lever for growth.

18 PwC • New products are being launched Winning the game of innovation across a range of categories that include private labels, apparel, footwear, Lifecycle leadership Local market needs Game-changing ideas consumer durables and electronics, personal care and grooming, hair care, Rapidly evolving customer Establishing R&D and R&D and innovation labs can demands, technology, innovation centres in regional help companies identify game- skin care, etc. competitor actions, etc. are areas enables global companies changing products. ensuring that product lifecycles to create products that meet Innovate Create Dominate Discontinuous in nature, shrink. local market needs. While these products can redefine products may be similar in • Competitors are establishing innovation Companies that continually a category, create new terms of the availability of centres in order to prepare for future innovate and launch new opportunities for growth, make product lines around the world, growth, capture new target consumers, products will extend the products obsolete and help local market nuances exist in etc. Hiring R&D talent is critical in longevity of their products and companies establish leadership terms of product size, pricing, product categories. positions in the minds of developing world-class centres of fragrance, look-and-feel, etc. consumers. excellence. Most global companies recognise that the next wave of growth will come from India and China. These 4. The consumer is king. 5. Customer service can be improved. brands are committed in increasing their R&D expenditure and innovating India’s retail sector is developing quickly As the Indian marketplace becomes products to cater to these markets. and becoming more competitive. R&C increasingly crowded with new entrants, companies understand the importance of customer service will be a key factor in • Companies are increasing their meeting the demands of Indian consumers. determining profitability and survival. efforts to hire senior staff and support Non-performance will result in consumers Today, Indian consumers are flooded with teams. They are entrusted with role migrating their preferences and purchases diverse products and services. Therefore, of innovating new products, product to other brands. Retailers need to develop it is important for retailers in India to development, R&D, understanding and offer products which meet consumer provide good customer service as a means to consumer behaviour, etc. demands and also delight and excite encourage repeat purchases and build brand • As the market becomes more crowded, them. To meet consumer demands, R&C loyalty. Retailers in mature markets have product differentiation will be critical companies are using R&D as a means to used customer service as a tool to generate and will separate today’s leaders from launch new products. footfalls and create a positive brand image. tomorrow’s game-changers. • Private labels: Consumers want quality They have developed consumer-friendly products priced competitively. Price is policies in terms of return and exchange, the primary determinant of purchase loyalty programmes, customer appreciation 3. Shopping with family is fun! for many Indian consumers. days, etc. Customer service aims at the To enjoy their increased spending power, following: • Premium personal care: With access Indians typically prefer to shop in the to the internet, frequent foreign • To help consumers differentiate company of their families by visiting malls, travel, increasing desire to experiment between retailers looking at brands, experimenting between with products, a pre-occupation • To generate customer loyalty categories, etc. Some retailers and brands with celebrity culture, etc., Indian have launched family stores to cater to men, • To increase purchases consumers want to look, feel and smell women and children. good. • To create a positive brand image Real estate developers are also creating • Non-carbonated beverages: Consumers spaces where retail and entertainment are focussed on health and wellness converge, making it a fun experience for and want to consume healthy juice- the whole family. Modern trade has made based, energy or fortified beverages. shopping enjoyable, with malls offering multiplexes, restaurants and food courts, a • Ready-to-eat meals: Consumers lead range of shops, arcades for children, etc. busy lifestyles and want convenience in the kitchen, the ability to prepare meals easily, etc.

Winning in India’s retail sector 19 Category: Value fashion Max Retail: Offering value fashion at keen prices

Sector snapshot

Growth opportunities exist in India’s apparel market… …across men, women, children, value, premium, plus-size, etc. PwC’s thought leadership report Strong and Steady - 2011 For many Indians, low prices are a key purchase driver. Outlook for the Retail and Consumer Products Sector in Asia The following factors drive the growth of value fashion retail: indicates that the Indian apparel market is relatively untapped across all categories. Clothing sales have been rising steadily in • Increasing incomes are enabling Indian consumers to spend recent years, supported by a large market of young consumers and more and experiment across products, brands and categories. an increasing interest in Western fashion. Apparel companies are • Apparel is no longer a functional category but one that conveys using marketing strategies to build their brand, increase awareness appearance, prestige and image. Consumers want to buy and create a fashionable, lifestyle-oriented image. apparel that is both affordable and fashionable. Efforts to raise funds from PEs are enabling apparel brands to grow • The growth of modern trade has helped increase the demand their store networks, boost production capacity, offer new styles, for both branded and value apparel. This, coupled with the hire design talent, develop larger format stores, establish shop-in- emergence of new sectors and professional job opportunities, shops, etc. has also helped drive demand for office wear.

Clothing: Market demand growth (% real change) pa • Over 50% of India’s population is under 25. Young Indians are aspirational, demanding and focussed on apparel that is both Country 2010 2011 2012 2013 2014 fashionable and affordable. China 10.9 10.8 10.3 10.9 11.4 • Current penetration of apparel in the organised retail category India 6.1 7.6 8.4 8.3 8 is 10%. This is expected to increase to 30 to 35% by 2015. Japan 1.6 1.2 1 0.9 0.8 Taiwan 3.9 4.8 4.2 3.4 3.8

Source: Strong and Steady—2011 Outlook for the Retail and Consumer Products Sector in Asia, PwC, 2010-14 are forecasts

Company profile Max Retail: Fashion need not be expensive!

Max’s focus on providing “fashion at keen prices” is generating strong … and presents long-term potential for its parent company, current growth… Landmark Group. Keenly priced apparel is priced lesser than affordably priced By March 2013, Max will operate 100 stores, doubling operations apparel even! Keenly priced apparel is especially important in from the current 51 stores. developing markets since customers need to be educated about Max is the Landmark Group’s fastest growing offering in fashion, before making the purchase. Max uses its design strength to India, across its formats (food and grocery, department stores, produce sharply-priced apparel that has a high fashion component. apparel, etc.). Designers in the Middle East along with those in India create and localise fashion for global and local markets, respectively. Tier 2 cities like Coimbatore, Indore, Bhopal, etc. are showing strong growth. Consumers in these locations are aspirational and view Max as a strong fashion brand.

20 PwC Four critical success factors help define the winners in India’s apparel market.

Fashion Providing fashion at very competitive prices is a major driver of success for Max. Max does not compromise and pricing fashion for price or vice versa. Providing apparel that is beyond normal pricing levels has enabled the chain to grow rapidly both within the Landmark Group and within India. Part of offering good fashion is localising the styling (necklines, hemlines, colours, embroidery, etc.). Max localises one-third of its product range sourced from its global headquarters, enabling it to “be global and connect local.”

The Customer needs and expectations evolve given their exposure to international travel, media, the Internet, etc. customer Today, the Indian consumer expects a better experience overall: experience • Availability of apparel: The consumer wants sharply priced, fashionable apparel to expand their wardrobe both at the workplace and at home. Customers no longer want to dress up just for work, they also want to look good at home, implying access to choice and range. • Store experience: From the time a customer enters the store to when she/he leaves, she/he must have a good experience across several touchpoints that include: Trial room | Interacting with staff | After-sales experience | Billing at the POS | Store ambience

Freshness Freshness takes into account new product promotions, new designs, new colours, new styling, etc. Keeping of category fashion exciting helps engage and retain customers, results in sales, generates repeat traffic, etc.

Long-term Participants need to build a sustainable business model given that the gestation period for success in the retail business sector is long. Sustainable product pricing, offering products that imply longevity, expanding operations in a model calibrated but determined manner, etc. are some of the ways in which retailers can convey their commitment to building a long-term presence.

applicable for all retailers Source: Discussions with senior management at Max Retail, PwC analysis

Winning in India’s retail sector 21 Selecting the right investment and transaction structure is key to developing a presence in 2 India’s retail market

Understanding India’s tax Most major global brands and retailers who A. Wholesale trading are not yet in India are assessing the market For wholesale trading or cash-and-carry and regulatory framework with keen interest, recognising its strengths is important. wholesale trading, 100% FDI is permitted, as a retail destination. India’s retail sector is without government approval. However, not yet fully liberalised. That said, the entry the government has prescribed certain of single brand retail in 2006 is viewed as operational guidelines for companies in the a major step forward towards liberalising wholesale trading sector. the sector. Another development is the Committee of Secretaries’ recommendation, Some of the key principles emerging from in July 2011, of allowing FDI in multi-brand this operational guideline are set out below: retail, subject to conditionalities. • Wholesale trading is defined as the sale of goods or merchandise to retailers, FDI policy framework industrial, commercial, institutional India has an open-arm policy for regulating or other professional business users FDI into the country. Under the current or to other wholesalers and related policy, foreign investment is permitted in subordinated service providers. virtually all sectors without government • The yardstick for determining whether approval, except for a few sectors of a sale is wholesale or not is the type of strategic importance (such as banking, customer to whom the sale is made, defence, media, telecom) where policy and not the size and/or volume of sales. prescribes equity caps or certain conditions for obtaining prior approval from the • Licences/registrations/permits, as government. specified under the acts, regulations, rules, orders of the government, The FDI policy is framed by the Department are required for wholesale trading of Industrial Policy and Promotion (DIPP), operations. the Ministry of Commerce and Industry and implemented by the Reserve Bank of India • Sales under wholesale trading can (RBI) for cases falling under the automatic only be made to customers holding the route (i.e. not requiring prior government following registrations/licences: approval). For cases under the government - Entities holding sales tax, VAT, route, approval is granted by the Foreign service tax, excise duty registration Investment Promotion Board (FIPB), which includes representatives of various central - Entities holding trade licences government ministries and grants approval - Entities holding permits/licences, on a case-by-case basis. etc. for undertaking retail trade Apart from the sectors which are of strategic (like licences for hawkers) from importance that require government government authorities/local self approval, there is a small list of sectors in government bodies which FDI is currently prohibited. Presently, - Institutions with certificates of this list includes retail trading (except for incorporation or registration as ‘single brand’ retail trading). a society or registration as public We provide an overview of the FDI policy trusts for self-consumption framework prevalent for the trading sector • Full records of sales need to be in India: maintained by the wholesale trading company on a day to day basis • Wholesale trading of goods to companies within the same group should not exceed 25% of the total turnover of the wholesale venture. 22 PwC B. E-commerce activities • The contribution of organised and locations for large format retail stores, E-commerce activities are also governed unorganised retail to the Indian primarily due to fragmented private by the principles mentioned above i.e. economy holdings and the infrequent auctioning of companies can engage only in Business to • The need for FDI to fill the gaps that large government- owned vacant lands. This Business (“B2B”) E-commerce trading and exist in the Indian system in terms of has led to a shift in preference towards the not in retail trading. weak back-end infrastructure suburbs of cities. C. Test marketing • The impact of FDI permissibility on Agriculture procurements the retail sectors in China, Thailand, With prior government approval, 100% States and union territories have enacted Russia, Chile and Indonesia. FDI is permitted for the test marketing of the Agriculture Produce Marketing items for which a company has approval The views of stakeholders were invited Committee (APMC) Act regulating the for manufacture, for a period of two years. on issues such as the proposed FDI cap procurement of agricultural and fisheries This is true provided investment in setting to be imposed, mandatory investment produce, including fresh fruits and up a manufacturing facility commences in developing back-end infrastructure, vegetables. A few States permit direct simultaneously with the test marketing. minimum employment opportunities procurement from farmers. Others require D. Retail trading for rural youth, minimum percentage the agricultural produce to be brought into of sourcing from the small and medium designated market yards and sold through FDI up to 51% is permitted with prior enterprises (SME) sector, the integration of an auction mechanism. government approval, for the retail trading small retailers in the upgraded supply chain, With a view to streamlining the of ‘Single Brand’ products, subject to the etc. following conditions: procurement system, the government has More than 250 responses were received asked state governments to review their • Products sold should be ‘single brand’ and a panel, including members from APMC Acts and enable direct procurement only. various ministries, was set up to analyse from farmers, besides simplifying the • Products should be sold under the same the responses and formulate the policy on procedures. the government permitting FDI in multi- brand internationally. The government has also taken measures brand retail trading. The matter is currently to improve the existing supply chain and • ‘Single brand’ product-retailing will under consideration by the government. facilitating farm-to-fork integration. For cover only products which are branded If it is decided to allow FDI in multi- example, tax benefits have been provided during manufacturing. brand retail trading, it is expected that and foreign currency loans are permissible the policy will impose certain obligations • The foreign investor should be the for establishing cold chain storage facilities. owner of the brand. on foreign investors such as a minimum capital infusion and the use of funds for the Applications seeking government Other important considerations development of an organised trading retail permission for FDI in the retail trade of infrastructure. Some of the other significant policy ‘single brand’ products are to be made to considerations that a foreign investor should the DIPP. The application should specifically Another development is the Committee of keep in mind for setting up/carrying out indicate the product or product categories Secretaries’ recommendation, in July 2011, retail operations in India are highlighted proposed to be sold under the ‘single brand’. of allowing FDI in multi-brand retail, subject below: Any subsequent addition to the products to conditionalities. or product categories to be sold under the • High stamp duties on transfer of ‘single brand’ would require fresh approval Property/real estate properties, varying by state from the Government. FDI up to 100% is permitted under • Rigid land use and zoning policies that E. Recent developments—The possibility the automatic route for construction- make the conversion of land use rights of FDI in multi brand retail trading development projects (including shopping time-consuming and complex malls), subject to compliance with certain In July 2010, the DIPP released a discussion • Legal processes for determining clear minimum area and capitalisation conditions title of ownership to avoid property paper inviting public comments on issues being met. concerning FDI in multi-brand retail disputes trading. This discussion paper included an In most cities, it is difficult to find suitable analysis of the following: properties in central and downtown

