India has been ranked the most attractive market in the world for the third consecutive year, although its appeal is starting to decline, according to a survey by management consulting company AT Kearney.
A combination of increased consumption and an under-developed organized retail environment has made India an attractive destination for global retailers, the study said. However, India’s attractiveness has dropped from 100 to 92, on a scale of 100, this year.
This is because new players have entered the market and the “window of opportunity will get smaller over time”, said Hemant Kalbag, principal, consumer industries and retail practice at AT Kearney. “There is still significant opportunity, but the new players will have to deal with more competition, shrinking margins and more expensive real estate,” he said.
India, in fact, has scored behind Russia, China, Chile, Mexico and Argentina among other countries on market attractiveness, which was one of the four criterion used for the global retail development index. While the potential for organized retail sales is high because of the upswing in young India’s spending power, regulatory and infrastructure issues have held back growth.
“In India, retailers have to deal with supply chain issues, infrastructure related issues,” said Kalbag. “For instance, India is one of few markets where retailers need to have their own generators.”
Currently, organized retailers form just 3% of India’s more than $300 billion (Rs12.3 trillion) retail market. But it could grow at 25-30% for the next few years, the report said. Large players, such as Reliance Industries Ltd, Aditya Birla Group and Bharti Enterprises have entered India’s largely fragmented market. This growth is driven by the readiness of young India to adopt products and lifestyles that they see in the media, it added.
“With the economy and corporate India growing at a record pace, young Indians have the job security to spend more,” said Harish Bijoor, chief executive of Harish Bijoor Consults Inc., a brand consulting company. “Our research shows that young Indians are more willing to spend on new products and services, and modern retail is the channel to bring these products to consumers.”
While India is ranked first on general attractiveness, it ranks behind Malaysia, the Slovak Republic and Thailand on the retail labour index. “This probably drags growth the most,” Kalbag said. Retailers compete with business process outsourcing units and other better paying companies, driving up their wage costs.
This, combined with rising real estate costs, has encouraged retailers to enter the Indian market through tier-II and tier-III cities before they enter the metros. New retailers, such as Liberty International and Prozone Retail, plan to enter the Indian market in smaller cities first. India scored better on country and business risk this year because both the regulatory environment as well as acceptance of foreign retailers has improved, the report said.