Winning in India’s retail sector 23 • Foreign trade policy to regulate the • Liaison office: Can only act as a subject to withholding tax is allowed as a physical import of goods and the issue communication channel for the deduction only in the year in which taxes of licences for it overseas group. are deposited. Any expenditure incurred in • A robust contract law for trade • Branch office: Can undertake limited contravention of the law or not for business activities activities such as import/export purposes is not tax-deductible. There is trading, consultancy services, etc. no concept of a group scheme of taxation • With a view to ensuring fair trade, in India. the government has put in place a • Investment in an Indian company: Will Competition Act which deals with anti- be subject to activities permitted under A company is also subject to the minimum competitive agreements such as price- the FDI policy of the government of alternate tax provisions whereby a company fixing, bid-rigging, joint boycotts, etc., India. In context of the trading sector, is liable to pay tax at an effective rate of as well as abusive practices undertaken please refer to the section entitled FDI 20.01% of the book profits (computed in a by dominant entities such as predatory policy framework. prescribed manner) if this tax is higher than pricing, abusive conditions of supply the tax payable under the normal provisions • Limited liability partnerships (LLP): An and the regulation of combinations. of the Act. LLP is a very effective and tax-efficient • Trademark and copyright registrations option for cash mobilisation purposes. The Act does not have any specific taxation are an important aspect for protecting Foreign companies can set up or invest regime for companies engaged in retail intellectual property rights (IPRs) in in LLPs engaged in activities permitted operations. There are some sector-specific the country. Registration under the for 100% FDI under the automatic incentives for cold chains, warehousing Trademarks Act 1999 and Copyright route. facilities for storage of agricultural Act 1957 can be used by retailers to produce, etc. protect their IPRs in India. Direct tax framework Business losses can be carried forward Income tax is a central subject in India. for a period of eight tax years and offset Entity options for doing business There are no state- level income taxes only against business profits, whereas Entrants to the retail sector also need to provided for under the Indian fiscal system. tax depreciation can be carried forward decide on the model they intend to use for The income tax provisions are codified indefinitely. Carry-back is not permitted. operating in India. For example, whether to in the Indian Income Tax Act, 1961 (the • Direct Tax Code (DTC): on the anvil enter into a joint venture arrangement with “Act”) and the Income Tax Rules, 1962 (the an existing company in India with equity “Rules”). The Act is amended from time to On 12 August 2009, the Indian government participation, whether to enter into a plain time, including through annual Finance released the draft DTC for public debate. franchise arrangement with an existing Bills that are required to be ratified by both The objective was to moderate the tax Indian company, etc. Houses of Parliament. The Central Board rates and simplify tax laws. All direct taxes of Direct Taxes is empowered to issue including wealth tax and income tax will Typically in these arrangements, tax and be brought under one code. Public and regulatory issues need to be addressed circulars and notifications which aid in the interpretation of the law. The tax year in stakeholder feedback on the proposals upfront–the manner of funding the was analysed by the government, and operations, the repatriation options, the India runs from 1 April to 31 March of the succeeding year. suggestions for amendments received from characterisation of receipts from and the public, business associations and other payables to foreign investors. Moreover, A corporate entity incorporated in India bodies were taken into account. tax authorities generally scrutinise the (referred to as a company) is subject to tax commercial terms of arrangements to at an effective rate of 32.45%. The income A revised discussion paper addressing the determine whether the foreign company from business operations is computed major issues was released in June 2010. is carrying on business in India through a by following the generally acceptable Further feedback was received on it. The permanent establishment. principles of accounting regarding the Direct Taxes Code Bill 2010 was tabled recognition of revenue. However, the in Parliament on 30 August 2010 as an Such issues would also depend on the entity outcome of this process. vehicle chosen. The following entity options deduction of certain expenses is admissible are available to retail investors as an India in accordance with the provisions codified A summary of the significant proposals of entry strategy: in the Act (e.g. deductions for the payment the DTC is as follows: of taxes, employee dues, etc. are allowed on a payment basis). Further, any expenditure

24 PwC - Companies having a place of • The sale, purchase or lease of tangible last day of November following the relevant effective management in India or intangible property financial year). at any time in the year will be • The provision of services The following penalties have been considered to be resident in India. • Cost sharing arrangements prescribed for default in compliance with - Controlled Foreign Corporation the provisions of the TP code: (CFC) provisions are proposed to • The lending and borrowing of money • For failure to maintain prescribed be introduced as an anti avoidance • Any other transaction having a bearing information or documents: 2% of measure. on the profits, income, losses or assets transaction value - The provisions of the DTC or the of such enterprises • For failure to furnish information Double Tax Avoidance Agreement, The AE relationship is determined based on or documents during audit: 2% of whichever is more beneficial to the participation by one enterprise, directly transaction value the taxpayer shall apply, except in or indirectly, in the management, control the following circumstances: or capital of the other enterprise. Some of • For adjustments to the taxpayer’s income: 100% to 300% of tax on • When General Anti Avoidance the situations where two enterprises can adjustment amount Rules (GAAR) provisions are become AEs are as follows: invoked • Direct or indirect holding of 26% or Some important transfer pricing considerations to keep in mind while • When CFC provisions are more voting power of an enterprise finalising business models are set out below: invoked by the other enterprise or by the same person in both the enterprises A. Franchisee model • When branch profit tax is levied • Guaranteeing by an enterprise of 10% There are many corporations that prefer to or more of total borrowing of the other operate in India through a franchisee model - The DTC contains the provisions enterprise whereby a third party in India is given the of GAAR, under which the licence to use the brand or intellectual income tax authorities have • Appointment by an enterprise of more property and is provided valuable services been empowered to declare an than 50% of the board of directors or in lieu of payment of a franchisee fee to arrangement as impermissible if one or more executive directors of an the overseas IP owner or service provider. it has been entered into with the enterprise, or appointment of specified Money can be repatriated to the franchisor objective of obtaining a tax benefit directorships of both enterprises by the from India through two mechanisms: and lacks commercial substance. same person • Complete dependence of an enterprise • The import price of products imported Transfer pricing framework (for carrying on its business) on the by the franchisee from the franchisor With the introduction of formal transfer intellectual property licensed to it by • The payment of franchisee fees pricing (TP) regulations in 2001, in line the other enterprise, etc. The above option is definitely workable in with similar regulations prevalent in other Where a transaction is entered into with the Indian context, but has its own share developed countries, TP has emerged as an unrelated party and there exists a prior of challenges. One of them being the the single largest source of tax litigation for agreement in relation to this transaction applicability of TP on transactions between multinational corporations (MNCs) in India. between the unrelated party and the AEs, franchisors and franchisees (which are The provisions of Indian TP regulations even transactions with unrelated parties can rank third parties) on the pretext that the apply to ’international transactions’ entered fall into the ambit of TP regulations. franchisee has complete dependence (for into by MNCs with their overseas associate carrying on its business) on the intellectual enterprises (AEs). They prescribe that The TP regulations require any enterprise property licensed to it by the franchisor and intragroup transactions should meet with that has entered into any international this dependence may result in the non arm’s the arm’s length standard and prescribed transaction (with an AE) during a financial length pricing of transactions. documents in this regard should be year to maintain prescribed information/ maintained. documents, obtain and furnish a report (to This challenge can be appropriately the tax authorities) from an accountant on addressed by conducting a robust TP An international transaction is a transaction or before the date of filing of the corporate study to benchmark the abovementioned between two (or more) AEs involving the income tax return (for companies, on the international transactions. In fact, such an following:

Winning in India’s retail sector 25 analysis can also be helpful for negotiations Indirect tax framework present, the peak rate of customs duty between the franchisor and franchisee Presently, there are multiple indirect taxes is 10%. In addition, there is a levy of regarding appropriate franchisee fees and either levied by the central government as education cess (EC) at 2% and senior the prices of imported products. federal taxes or by the state governments on and higher education cess (SHEC) of B. Distribution model sales, purchases or movements of goods in 1%. The overall rate of customs duty their respective jurisdictions. Typically, any with all components of custom duties For single brand retail, MNCs can invest (i.e. basic custom duty, counter-veiling up to 51% to set up a joint venture with company in the Indian retail industry has to deal with all of these taxes at some point in duty and additional duty of customs) is an Indian partner having 49% stake. The approximately 27%. overseas partner may choose to set up time during the entire supply chain. the joint venture with an active or passive The Constitution of India envisages • Central Value Added Tax (CENVAT): A Indian partner depending upon long-term the governance of the country as a tax on the manufacture or production objectives. Money can be repatriated to the federal structure, comprising the Union of goods in India is imposed by the franchisor from India through the following Government at the Centre, and the State central government. It is also referred mechanisms: Governments in the different Indian States. to as excise duty. At present, the Under the Indian Constitution, the central peak rate of CENVAT duty is 10.3% • Import prices of products imported by (including EC and SHEC). the franchisee from the franchisor government is empowered to impose taxes in the form of excise duty on the production • Service tax: A tax on identified services • Payment of royalties for the use of or manufacture of goods, as well as taxes rendered by persons defined in the brands or intellectual property on the provision of services. The central statute is imposed by the central • Payment for services government can also authorise and regulate government. Present rate of service tax the imposition of taxes on inter-state sales or is 10.3% (including EC and SHEC). All of the above transactions are subject to purchases of goods, although they may be • Central Sales Tax (CST): A tax on the TP and a robust TP study to benchmark the levied and collected by the states. abovementioned international transactions inter-state sales or purchases of goods is is critical to limiting TP exposure. It is The states themselves are empowered to imposed by the originating state. Rate imperative that taxpayers have a proactive impose taxes on intra-state transactions of CST in case of transactions between 1 approach to avoid TP audit issues at a later concerning the sales or purchases of goods. two VAT registered assessees is 2% . stage. The states are also authorised to impose • States Value Added Tax (VAT): A tax certain other local taxes such as entry tax. on the intra-state sales or purchases of Finally, local authorities and municipalities goods is imposed by the states. There impose local taxes. are two major slabs of VAT rate across In addition to all of the above, the central the states–5% and 12.5% to 15%. In government is also empowered to impose addition, there are some goods exempt customs duties on the import of goods into from VAT. the country. • Entry tax: A tax on the entry of goods To summarise, the following regulations/ into the state is imposed by the states. indirect taxes exist in relation to the field of In addition, local levies, such as octroi commodity/service taxes, commonly known or local area taxes, can be imposed by collectively as consumption taxes. municipal or local authorities. • Customs duty: Customs duties or In view of the evolving nature of all of these import duties are levied by the central multiple indirect taxes, it is imperative for government under the Customs Act, companies operating in India to not only 1962 (CA) and the Customs Tariff Act, understand the present indirect tax regime 1975 (CTA). These duties are imposed in India but also to keep pace with changes on goods imported into India. At in these areas.

1 A rate of 2% is applicable on the fulfillment of prescribed conditions.

26 PwC • Goods and Services Tax (GST): On the anvil Currently, India has multiple indirect taxes with variances in several aspects such as tax rates, taxable events, the taxable base, eligible input credits, the point of eligibility of input credits, etc. This makes the indirect tax regime quite complex. There continues to be a distinction between the taxes on goods and the taxes on services. In order to integrate all of these taxes into a single unified tax system and bring about broad- based reforms in the indirect tax regime, the government of India has envisaged the introduction of a uniform Goods and Services Tax (GST) across the country. The date of introduction has not yet been announced. As India is a federal country, in the first discussion paper on GST in India, the government recommended a dual GST model, consisting of a central GST (CGST) to be levied by the central government and a state GST (SGST) to be levied by the state governments. With the introduction of GST in India, a number of central as well as state taxes would be subsumed into the GST. Based on the present information, the rate of GST on services is likely to be 16%, comprising both CGST as well as SGST. On the other hand, the rate of GST on goods is proposed to be at 20% (10% each for CGST and SGST). The major change in the proposed GST regime will be that credit of input GST will be available for both goods and services. GST is likely to be a big boon for the retail sector since it will allow retailers to make use of a seamless credit on all input taxes and pass on the benefit of these tax savings to consumers. It will be a win-win situation for both retailers and consumers. The proposed GST is an inflexion point in India’s fiscal landscape and marks a transition from the existing origin-based to a destination-based taxation regime. The introduction of the dual GST is expected

Winning in India’s retail sector 27 to remove the present problem of tax These changes pose challenges for cascading by moving to a common tax base companies as to how they might engineer and by subsuming various central and state their supply chains so as to be GST-efficient. taxes and levies into the CGST and SGST It is probably fair to suggest that the longer respectively. the supply chain, the more the tax points in the GST scheme of things and hence One of the key challenges relating to the increased compliance costs. The challenge GST is with regard to supply chains. At and opportunity is to thus compress supply present, the supply chains are impacted chains for GST efficiency while ensuring by several forces, some intrinsic to the that the business objectives in and around organisation, some market-specific and supply chains are also met. The dual some fiscal in nature. Fiscal considerations GST consequently affords companies have historically been a key determinant significant opportunities for re-alignment of supply chain structuring in India with of procurement, manufacturing and manufacturing bases and distribution distribution/sales patterns and to engineer networks engineered primarily to harness their supply chains on purely economic fiscal benefits. The availability of tax considerations as opposed to fiscal exemptions/benefits and the prevalence considerations. of differential taxes based on geographical locations have influenced the structuring The time is therefore opportune for of supply chains, procurement patterns and companies to gear up to face the challenges distribution networks. The proposed GST and also to seize the opportunities that the will significantly impact supply chains from transition from the present tax system to the procurement through manufacturing to GST has provided. distribution. In essence, GST presents both challenges and opportunities in this regard. The existing indirect tax regime has several characteristics which negatively impact supply chains. These range from irrecoverable taxes such as the CST, complex documentation of inter-state movement of goods, entry barriers at state borders resulting in long transportation times and imposition of local levies such as entry taxes and octroi upon physical entry of goods into designated areas. These characteristics add to the cost of doing business in India. GST moves away from origin-based taxation to a destination-based consumption tax. This means that all taxation will be based on where consumption of a good or a service takes place. Also, the taxable supplies under the GST will extend to all inter-state movement of goods, including on branch or consignment transfers not resulting in a sale of goods. This has major implications for supply chains of most companies.

28 PwC Tax issues faced by retailers the taxability of these charges in the hands operating in India of recipient. We present below some of the common C. Withholding tax implications of business issues faced by players in the retail discounts given to distributors sector: Large groups operating in the retail sector A. A complex tax structure with varying generally enter into an arrangement with VAT rates various distributors for the distribution of Since each state has its own VAT legislation, their products. The mechanism generally it is very difficult for a retail company followed is that goods are transferred by operating on a pan-Indian basis to configure the company to the distributors, who sell different tax rates for a product. In addition, them to the final consumer. At times, the due to different tax rates, companies either companies offer special discounts to their have varying margins or different pricing distributors to be competitive in the market for each state. In addition, compliance and increase their market share. requirements under the state VAT The key tax issue under these legislation are not uniform, adding to the arrangements is whether the discounts cost of undertaking all compliance activities given to distributors by the companies is between states. a commission by nature, and subject to The VAT system also faces a challenge withholding tax under the provisions of the in keeping pace with the variety and Act. An important factor in determining complexity of the number of judicial the characterisation of the discounts pronouncements passed by the state given to distributors by companies is the government and the Supreme Court. relationship between the distributor and the company, i.e. whether the distributor is B. Withholding tax implications on operating as an agent (an extended arm of management/intercompany charges the company) or as an independent entity Indian companies often enter into acting in his/her own individual capacity. arrangements with their associated The terms of arrangement between the enterprises outside India to avail of certain distributor and the company generally common shared or pooled services within its determine the relationship between the group such as HR, IT, finance, legal, training two. In cases where a relationship of agency services, etc. The purpose of entering is established between the distributor into such arrangements is to achieve and the company, Indian tax authorities economies of scale and avoid duplication generally characterise the discounts given of work for the group as a whole. In such to distributors as commission subject to arrangements, each participant bears its withholding tax under the provisions of the proportionate share of the combined cost Act. The classification of the payments to for availing such common shared or pooled distributors as a discount or commission services. Typically, the understanding is also important for computing the tax among independent parties in such cases liability relating to non-compliance with the is that the cost-sharing arrangement has withholding tax provisions, leading to the been entered into for mutual benefit and disallowal of expenditure. Also, there could hence, each participant is required to make be tax, interest and penalty exposure. a contribution only at actual cost. The tax authorities generally scrutinise such transactions to examine the withholding tax compliance on the payer of charges. Furthermore, tax authorities also examine

Winning in India’s retail sector 29 D. Withholding tax implications on the between the amount of VAT collected by the H. Cascading effect of indirect taxes paid distribution of gifts company and the VAT paid by the company on input services not allowed to be set In order to promote the business and to the government. off against the VAT liability arising from increase sales, companies in the retail The tax issue arising on the payment of sales of goods sector often provide their agents with the present value of VAT is whether the Companies not engaged in the manufacture scratch cards, promotional offers or gifts. difference between the VAT payable after of excisable goods or providing taxable These agents in turn provide scratch cards, a deferment period and the present value services are not eligible to offset any input promotional offers or gifts to the final of VAT is a capital receipt not subject to service tax. This input tax is usually a consumer. What needs to be analysed in tax, or whether there is any remission or significant cost for retail companies. these arrangements is whether liability to cession of trading liability by virtue of which I. Customs valuations in cases of imports withhold tax arises on the distribution of the difference becomes taxable under the from related parties gifts, promotional offers or gifts under the provisions of the Act. provisions of Act. Cross-border transactions between group G. Tax deductibility of advertisement, companies are treated as transactions E. Obsolescence of stock marketing and sales promotion between related parties and closely expenses Typically companies in the retail sector scrutinised by the special valuation branch have to maintain optimum stocks of goods Large companies operating in the retail (SVB) of the customs department to in order to run their business smoothly and sector incur significant expenditure on the determine whether the value declared by meet the demand for products in various advertising and marketing of their products the importer is arm’s length. The entire geographical regions across the country. in order to create awareness among their process of determination of values by the Furthermore, the maintenance of optimum potential customers. These expenses SVB is time-consuming, and during the stock levels of finished goods is subject to are incurred in order to promote sales, interim period the importer has to pay extra quality standards. If the quality standards make products more competitive and to duty on a provisional basis. are not met for any reason, e.g. the expiry of further penetrate the market. Companies J. Continuation of the Central Sales Tax shelf life of finished goods, damage of goods generally promote their products through in transit, etc., these finished goods need to advertisements in print or the electronic Under the present system of levying taxes be destroyed physically and written off. The media, by incurring expenditure on the on inter-state sales or purchases of goods, tax authorities have in the past disallowed sponsorship of events, and through display the buyer is not eligible to credit input obsolete stock written off in the books, materials and promotional schemes such as central sales tax charged by the seller in the contending that obsolescence of stock is not buy-one-get-one-free, etc. originating state. This adds to the cost of an allowable business expenditure or loss. procurements of the buyer. CST is intended The tax authorities have in the recent past to be phased out before the introduction of F. Prepayment of sales tax deferral disallowed expenditure on advertising, the GST regime in India, currently expected marketing and sales promotion activities VAT laws for various states provide for in 2012-13. In the interim, CST continues to on the basis that it is capital expenditure, deferral and package schemes of incentives. coexist with state VAT. Under these, an eligible company collects and they are not merely acts of providing K. Strict compliance requirements under the applicable VAT from its customers but information about products, but also state VAT legislation pays it to the government at the end of the brand-building exercises of enduring deferral period without interest, as part benefit to companies. Tax authorities also There are varying compliance levels under of an incentive scheme. Thus the amount contend that the entire aim of brand- various state VAT legislations and most of of tax collected by the eligible company building is to secure a larger market share these are paper-driven. Lately, states have serves as an interest-free loan up to the and extract a premium from the customer. started to move towards the electronic period of deferment. The government has Therefore by advertising, companies are payment of taxes and filing of returns. Any also introduced schemes in the past for the building intangible assets such as goodwill, default in compliance results in the levying advance payment of VAT on the basis of the reputation and credibility, which cannot be of interest and penalties. allowed as revenue expenditure. net present value of VAT payable after the Another important challenge is the deferment period. Thus a difference arises documentation requirement in the case of inter-state movement of goods. India is a large country with 28 states and seven

30 PwC union territories. The various state VAT significant additional functions compared Another issue faced by MNCs is in relation legislations prescribe various types of to other comparable distributors, and to the disallowing by the tax authorities documentation for bringing goods into the whether they should be expected to receive of royalty or franchisee fee payments. The respective states. Complying with these additional rewards and remuneration, taxpayer is required to justify the payment requirements is generally a challenge for through any of the following: of royalty or franchisee fees, demonstrate retail companies. In the absence of complete • Reimbursement of the excessive A&M the economic benefit realised and prove that documentation, there are provisions for expenditure by the principal, being services received from overseas AEs are not levying penalties and the detention of the legal owner of the brand: In a in the nature of shareholder or stewardship goods. case where the significant personnel services. The economic benefit has to be L. Litigation functions relating to A&M activities are demonstrated by submitting documentary carried out by the principal and the evidence for all services received, and their Since formal TP legislation was enacted utility for the Indian business. in India, it has become the single largest distributor merely develops the brand source of tax litigation for MNCs in India. and creates the marketing intangibles Apart from a TP analysis that benchmarks Incidentally, India contributes more than in its territory for and on behalf of the payments for services, it is critical for 70% of global TP disputes at tribunal level principal taxpayers to set up processes to ensure that and above. We have discussed below a • Profit split mechanism: Where documentary evidence to demonstrate couple of issues that have been frequently significant personnel functions relating economic benefit is readily available at the raised by Indian TP authorities and are to A&M are performed by Indian time of the TP audits. This is critical for relevant for MNCs engaged in the retail distributors and marketing intangibles defending payments of royalty or franchisee business. are created by these distributors on fees before the tax authorities. One of the major TP disputes on their own account. In this case, the transactions between principals and Indian distributor goes out of the realm distributors is the issue of marketing of benchmarking against normal intangibles--who should bear the expenses distributors, having contributed and enjoy the fruits of creating marketing significant non-routine intangibles. intangibles in the country of operation of The tax administrator’s concern in such the distributors. Marketing intangibles a situation is understandable, as there typically refer to benefits emanating remain opportunities for the passing- from selling or distribution functions, on of entrepreneurial profits related to e.g. trademarks, distribution or marketing intangibles by the distributor to dealership networks, customer lists and the principal, by loading on to the prices relationships, etc. of imported goods and payment of brand One of the key concepts here is that of the royalties. However, the concept is being ‘bright line’, which is the general threshold applied by tax authorities at lower levels in limit of advertising and marketing (A&M) a mechanical manner without considering expenses, reflected as a percentage of the functions, assets and risk profiles of the turnover. This is what a distributor generally transacting entities. At this stage, several incurs while selling products belonging to cases on the issue are pending before the the principal manufacturer. The trademark tribunals and the outcome of this matter is relating to the product is legally owned difficult to predict. by the manufacturer and the distributor In order to tackle this issue, it is critical for obtains a licence to sell the branded companies to have a well-defined TP policy products in the designated territory. that clearly spells out the functions, assets Tax administrations have investigated and risk profiles of transacting entities cases where the distributor incurs A&M and have well-drafted inter-company expenses, generally above the industry agreements that echo the group TP policy. average or ‘bright line’. They ask whether the distributor is actually carrying out

Winning in India’s retail sector 31 Modern trade benefits several stakeholders and 3 helps create a more robust retail ecosystem

Liberalising the Indian The PwC thought leadership report titled fridge, distribution involves multiple retail sector benefits The Rising Elephant - Benefits of Modern intermediaries and wastage during Trade to Indian Economy indicates that transportation and storage. The current multiple stakeholders. liberalising the retail sector will result in food supply chain situation in India is weak: three major macro-economic benefits: • Existing intermediaries cause delays and eat up a large portion of the earnings that essentially belong to the #1 farmer, resulting in a chain replete with Reducing wastage inefficiencies. Managing wastage in India’s food supply • Increased wastage levels are between chain is imperative. 24 and 40%. Empirical studies in emerging market • Several small stakeholders (farmers, economies have shown that the growth of wholesalers, food manufacturers, organised retail results in the following: retailers) work in silos. • Technology transfer to reduce wastage • A large portion of fruits and vegetables in the food supply chain are lost due to inadequate post-harvest • Improvements to the quality of produce handling, cold storage, processing available in local markets since it facilities and convenient marketing creates local distribution channels for channels. produce • Huge quantities of grains are wasted • Benefits to local economy since local because of improper handling and suppliers are engaged in it storage, pest infestation and poor logistics management. • More competitively priced products for all consumers India’s food supply chain is among the least developed in the world. It is a challenge to • Fresher produce with higher levels of unlock operational efficiencies, facilitate hygiene and quality growth, reduce costs and improve the time • Produce with a longer shelf-life it takes for food to move from the point of Like other developing economies, India’s manufacture to the point of consumption. supply chain is fairly one-dimensional and To solve these issues, robust and scalable there is very little value-added activity, supply chains need to be built and the since distribution remains fragmented and government needs to make appropriate unorganised. India is a fragmented country legislative changes to catalyse this transition with 70% of the population residing in rural in the food supply chain. areas. The ability to reach consumers and transport goods to them is challenging given the absence of robust infrastructure and logistics. Due to the presence of large local and multinational companies, India has a well-developed non-food manufacturing supply chain. One of the arguments in favour of foreign direct investment (FDI) is that it will usher in technologies and expertise required to build robust food supply chains. In the Indian food chain, from farm to

32 PwC from India, as they develop and leverage #2 relationships with local suppliers. The Employment extent of sourcing from India will increase when global retailers are allowed to Retail can boost employment in India. operate in the Indian market. PwC’s Modern trade emerged in the 1990s and is a research indicates that China is the most relatively new sector in India. Given India’s important sourcing destination for many attractiveness as a retail destination, foreign R&C companies. Having said that, since brands, if not already here, plan to arrive factors like quality control, risk profiles, soon. In addition to global retailers, Indian innovation capabilities, logistics and incumbents have aggressive expansion plans existing relationships are also important, in terms of growing their store networks, countries like the US, Germany, China, launching new formats, entering Tier II and India, and Brazil are considered some of the Tier III cities, etc. To staff their operations, most important future suppliers1. retailers will hire millions for front- and Wal-Mart plans to source ’hundreds of back-office functions. Retailers are also millions of dollars’ from India2. In India, investing in training and creating captive Wal-Mart and its Indian partner plan training academies. Others are partnering to locally source a range of agricultural with local business schools to create retail products. “We are already making a certification courses, where students are contribution to India’s agricultural sector Sector snippets absorbed into retailers’ operations after by working with a large number of farmers graduation. in Punjab. I am pleased to announce that Products that can be sourced FDI in retail will generate employment Bharti Wal-Mart will be directly sourcing from India include but are since new entrants will need to hire staff from 35,000 small and medium farmers by not limited to the following: for operations. Most individuals currently 2015,” said Mike T Duke, CEO, Wal-Mart • Accessories employed by unorganised retail players do Stores Inc.3 not receive healthcare, educational or other Retailers who source locally-made products • Apparel benefits. Once individuals are absorbed in can avoid import duties and pass on better • Baby products retailer operations, they can access more prices to consumers. Global retailers are equitable wages and benefits. The effect not the only winners in the sourcing game. • Food and grocery items of modern trade will be most apparent at Domestic retailers who source locally-made • Footwear the bottom of the population pyramid, as it products can meet market needs and remain will unleash opportunities such as non- competitive. • Furniture agricultural employment for rural youth and better quality of living for the existing Some global food and grocery retailers • Textiles are sourcing locally-procured food items agricultural society. Retail can be an enabler • Toiletries for the unemployed in urban, semi-urban that include fruits, vegetables, poultry, fish and rural India. and lamb, as outlined in the case example • Toys below. These participants are working with local suppliers and farming communities to #3 improve quality and hygiene levels, farming Sourcing and processing practices, etc. 1 PwC’s R&C Worlds Express, ‘Growth re-imagined- Retail can strengthen India’s position as a Succeeding on the world stage’ (May 2011) sourcing hub to the world. 2http://www.reuters.com/article/2010/04/14/us-walmart- Global retailers have already been sourcing india-idUSTRE63D04320100414 products from India. Their presence in 3http://articles.economictimes.indiatimes.com/2010-10- the Indian market will enhance exports 26/news/27615345_1_bharti-wal-mart-retail-sector-rajan- bharti-mittal

Winning in India’s retail sector 33 Modern trade benefits • A zero tolerance policy for defective several constituencies. products: The growth of modern trade #2 enables the entire retail ecosystem to Government exchequer evolve and develop. Here, better customer The benefits of modern trade to India are service policies are created, staff is Modern trade players are tax-compliant and manifold and will positively impact several trained to focus on customer satisfaction, large tax payers. constituencies, as outlined below: companies offering quality products The organised and unorganised retail with value succeed, etc. We observe sectors differ not only in their size and #1 that as the market evolves and becomes infrastructure but also in terms of their more competitive, consumers become contribution to the government exchequer. Consumers more aware of their rights and are vocal Collecting revenue from the unorganised Choice, improved quality of life, better when products do not meet their stated retail sector is a challenge for authorities: prices mean more satisfied consumers. objectives or value propositions. This • Kirana stores and kiosks are located ushers in new tolerance levels for both The growth and development of modern across urban and rural India. efficiencies and inefficiencies. This, in trade ushers in several benefits for turn, enhances the overall effectiveness • Street vendors and rural outlets do not consumers, some of which include better of the retail industry in terms of new have a postal address. prices, increased product choice and an business practices, the pace of improved quality of life. Consumers are • Most people who own and operate innovation, the availability of products experimenting with products, brands and these stores or kiosks do not have basic and services, etc. categories, and are trading up in their education. purchases, wanting to use products of good • Better quality: Modern trade helps quality. Modern trade retailers, on their improve the quality of products supplied part, will also help consumers understand by retailers, due to competition, new Sector snippets how to use products (e.g., skin creams, entrants, etc. When looking at the food consumer durables and electronics, etc.). supply chain, we observe several benefits The PwC study entitled This ongoing ‘education’ from retailers to when modern trade participants are able The Benefits of Modern consumers will enable buyers to improve to interact directly with farmers. Modern Trade to Transitional their knowledge and understanding of trade players transfer best practices Economies indicates that products and product benefits. in grading, sorting and processing in a democracy, one of techniques, help reduce the number Modern trade will enable consumers to of intermediaries, stabilise wages for the fundamental tenets benefit from the following: farmers, reduce final prices paid by of progressive policy • Price rationalisation: Greater supply consumers, etc. Thus, hygiene and quality changes is that the main of products, increased competition, of food improve. beneficiary must be the new product launches, etc., increase • ‘Lifestyle parity’: Liberalisation in consumer. It is essential that the flow of products into the market. As the 90s, globalisation, exposure to a result, prices tend to fall and become nations, as they embark the Internet and increasing incomes more competitive. Locally sourced upon more sophisticated have fueled consumer aspirations and products (leather, footwear, apparel, economic policies, should the desire for best-in-class products. accessories, etc.) are competitively Consumers in India now want access to not be influenced by the priced and price benefits can be the same products and services available politicisation of issues. The passed onto Indian consumers. As overseas. This ’me-too’ attitude has modern trade develops, retailers will government can help serve as resulted in consumers demanding better be able to source in greater volumes a catalyst towards providing products, this helping equalise standards and will benefit from more agile and consumers with access to of living between countries. This parity in cost-competitive supply chains. This product choice boosts consumption and products that improve the will enable them to pass on price helps level the playing field. quality of life. efficiencies to consumers.

34 PwC The Benefits of Modern Trade to On recognising that food inflation, quality of Transitional Economies puts forth the #3 food and its supply are major issues, India’s following: Farmers and producers finance minister, through the union budget 2011-12, put in a series of measures aimed • It is challenging to make kirana owners Farmers will become integrated in the food at improving the country’s food ecosystem; aware of tax laws and unrealistic supply chain. some of which include the following: to expect them to come forward and comply with tax obligations. In A major challenge in India’s food • The state governments have been addition, the availability of exemption landscape is the farm-to-fork supply chain, advised to review and enforce a or composition schemes enabling small characterised by high inflation levels, reformed Agricultural Produce retailers to effectively not pay VAT of several levels of intermediaries (eg., agents, Market Committee Act (APMC Act): any significance leads to a large number middlemen), high wastage levels, etc. Total Creating a unified agriculture market of retailers not contributing much to food inflation remains a concern revealing in India will facilitate farm-to-fork the exchequer. There is also the related shortcomings in distribution and marketing integration and enhance efficiencies. issue of such schemes facilitating systems. Farmers are not being paid fair Reforming the APMC Act will enable possible tax evasion. Organised market value and consumers are paying the following: retailers, on the other hand, are both high prices. Several studies have indicated that India can become the food basket to - Enable direct interplay between tax-compliant and large taxpayers. farmers and modern trade players Given their significantly larger the world if it addresses fundamental issues turnover, there is typically no means by in its food supply chain. These include high - Reduce the layers of which they will be able to avoid taxes. inflation, inadequate supply and delayed intermediaries in the supply chain freshness. • The organised retail sector also - Reduce wastage levels facilitates the generation of significant The majority of the Indian population - Enable farmers to get a fair price tax revenues by building a robust resides in the rural areas. Due to issues like - Reduce final prices paid by and sophisticated supply chain which long distances, inadequate infrastructure consumers impacts the logistics, transportation, and the absence of a robust supply chain warehousing, freight forwarding and and logistics, the freshness and overall • A series of allocations has been made other similar service sectors. These quality of the food is affected. for the agriculture sector which spans contribute to the exchequer through Establishing an efficient supply chain that access to credit, interest subvention, the payment of indirect taxes, primarily links farmers and small manufacturers (who encouragement ideas like the Green the service tax. have limited infrastructure or distribution Revolution, production of palm oil strength) directly with retailers will and pulses and organic farming, maximise the value for all stakeholders. etc.: Many of these allocations ought Together with back-end infrastructure, this to increase farm production, enable will minimise wastage (especially for fresh farmers to access greater funds and raw foods and vegetables), increase farmers’ materials, reward those who pay back realisations, encourage best practices in loans in a timely manner with interest crop management and improve food safety subvention, generate further food and hygiene. processing gains with the establishment of mega food parks and encourage the Modern trade players will be able to work development of storage capacity and more closely with farmers to provide cold chains. training in terms of best practices related to harvesting, demand forecasting, weighing, • The government proposes to recognise cleaning, grading and sorting,shelf-ready cold chains and post-harvest storage packaging and work towards cutting as an infrastructure sub-sector: intermediaries and also automising and The placement of cold chain and mechanisation. This will cut cost, increase post-harvest storage as a subsector in shelf-life, preserve freshness, increase infrastructure will enable companies to hygiene and quality. Winning in India’s retail sector 35 secure better loan terms from domestic kiranas access to credit and other banks. This will result in capital #4 means through which they can grow infusion which can be used to expand Unorganised mom-and-pop stores in an environment that is increasingly operations. (i.e., kiranas) becoming modernised. Partnership models that can be explored Organised and unorganised participants • Kiranas, in order to avail of between farmers and modern trade include can co-exist peacefully. competitively priced products, can the following: enter into sourcing agreements with India’s retail sector is large enough modern trade players for food and • Contract farming: Contract farming is to accommodate both organised and grocery items. This reduces costs and likely to improve food safety since large unorganised participants. PwC believes that helps them offer competitively priced corporates will partner with farmers kiranas can exist alongside modern trade products to the customer base. to teach them best practices in crop players and can explore partnership models management and food safety. This will in a rapidly changing retail environment. • Kiranas can also become franchisee help decrease the hazards associated Modern trade players, on the other hand, partners to retailers and benefit from with fresh foods and produce. Also, are subject to high operating costs in the retailers’ supply chains, promotional cold chain facilities which refrigerate form of renting land, employing people, assistance and offers to train and foods, robust transportation networks, paying for air-conditioning and bright upgrade staff skills. This mechanism etc. will also help maintain the lighting, making capital investments in IT allows kirana owners to become a freshness of foods and reduce health such as retail software, part of a larger brand and this in turn, risks. improves brand image and builds Most kiranas are owned and managed by brand equity. • Cooperative models: Farmers, small business owners and their families. retailers and agri-universities can Kirana stores are typically located in good As the retail sector develops, operations explore partnership models. Through catchment areas, and in addition to having of unorganised players will become collaboration, stakeholders can share a detailed understanding into consumer more professional as they improve their best practices in harvesting, crop behaviour in that area, have virtually no merchandising. Their sales per square management, soil conservation and operating costs. The operators often own foot will also increase. With time, these protecting the environment. the land their shop is located on and use mom-and-pop stores can also evolve into becoming convenience stores and In addition to farmers, small and medium household labour to operate the store. mini supermarkets, from where they will scale industries will benefit from the reach CEOs of leading retail companies who source and procure their products from and distribution potential offered through participated in The Benefits of Modern wholesale cash-and-carry stores. They organised trade. One of the main challenges Trade to Transitional Economies believe can also organise themselves into buying faced by smaller entrepreneurs is to develop that as modern trade grows, kiranas will cooperatives, thereby improving negotiation distribution strength in the local market. continue to be a major part of Indian retail. powers with suppliers. Over time, their Also, creating a presence in other cities, Case studies of other transitional economies unique selling proposition will be as follows: states or regions is a challenge. Local indicate that globally, both organised and entrepreneurs will benefit by supplying unorganised retail can co-exist given the • Offering a targeted assortment of goods goods to modern trade players who buy in different value propositions that are offered. to meet the needs and preferences of bulk and distribute goods to outlets across Participants in the Indian retail sector consumers in the local catchment area India. Small and medium scale participants believe that this will also occur in India. • Providing a superior level of will be able to extend the reach and To adapt to the developing retail sector, personalised customer service with presence of their products, across India, deep insights into local behaviours relatively quickly. kiranas can explore a variety of options to upgrade themselves and in some cases, which larger players may be unable to partner with modern trade players: replicate • Limited availability of credit is a major constraint for kiranas who are looking to expand and upgrade operations. The government can consider providing

36 PwC #5 Several constituencies are positively impacted by modern trade Small vendors Farmers/producers Consumers Government Unorganised trade exchequer Small vendors can also be integrated into modern trade. Inefficiencies in Modern trade Increased tax inflows Kiranas as a major India’s food supply improves the quality for the government part of India’s retail Headload vendors are a particularly chain of life sector vulnerable group since many are middle- • Organised and aged widows or women with little family • Several layers of • Greater choice unorganised trade • India’s large intermediaries • More competitive that is different retail sector that support. They earn small profit margins and • High wastage prices in structure, size accommodates are impacted by sales from food and grocery levels (24-40%) • Better quality of and in terms of both organised stores, modern or unorganised. A major • Lower than fair food products taxes paid to the and unorganised asset of headload vendors is their mobility market value paid for modern trade exchequer trade since they traverse areas on foot. to farmers players to transfer • The challenge • High final prices best practices to of revenue Most headload and pushcart vendors for consumers local farmers collection from require credit to fund their working capital. • Agents controlling • ’Lifestyle parity’ the unorganised However, small vendors are often unable prices where Indian retail sector to access credit due to issues pertaining products are • Tax-compliant to high interest rates and lack of access to similar to those modern trade credit societies. Credit is required to fund available overseas players who are daily and longer-term working capital large taxpayers needs, smooth out sales and seasonal fluctuations and also fund family needs. Farmers benefit from Consumers benefit The government Unorganised trade Some companies are embarking upon the modern trade. from modern trade benefits from modern benefit from modern trade. trade. following initiatives that involve working • Wastage is • In a democracy, with headload and pushcart vendors: reduced. a fundamental • State VAT • Kiranas can • Providing marketing and branding • Income flow tenet of revenues increase source food assistance for farmers is progressive as modern and non-food stabilised. policy changes trade grows and items, essential • Providing back-end assistance to small • The quality of is that the main develops. for operations, vendors fruits, produce, beneficiary must • Modern trade from cash-and- dairy, poultry, etc. be the consumer. helps develop carry providers, • Offering microfinance as a means to is improved. • As economies related sectors benefitting from upgrade operations • Farmers are evolve, (supply chain, bulk discounts. integrated into governments logistics, cold • Kiranas can modern trade. should provide for chain, etc.). become franchise inclusive growth Companies in partners and minimal these sectors for modern displacement. contribute to trade players’ the exchequer in neighbourhood terms of indirect format. taxes.

Source: PwC’s The Benefits of Modern Trade to Transitional Economies

Winning in India’s retail sector 37 Succeeding in India’s retail sector is a combination of choosing the right retail real estate, localising 4 products and mastering the supply chain

Retail is a long-term play in India and success is a #1 combination of several Securing the right retail real estate factors. Retailers believe that the key to success lies in choosing the right real estate. India’s real estate sector is witnessing high demand across categories such as hospitality, commercial, retail, etc. Several demand and supply factors influence the growth of real estate in India:

Demand pull factors Supply push factors • Robust and sustained macro- • Policy and regulatory reforms economic growth • Positive outlook for global • Surge in industrial and business investors activity • Fiscal and tax incentives to Factors • Favourable demographic impacting developers parameters real estate • Simplification of urban • Significant rise in consumerism in India development guidelines • Rapid urbanisation and • Infrastructure support and nuclearisation development initiatives from the • Availability of easy financing government options

Impact Impact

• Increasing number of occupiers • Entry of several domestic and • Significant rise in demand for foreign players, increasing office and industrial space competition and consumer • Demand for new avenues for affordability entertainment, leisure and • Easy access to project-financing shopping options • Creation of demand for new • Increased developers’ risk appetite housing and large-scale development • Improved quality of real estate assets • Development of new urban areas and effective utilisation of prime land parcels in large cities

38 PwC A few years ago, there were not enough Good quality retail real estate is a fundamental aspect of retailer operations and retail real estate options and retailers were important from several aspects: forced to rent (high-priced) space that Location • Developing catchment areas offer favourable retail infrastructure skewed their profitability metrics. Today, the scenario is different. Presently, there • Easy access to consumers are many shopping malls in metros with • Where there is demand for retail space and limited supply little differentiation in terms of the brands • Good infrastructure facilites like connectivity, power, water, etc. present (given that the retail sector is not yet fully liberalised). To develop a strong Features • Good frontage national presence, one has to choose the • Sufficient parking facility right location. Your choice depends on the Government • Government initiatives to encourage organised retail sector availability of land, consumer needs, the policies • Government regulation in terms of approvals, project development standards, etc. type and availability of products, etc. • Support from local shopkeepers and kirana stores Positive market and consumer sentiments, the entry of foreign brands, incumbents’ Contracts • Tie-ups with reputed developers and expansion plans and increasing hiring needs • Contracts with efficient facility and property management companies for agreements are driving the demand for retail space in maintenance Tier I cities. Consumer aspirations, higher incomes and better product knowledge against the backdrop of industrial growth and expansion ensure that several retailers are planning to expand operations to Tier II and Tier III cities as well. Selected major retail real estate formats present in India include the following: Source: ibef, Kinghtfrank report on retail • Five-star hotels: These are most often used by luxury brands where accessing the ‘right’ customer is important to high streets that have stand-alone • Discount malls: Value malls are (affluent travelers, well-heeled Indian stores from premium Indian and also expanding their presence in the consumers, etc.). India also has a global brands. Indian retail real estate sector. Some value malls straddle a double-edged ‘hotel culture’ where families gather at • Malls: Large regional developers are positioning of both premium and mass hotels for meals, wedding celebrations, expanding their reach and launching fashion brands. These malls offer large festivals, fashion shows, soirees, etc. malls in newer regions. For example, discounts throughout the year, thereby Luxury brands have capitalised upon one large west India-based mall encouraging consumers to feel that this to target consumers who frequent developer, according to media reports, any time is a good time to shop! These hotels for recreational and lifestyle is planning to open new malls in south malls also hold a range of promotional pleasures. India. Mall developers are starting to activities to ensure larger footfalls, launch mall chains and are focusing • High streets: High streets are a main especially around festivals. Value malls on building their brand, ensuring part of India’s retail landscape with that offer the following are doubling strong anchor tenants are in place, some of the most expensive rentals footfalls, driving sales and increasing etc. However, most malls in India lack in cities like Delhi and Mumbai. They revenues from non-shopping areas: are also a major part of the traditional differentiation, an offshoot of the Indian shopping experience. High country’s regulatory framework. - Vast food courts that offer a range streets that used to offer a range of of cuisines India-made products like slippers - Large multiplexes with several (jootis), cloth bags (jholas), screens that offer tiered pricing trinkets, etc. are slowly giving way structures

Winning in India’s retail sector 39 - Family entertainment areas or kid- - Some luxury malls have open-air in India. Bangalore and Kolkata have zones which offer video games and entertainment, recreational areas a retail stock of 3.8 to 3.9 million sq ft other activities and food courts. These food courts respectively, followed by Hyderabad, offer a range of dining options to Pune and Chennai. In addition to • Hypermarkets: This format is attract consumers other than just shopping centres, high streets with becoming popular with cash-and-carry pure-play luxury consumers. This stand-alone outlets of established operators as well as those in food often attracts non-pure luxury brands are prevalent across cities. and grocery. Usually with a mix consumers too. 65 shopping centres (24 million sq ft) of 40% food and 60% non-food, are expected to become operational hypermarkets enable retailers to Today, a range of activities are occurring during the next five quarters of the generate greater returns from the with regards to the retail real estate fourth quarter of fiscal year 2010 to higher margins on non-food categories scenario. 2011 cross the top seven metropolitan like electronics, houseware, home • The convergence of hospitality, cities. Increased construction activity is goods, apparel, etc. The Images Retail residential, retail and commercial occurring in Tier II markets, which are Report 2011 indicates that with a 40- spaces: Developers are launching relatively underserved. 60 mix of food to non-food, retailers mixed-use space to draw footfalls, ii should yield a blended gross margin meet consumer needs, provide a range • Revenue sharing models : A recent of 18 to 19%. Most modern trade of convenient offerings (e.g., offices, trend is the emergence of revenue- food and grocery majors have already multiplexes, shop, live), etc. These sharing where the retailer and started increasing their presence in the mixed-use areas are being launched developer determine a portion of hypermarket area. One large food and either as stand-alone properties or revenue that will be paid as rent. This grocery operator plans to open over with foreign joint venture partners helps minimise the downside risk and 20 hypermarkets over the next two to who have specific areas of expertise enables both parties to share profits. three years, covering mostly Tier I and (e.g., managing service apartments). Many retailers were able to re-negotiate Tier II cities. Another food and grocery Developers are positioning these rental rates after a brief period of a retailer plans to ‘aggressively’ increase offerings as world-class in terms of slowdown, asking for revenue-sharing both its hypermarket and supermarket connectivity, infrastructure, shopping models. presence, as well as push its private and customer experience. label products, planning to increase Anchor stores: Revenue share % by 50% the portion of total revenue • Development of large gated derived from private labels. communities: The development of Category Revenue share large-scale gated communities across Hypermarket 3-4 • Luxury malls: India’s luxury malls India’s urban centres has led to the Department stores 7-8 include DLF Emporio (Delhi), UB growth of retail real estate, mainly City (Bangalore) and The Palladium malls. These malls have established (Mumbai). When these malls opened Source: Jones Lang LaSalle, ’Indian Real Estate: An operations near gated communities in Outlook on Industry Trends’. 2011 their doors, many luxury brands order to serve the thousands of people quickly assumed space in them. These residing in these areas. Also, there is Vanilla stores: Revenue share % multi-tiered malls (frescoed ceilings an absence of modern trade shopping and valet parking included) enable formats due to difficulties in finding Category Revenue share luxury brands to convey the right large enough spaces to accommodate Apparel 12-18 image, attributes and positioning. these buildings. Yet, these malls face the following Footwear 15-18 issues: • Large number of malls slated to Jewellery 2-2.5 become operationali: At the end of - Due to space constraints, in some Health and beauty 10-12 Q3 2010, NCR-Delhi and Mumbai luxury malls, premium brands and Food 15-20 have 70% of the total retail space luxury brands vie for consumer contributed by shopping centres in Entertainment 8-10 attention. India. These cities house 127 of the 192 shopping centres currently operated Source: Jones Lang LaSalle, ’Indian Real Estate: An Outlook on Industry Trends’. 2011

40 PwC • Creating and launching products • Making adjustments to certain #2 specifically for Indian consumers: production or food preparation Localising products to delight and Creating products that appeal to the practices: This is perhaps most excite Indian consumers local market and adhere to cultural appropriate for quick service restaurant sensitivities (e.g., not serving beef in (QSR) companies, who not only avoid R&D, innovation and new product restaurants) can boost sales. serving beef products in India but have development are emerging as key drivers also established separate vegetarian • Creating a store layout to appeal to of success for R&C companies. As a part of and non-vegetarian food preparation Indian consumers: Some global food this effort, product localisation has lines in outlets. emerged as a driver of sales, customer and grocery companies have installed excitement, customer interest, etc. Indian large open containers in their stores Following are the examples of localisation consumers, while they want access to the filled with pulses and grains. This is for both the R&C sectors, across a range of same products available overseas, also because Indian consumers typically brands, categories and also price points. want to feel that a product has been created like to touch and feel products before especially for them. scooping out the desired amount and placing it in a plastic bag. Localisation can take several forms which include but are not limited to the following:

Luxury Accessories Judith Leiber Leiber and Indian designer Suneet Varma have partnered to create a line of minaudieres that reflect India-inspired moods, motifs and patterns. Fashion and A global fashion and This global brand introduced a limited collection of bags and shoes for the Indian market. accessories accessories brand Consumer durables and electronics Media tablets An India-based consumer The company launched a new range of tablets in early 2011. Positioned as India’s first tablet with electronics brand localised content, it was created with the Indian user in mind. The company also strengthened its back- end systems to support the product through its lifecycle. Consumer An Asia Pacific-based The company’s website indicated that it has launched a range of products customised for India. The durables and consumer durables and company understands the habits of the modern Indian consumer and has designed products keeping electronics electronics brand these specifications in mind. Quick service restaurants Menu items Global QSR brands Increasing incomes, the growth of dual income households, the desire to experiment with different cuisines, busy lifestyles, etc. drive the growth of India’s QSR market. Global participants in the Indian market are witnessing double-digit growth rates, as they have localised their products to suit Indian consumers. QSR brands do not serve beef, have increased their assortment of vegetarian offerings, use local ingredients (e.g., cottage cheese) and flavours, launched spicy ranges (to cater to the Indian palate), etc. Food and beverages Savoury snacks, Global F&B brands In order to appeal to the Indian consumer, two large F&B companies have created offerings in savoury carbonated and snacks and beverages with a local appeal. They have even given Indianised names to the products. non-carbonated beverages

Winning in India’s retail sector 41 Localisation is closely related to the idea of R&D and innovation. Investing in future ideas and technologies will help create game-changing products which in turn change the dynamics of the marketplace. A range of R&C companies, especially those in the fast-moving consumer goods sector, plan to increase their R&D spend in the current and upcoming fiscal years. Companies who have set up R&D and innovation labs leverage India’s technical talent and ensure that they produce for local, Asia-Pacific and global markets.

The Hindustan Unilever Research FMCG Centre (HURC) was established in 1967 in Mumbai. It focusses on non-edible oil seeds, infant foods, perfumery chemicals, fine chemicals, polymers and nickel catalyst. Over the years, HURC

Beauty care and cosmetics

Quick service Yum! Restaurants, the owner of brands like Kentucky Fried Chicken, Pizza Hut and Taco Bell, created the Food restaurants and Innovation Technology (FIT) Centre in Gurgaon, to invest in R&D and innovation. Yum! holds ‘innovation days’ twice a year where stakeholders and departments come together to create out-of-the-box ideas. Promising ideas are then tested to assess viability. From this point, new product meetings take the process forward where products selected on the innovation days are taken

Lenovo maintains a global marketing centre Consumer in Bangalore. Professionals from different electronics backgrounds including marketing, creative, software, analytics and research work at the hub. The analytics team in Bangalore works on understanding the Lenovo customer

i http://www.hul.co.in/careers-redesign/carreerschoices/researchanddevelopment/OverviewofResearchCentres/ ii http://timesofindia.indiatimes.com/articleshow/7289240.cms?prtpage=1 iii http://articles.economictimes.indiatimes.com/2011-04-06/news/29388975_1_innovation-centre-innovation-labs-innovation-process iv http://articles.economictimes.indiatimes.com/2011-04-06/news/29388975_1_innovation-centre-innovation-labs-innovation-process

42 PwC has helped create new brands and build new businesses. Significant as one of the six global R&D centres of Unilever with the creation of improvements were made to manufacturing processes too. HURC’s Unilever Research India in Bangalore in 1997. Towards the end of breakthrough innovations include structured bar soap, fairness cream, 2006, with the construction of an additional set of laboratories, all the zero alcohol soap, poly-coated scouring dishwashing bar, fortified research programmes in India were integrated into a single research salt, instant tea, critical components for a water-purifying device, establishment of Unilever Research Bangalore.i and value-added (nature care) tea. Many of these received significant success in the marketplace. At the same time, HURC became recognised

In January 2011, Jean-Paul Agon, CEO, L’Oreal indicated, “…India is innovation for India and for the world. But the third very important really at the centre of strategy for L’Oreal for the next 20 years. After aspect of our strategy is to accelerate our international expansion. For the crisis, we have redirected our strategy to certain key priorities such this, we need talent. India will be a great source of talent for L’Oreal, as recruiting one billion new consumers around the world. Definitely, not only for India but also for the world… We are going about our we are going to find many of them in India. Number two priority is innovation process to make and design products relevant for Indian innovation and India will play an important role here as well. We are consumers. Our ambition is to increase market share every year.” ii going to create a new R&D centre in India to help the team accelerate through the stage gate process for further fine-tuning. Test runs cut and served in four pieces.” FIT has also enabled Yum! to identify are done in real-life situations to assess the viability from several market gaps. For example, KFC launched Sparklers (from the KFC’s perspectives (e.g., flavour, serving portions, service time taken). Krushers range) since this was identified as a product that could help Vijay Sukumar, director R&D and QA at Yum! Restaurants India and get many vegetarians, traditionally not KFC-goers, into the brand’s head of FIT, elaborates, “It is the backbone of the innovation process fold. It was also introduced in India keeping climatic conditions in and involves going through a stage gate process of approval and mind and the price points for first-time users. Also, consumer patterns calibration… It also led to a few interesting learnings—the consumer were observed at pubs and bars to help hone in on new product still wants to share the pizza and keeping it an uncut big round pizza, offerings.iii as per the original plan, was not well received. Thus, the pizza was by assessing purchase behaviour, transaction history, frequency The guidelines for creative work, tactics for local adoption, brochures, of purchase, value of purchase, etc. The hub works closely with the direct mailers, microsites, websites--everything will be done from company’s creative agency to fine-tune communication for India and here. The local markets can then take the prototype and adapt it to the global markets. “The traditional way of doing marketing was taking up local market before rolling it out,” said Ajay Kaul, executive director, precious dollars and the idea to decentralise the function took root… marketing services worldwide, Lenovo. The hub manages over 5,000 We will be launching a master brand campaign across the globe soon. marketing jobs from all over the world. iv

Winning in India’s retail sector 43 Category: Premium fashion jewellery Swarovski: Providing Indian consumers with stylish jewellery

Sector snapshot

India’s gems and jewellery sector is growing at a CAGR of 15 to 20% …and is exhibiting strong growth potential in the premium and per annum… fashion jewellery segment. India is one of the largest consumers of gold. Traditionally, Indians Indian women want jewellery they can wear to luncheons, dinners, have always believed gold to be a sound investment. Weddings and soirees, etc. The emphasis is on style, modernity, global appeal, festivals saw gold jewellery that was not worn every day, given its quality, and brand. ornate nature. Several factors are enabling Indian women to not think twice before Indians celebrate numerous festivals through the year and consider spending hundreds of rupees on premium jewellery: them an auspicious time to purchase gold and jewellery. Since gold • GDP growth and an increasing number of women entering the and jewellery are the most popular festival gifts, retailers in India workforce are enabling Indian women to spend on premium are embarking upon promotional activities to maximise revenues jewellery. during this time. • Indian women are travelling abroad, reading international While for most consumers jewellery is considered an investment fashion magazines, looking at global fashion online and Indian women today are demanding jewellery made from a mix of choosing more contemporary products to reflect a more metals (silver, white gold, platinum) and semi-precious stones. modern lifestyle. They want to wear lighter jewellery, every day, which is also easier on the pocket! • The increased adoption of western wear has fuelled demand for trendy jewellery. These accessories complement western apparel and are appropriate to wear to many personal and professional settings.

Company profile Swarovski: Enabling Indian women to access modern, fashion accessories

Growth rates for Swarovski’s Indian operations… … are in excess of its global growth rates!. Swarovski has two business units: crystal figurines and premium Given that the Indian business is growing at a healthy rate, fashion jewellery. Here, we focus on Swarovski’s jewellery business. Swarovski has two main goals: Swarovski entered India in 2000 and took a few years to understand • Increase its store network (i.e., distribution presence) the market and help Indian consumers learn about its fashion- • Build brand awareness (i.e., become the top-of-mind choice for focussed jewellery. From 2008 onwards, sales per square foot have Indian women looking for premium fashion jewellery) been growing strongly and are at par with growth rates in selected Asia Pacific markets. Global and regional leadership are focussed on growing the Indian market.

44 PwC Offering the best value proposition is the key to long-term success.

Understand the Creating and offering the best value proposition is key to pleasing and understanding the Indian Indian consumer consumer. The best value proposition in fashion jewellery does not necessarily mean the lowest price. Consumers define value according to different parameters: • Styling and design • Quality • Fashion • Customer service • The buying experience Swarovski has conducted local market analysis to understand what appeals to the Indian consumer. For example, clip-on earrings that sell well in western markets do not sell in India because consumers here have pierced ears. For its Indian consumers, Swarovski selects the most suitable products from its global range. Swarovski believes that it is important to be flexible to adapt to the nuances of the Indian market. Localise the Localisation is important but will be done with time once Swarovski has increased its distribution product strength and brand awareness in India. To localise, Swarovski will need to have a certain critical mass of sale. This will naturally occur as the market grows and as consumers gravitate toward more chic accessories. Swarovski in China has a localised range. Swarovski will soon offer localised jewellery for Indian woman, devoid of religious intonations, so as to keep the global appeal of the brand. That said, this localised jewellery will have an ethnic twist to appeal to Indian women who are both modern but also like to celebrate their culture.

Source: Discussions with senior management at Swarovski, PwC analysis

Winning in India’s retail sector 45 Sector snippets Some supply chain issues include the following: • Presence of multiple intermediaries • Absence of suitable infrastructure • Lack of integration with suppliers • Increased demand from consumers • Reducing shrinkage • Preventing and managing stock-outs

Challenges • Store replenishment: At times, retailers store inventory at several locations #3 Today, efficient management of logistics to shorten the lead time in reaching Mastering supply chain to drive and the supply chain is not just important stores. With multiple distribution competitive advantage for survival, but a necessity for retailers centres stocking the same items, to gain a competitive advantage. Looking According to PwC’s thought leadership difference in inventory is observed at the rapidly evolving retail sector, it is report Strategic Issues for Retail CEOs, and store replenishment arrives from essential to develop robust supply chains. “Mastering supply chain dynamics is critical different centres. for the growth of modern trade.” Supply The following supply chain issues affect chains will also become essential due to the retailers: • Underdeveloped infrastructure: Issues such as lack of good roads, following: • Inappropriate planning and communication infrastructure, forecasting: In the race for operational • Regional variances exist in demand electricity and water shortages and a excellence, optimal demand and supply patterns. These result in differences limited number of ports impede the forecasting determine the winners. in goods distributed to cities and rural development of a pan-India network. Sub-optimal forecasting, which does areas. Besides, the lack of a robust cold chain not take into account seasonality, system also results in high wastage • Value-conscious consumers demand promotions and factors leading to levels. The rugged Indian terrain and lower prices. This requires retailers to sudden increase in demand, often lead use of old vehicles by transporters be agile in moving goods efficiently and to issues like stock-outs. High inventory further increases inefficienciesvii quickly through the supply chain. levels, due to improper forecasting, also . • Supply chains help retailers create exist in the Indian retail sector. • Inconsistent tax rates: Although strong customer value propositions, • Purchase, logistics and distribution: the Indian government is trying to such as being cost-effective, providing India’s large geographical distances, regulate it, the tax structure is heavily fresh and better product assortments fragmented nature of transporters impeded by differential tax rates. Also, and having a better reach. and poor transport infrastructure due to large geographical distances, suppliers need to operate a regional India is a large and fragmented country. development are the reasons behind network and nation-wide redistribution Further, the absence of strong infrastructure high lead times and transportation centres, which in turn increase the and logistics makes it difficult to reach costs. size of supply chain. It is important consumers in urban, semi-urban and rural Also, due to the diverse location of to shorten this chain to save time India. With the Indian government investing suppliers and the presence of several large and money. Once the tax structures in state highways, logistics costs are bound intermediaries, product costs increase are standardised, operations will be to reduce. Studies suggest that logistics artificially. This results in decreased margins streamlined and retailers will be able to costs are between 10 to 12% of total GDP. for retailers. A large number of retailers reduce costsviii. lack the ability to effectively manage the less than truck load (LTL) sized shipments. Besides, the benefits of aggregation and appropriate route planning have not been fully exploited by Indian retailers. By consolidating or aggregating the goods to be distributed to various distribution centres, retailers can reduce the number of times a merchandise is handled, thereby reducing the likelihood of freight damage. The absence of long-term relationships with transporters during peak season on spot rates also leads to an increase in product costs.

46 PwC • Skills shortage: This gap exists in planning and forecasting processes: hiring new recruits. Retailers also need varying degrees in India’s retail In VMI programmes, the vendor, or to invest in training and development sector. There are very few supply supplier, takes complete responsibility of their employees in areas of vendor chain management professionals with of maintaining the inventory at the management, merchandising and significant experience in the country. buyer’s, or retailer’s, premises. The inventory management, supply chain Retail professionals need to keep vendor’s representatives are also management, warehouse management, pace with the rapidly evolving retail present at the supplier’s premises to business intelligence, customer management processes and operations, help gather important information relationship management and store demanding customers, etc. The regarding market trends. VMI managementxii. absence of structured skill development programmes also help reduce problems • Using innovative techniques in retail initiatives, lack of attraction for new of stock-outs and excess inventory at logistics: Voice-based technologies recruits arising from poor working the buyer’s premises. Creation of a have been created to increase the conditions in warehouses, lack of collaborative VMI and replenishment efficiency of the logistics and supply incentives and benefits, and the programmes aid in enhancing planning chains across industries. These emergence of attractive alternate career efficiency, maintaining appropriate solutions are being used by retailers in options also aggravate the issue. levels of inventories, risk-sharing for warehouses and sales-floors. They aid unsold inventory between vendors • Technology implementation in monitoring real-time sales, collecting and buyers and providing better and usage: It is a challenge for data inventory, tracking schedule customer service. organisations to achieve their changes, meeting requests, improving business goals due to inefficient • Integrating components of the value worker productivity, etc. implementation of IT systems in chain: It is important for participants • Utilising technology: Modern logistics vendor management, merchandising in the value chain to integrate activities and supply chain management are and inventory management, supply and work together. Manufacturers not limited to the flow of merchandise chain management, warehouse should work in close association in packed boxes and packets but are management, business intelligence, with service providers, distributors, dependent on the flow of information. customer relationship management, wholesalers and retailers. Indian Monitoring and controlling appropriate stores management, etc. Further, retailers can follow examples set by and authentic information can enable forecasting demand becomes difficult global retailers who have embarked retailers to match demand and supply. in the absence of proper knowledge and upon backward integration and have Companies should invest in technology skills among users to feed data into the developed captive logistics, transports to store and retrieve key data for various IT systems, to retrieve historical and warehouse capabilitiesx . successful forecasting. The need of the data, analyse and create meaningful • Using a multimodal transport hour is to adopt best-in-class IT systems results. This, in turn, results in stock- network: Currently, a majority of across the retail value chain such outs, low inventory turns and a high the goods in India are transported as merchandise, financial planning pilferage rate. Proper and efficient through the extensive road network. and forecasting systems, vendor and usage of the IT systems will help derive A multimodal transportation network merchandise management systems, meaningful results out of the available involving a combination of roads, rail, warehouse management systems, data. This will create efficiencies air and water needs to be explored. logistics and channel management across the value chain and help meet This can help overcome some of the systems, customer relationship the critical demand and supply issue, bottlenecks experienced during road managements systems, RFID, etc. thereby benefitting all stakeholdersix. transportationxi. These are also essential in generating Gaining the competitive edge efficiencies for retailersxiii • Encouraging skill development: . Creating efficient supply chains and Considering modern trade emerged in achieving competitive advantage for the 90s, the organised retail sector in retailers is a function of the following: India is relatively young. Retail talent is • Integrating vendor-managed still developing and some large retailers inventory (VMI) programmes with are establishing training academies for

Winning in India’s retail sector 47 IT optimisation improve customer service and become more 4 to 10% is invested in IT and within this, competitive. India’s retail sector, today, is approximately 30 to 40% is meant for IT optimisation and effectiveness is an advanced in its adoption of basic IT systems networking infrastructure.”xiv area most retailers need to focus on. As the and infrastructure like ERP, networks retail market evolves and becomes more Most Indian retailers need to use etc. Medium and large retailers are in the crowded, supply chain systems and IT advanced IT products and solutions like process of establishing robust transaction optimisation will be key to remaining agile, replenishment planning, world-class supply systems including suitable POS systems, reducing costs and being successful in the chain and logistics management systems, merchandise management systems, CRM long term. In India, the use of IT is confined business intelligence and analytics systems, systems, and radio-frequency identification to the organised sector, a small proportion warehouse management systems, etc. The (RFID) technology to avoid pilferage. of the retail industry. In general, mid-sized growth of the Indian economy is bringing players are only using point-of-sale (POS) In today’s competitive market, modern about several changes in consumer demand and basic systems like stores software, trade participants are relying more on IT and purchase patterns. The Indian retail SKU software, etc. However, small modern solutions to manage the rapidly changing market is difficult to predict, consumers retailers have hardly made investments in IT business scenarios and rising customer are evolving, retailers are expanding infrastructure. demand. Huge investments are being made operations, further driving the need for IT in updating IT infrastructure. According to Barcode scanning was the first major adoption. Cisco India, “Of the total investments made technology application adopted by Indian by Indian retail companies, approximately retailers that ushered in a new level of automation to front-end point-of-sale processes. Using scanning technologies made cashiers more productive, reduced the number of errors at the register and made the inventory and buying trends more visible and accurate. India’s retail sector has undergone several technology evolutions to enable retailers to increase efficiency,

48 PwC Technology components required by retailers

Retail Business Supporting IT Infrastructure Processes

Planning and Financial Merchandise Planning and Forecasting Supply Chain Business Forecasting Planning and Management Intelligence Forecasting Solutions Purchase Vendor Purchase Order Merchandise Item Cataloging and Management Management Management Management Analytics

Logistics Distribution Logistics Channel RFID Centre Management Management Technology Management Storage Warehouse Returns Replenishment Management Management Management Inventory Dispatch Stock Transfer Management Management Management

Sales Point of Sale E-commerce Solutions Decision Support Solutions Support Knowledge Management MIS Systems Financial Human Resource Management Loyalty Programs, Legal and Management Schemes and Contracts Promotions Management Customer Customer Relationship Management Relationship

Source: PwC analysis

Some of the key innovations that have Case study Open source security solutions occurred in India’s retail sector include the The use of this technology helped enhance These solutions enable retailers to secure following: Wills Lifestyle’s existing processes such their applications and improve operational RFID technology as reducing time-to-market, managing efficiency and agility. material efficiently and bringing more • It enables organisations to become Case study accuracy in books as compared to physical more efficient in tracking goods and inventory. The chain’s apparel products Trent improved its security with a more assets, optimising inventory levels and used to slow down when they reached the flexible and cost-efficient open source improving asset visibility. warehouses. Each day that a box of clothing solution. Since then, the retailer has brought • It can be used for customer remained shelved in the warehouse, was a in new functionalities to their POS system identification by issuing smart day less on display and worth 10 hours less and increased the speed of deployment. cards embedded with smart in making a sale. With traditional manual This has improved their time-to-market and chips. These RFID-enabled cards practices, there was only so much that enabled them to adopt new functionalities provide information such as buying the retailer could do to reduce its time- across stores, ahead of their competition. preferences, shopping behaviour, etc. to-market cycles. Looking to streamline For instance, when the company’s marketing • There are privacy concerns related operations, the chain identified RFID as the team rolled out a new customer loyalty to the use of RFID which must be solution that could increase the company’s programme, the IT team made a simple addressed to fully utilise the potential responsiveness. Today, it takes the company change to its POS and the programme was of the technology. between 20 to 30 seconds to inventory 30 deployed across 42 stores in just two days. to 35 garments (about one box) compared This was a tremendous improvement given to the five and eight minutes it took earlier. that it used to take 20 days to roll out a new Currently, on a given day, each worker can release across stores. Over a timeframe of handle between 2,000 and 3,000 garments four to five years, the retailer’s operating from the earlier 300 to 400.xv expenses were reduced by 40%. With the deployment of the open source project, the retail team increased its operational agility and security infrastructure.xvi

Winning in India’s retail sector 49 Cloud computing Case study Innovations used by retailers globally For retailers seeking to gain greater results The leisure chain Oxford Bookstore • Mobile POS: This technology enables using minimal resources, cloud computing increased its revenue by INR 3.4 crore by consumers to purchase goods while is like a miracle. It allows retailers to using the SaaS ERP. Prior to this, issues like putting them in a shopping cart. invest less in maintaining, monitoring excess purchases, over-stocked SKUs and The customer is spared the hassle of and updating shared working documents, slow-moving inventory plagued the retailer. standing in long queues. email and operational data. It enables There were significant inefficiencies with • Digital signage: Static signboards them instead to focus resources on store the POS function and since the inventory have not proved beneficial in terms of portals, social media, digital marketing, management system was not integrated helping a customer track a product. etc. Retailers have been quick to realise the with the POS system, the company lacked Digital signboards integrated with benefits that cloud offers. control over its inventory. With dispersed an automated tracking system are Cloud computing enables retailers to retail operations and increased volume of expected to make this tracking easier. efficiently manage seasonal and unexpected transactions, the main challenge was to find a way to regulate processes and manage • Intelligent database: Today, with demand and weather-disastrous events. technology advancements, a detailed In a typical IT environment, retailers need transactions. The company decided to implement a SaaS-based ERP to resolve the database of customers can be made to scale fixed data centre resources prior available online, to help the retailer to demand spikes. This leads to wasted challenges. Today, the ERP-SaaS project has centralised the entire product titles understand a particular customer’s capacity and increased costs. Even worse, buying characteristics and preferences. it can mean an under-supply, with network across all branches into a single directory outages and crashed servers. However, controlled by the ERP. The ERP also covers Indian and global IT service providers by taking advantage of cloud computing, the company’s payroll, accounting needs are working on a range of other retail retailers can adjust to this dynamic demand. and web tools. The investment of INR 1.08 innovations such as hi-tech store solutions, With cloud computing, retailers only have crore in the ERP-SaaS increased footfalls mobility solutions, shopping assistants, etc. to pay for the level of service they need, by 25% and bill size by 20%. Profits were that will ease daily operations and provide without the costs of unused or under spectacular on the e-platform too. Online retailers the much needed competitive supply capacity. sales increased by 100% and revenues advantage. grew by 50%. Other aspects of managing Lastly, cloud computing transforms how the business, like operating a CRM system, retail employees collaborate and share loyalty programmes and discount schemes, information. By implementing a hosted have become easier.xvii intranet with messaging, online meeting and social networking tools that span time zones and geographies, employees can collaborate more effectively, whether in the field, at headquarters or with a supplier. Cloud computing improves information flow and enables retailers to spend more time interacting with consumers.

50 PwC i Jones Lang LaSalle, Indian Real Estate: An Outlook on Industry Trends, 2011 ii Jones Lang LaSalle, Indian Real Estate: An Outlook on Industry Trends, 2011 iii http://www.hul.co.in/careers-redesign/carreerschoices/researchanddevelopment/OverviewofResearchCentres/ ivhttp://timesofindia.indiatimes.com/articleshow/7289240.cms?prtpage=1 vhttp://articles.economictimes.indiatimes.com/2011-04-06/news/29388975_1_innovation-centre-innovation-labs-innovation-process vihttp://articles.economictimes.indiatimes.com/2011-04-06/news/29388975_1_innovation-centre-innovation-labs-innovation-process viiAashish Sood, Supply Chain Challenges in Indian Retail, May 2011 http://www.ideasmakemarket.com/2011/05/supply-chain-challenges-in-indian.html viiiAashish Sood, Supply Chain Challenges in Indian Retail, May 2011 http://www.ideasmakemarket.com/2011/05/supply-chain-challenges-in-indian.html ixAashish Sood, Supply Chain Challenges in Indian Retail, May 2011 http://www.ideasmakemarket.com/2011/05/supply-chain-challenges-in-indian.html xAashish Sood, Supply Chain Challenges in Indian Retail, May 2011 http://www.ideasmakemarket.com/2011/05/supply-chain-challenges-in-indian.html xiDrivers shaping the smart supply chain, TCS, 2011 www.tcs.com/whitepapers xiiDrivers shaping the smart supply chain, TCS, 2011 www.tcs.com/whitepapers xiiiAashish Sood, Supply Chain Challenges in Indian Retail, May 2011 http://www.ideasmakemarket.com/2011/05/supply-chain-challenges-in-indian.html xivNeeraj Gandhi, IT innovations in Indian retail, http://www.expresscomputeronline.com/20080107/market02.shtml (7 January 2008) xvKanika Goswami, RFID Speeds Up Wills Lifestyle Business, http://www.cio.in/case-study/rfid-speeds-wills-lifestyle-business xviSneha Jha, Trent Strengthens Security with an Open Source Solution, http://www.cio.in/case-study/ka-ching xviiVarsha Chidambaram, With SaaS ERP, Oxford Bookstore increased its revenue by Rs 3.4 crore, http://www.cio.in/case-study/erp-solution-delivered-saas- style-bumped-oxford-bookstores-revenue-rs-34-crores

Winning in India’s retail sector 51 Looking ahead The Indian retail sector is evolving rapidly and those who enter the market now can learn about local dynamics, develop market insights and establish leadership positions

52 PwC Patience, deep pockets, localisation and market evolution Now is the right time to enter and establish operations in India’s booming retail sector. Domestic and global retailers who have already entered the Indian market are learning about consumer wants, preferences and needs. This is an important education for retailers and brands looking to establish leadership positions. We provide an insight into the four key areas of focus for the coming decade:

• Consumers vary by region, state, city and street. It is critical to understand #1 local market dynamics and ensure that product assortments at the store level Understanding consumers can meet these needs. needs, preferences and wants • Creating localised products will help drive purchases and increase sales. • Data derived from loyalty programmes will help retailers understand consumer behaviour.

• Operating stores and managing operations will lead to cost competiveness. #2 Passing on the best prices to consumers include the following: Operating stores efficiently - Finding the right merchandise mix for stores by catchment area and profitably - Using IT to optimise systems - Incorporating logistics, warehousing, transport and cold chain Mastering supply chain systems - Reducing shrinkage - Securing the right retail real estate

• Indians are not always looking for a bargain. Recognising this, retailers and #3 brands need to offer value in quality, style and price. Serving value-aware • Offering a comprehensive range of food and non-food private labels will consumers address this demand-supply gap in the market. Private labels will also become more sophisticated in their look-and-feel. Retailers will use their private label portfolios as a means of differentiating and standing out in the market.

• With the emergence of modern trade in the 90s, India’s retail ecosystem is #4 evolving rapidly. Good customer service policies, loyalty programmes and Evolving with the market promotional offers will be a significant part of the retail landscape. • The sector will eventually liberalise and when it does, several benefits will flow to stakeholders (consumers, unorganised trade, farmers, producers, the exchequer, etc.). When the sector opens further, we expect to see some consolidation as market dynamics take over to create a more competitive marketplace. Works cited

54 PwC Primary research discussions were conducted with senior management at: • Flipkart • Max Retail • Swarovski PwC thought leadership reports used include: • Strategic Issues for Retail CEOs • 14th Annual Global CEO Survey • Strong and Steady 2011 Outlook for the Retail and Consumer Products Sector in Asia • The Rising Elephant—Benefits of Modern trade to Indian Economy • The Benefits of Modern Trade to Transitional Economies • R&C World’s Express, Growth re-imagined--Succeeding on the world stage Secondary research • www.reuters.com • www.economictimes.com • www.ibef.org • Jones Lang LaSalle, ’Indian Real Estate: An Outlook on Industry Trends,’ 2011 • www.hul.co.in/careers-redesign/carreerschoices/researchanddevelopment/OverviewofResearchCentres/ • www.timesofindia.indiatimes.com/articleshow/7289240.cms?prtpage=1 • www.articles.economictimes.indiatimes.com/2011-04-06/news/29388975_1_innovation-centre-innovation-labs-innovation- process • Aashish Sood, Supply Chain Challenges in Indian Retail, May 2011 Website: www.ideasmakemarket.com/2011/05/supply-chain-challenges-in-indian.html • Drivers shaping the smart supply chain, TCS, 2011 • www.tcs.com/whitepapers • Neeraj Gandhi, IT innovations in Indian retail Website: www.expresscomputeronline.com/20080107/market02.shtml (7 January 2008) • Kanika Goswami, RFID Speeds Up Wills Lifestyle Business Website: www.cio.in/case-study/rfid-speeds-wills-lifestyle-business • Sneha Jha, Trent Strengthens Security with an Open Source Solution Website: www.cio.in/case-study/ka-ching • Varsha Chidambaram, With SaaS ERP, Oxford Bookstore increased its revenue by Rs 3.4 crore Website: www.cio.in/case-study/erp-solution-delivered-saas-style-bumped-oxford-bookstores-revenue-rs-34-crores

Winning in India’s retail sector 55 Acknowledgements

Retail and Consumer Practice Lalitha Banerjee

Tax and Regulatory Services Kamal Abrol Vikas Garg Sahil Gupta Nishant Saini

Consulting Krishnakumar Sankaranarayanan Manisha Sachdev

Brand and Communications Nandini Chatterjee Nidhi Jain

56 PwC About PwC PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com. In India, PwC (www.pwc.com/India) offers a comprehensive portfolio of Advisory and Tax & Regulatory services; each, in turn, presents a basket of finely defined deliverables. Network firms of PwC in India also provide services in Assurance as per the relevant rules and regulations in India. Providing organisations with the advice they need, wherever they may be located, our highly qualified, experienced professionals, who have sound knowledge of the Indian business environment, listen to different points of view to help organisations solve their business issues and identify and maximise the opportunities they seek. Our industry specialisation allows us to help co-create solutions with our clients for their sector of interest. We are located in these cities: Ahmedabad, Bangalore, Bhubaneshwar, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune.

Acknowledgements Retail and Consumer Practice Contacts Lalitha Banerjee For further information, please reach out to any of our key contacts in the Retail and Consumer Practice:

Tax and Regulatory Services Rohit Bhasin Akash Gupt Lalitha Banerjee Kamal Abrol Partner Executive Director Senior Manager Vikas Garg Leader, Retail and Consumer Practice Regulatory Leader Retail and Consumer Practice Sahil Gupta Price Waterhouse & Co. PricewaterhouseCoopers Pvt. Ltd. PricewaterhouseCoopers Pvt. Ltd. 17th floor, Building 10C 17th floor, Building 10C 7th floor, Tower D, The Millenia Nishant Saini DLF Cyber City DLF Cyber City 1&2 Murphy Road, Ulsoor Gurgaon, Haryana 122002 Gurgaon, Haryana 122002 Bangalore Karnataka 560008 Consulting India India India Krishnakumar Sankaranarayanan Direct: +91 (0) 124 330 6016 Direct: +91 (0) 124 330 6001 Direct: +91 (0) 80 4079 7064 Manisha Sachdev Mobile: +91 (0) 98 1019 1282 Mobile: +91 (0) 98 1133 1613 Mobile: +91 (0) 98 4573 6653 Email: [email protected] Email: [email protected] Email: [email protected] Brand and Communications Nandini Chatterjee Nidhi Jain

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