The revised foreign direct investment (FDI) policy on retail announced by the government last month has allowed for the exemption of the local sourcing clause in single brand retail on a case by case basis, especially in the hi-tech and luxury products. As a result, one can expect to see major global brands, especially in the consumer electronics and luxury space, opening their own stores in India in 2016 and provide consumers the same retail experience as they do globally.
According to a report by KPMG on the retail sector, the trends and expectations, with single brand retailers being allowed to conduct e-commerce transactions, we can expect to see many global brands introducing their global e-commerce retail platforms into India, and on the other hand, reducing their reliance on the existing Indian e-commerce marketplaces.
The report said that a significant trend that is expected to be seen in 2016 is brick and mortar retailers operationalising their own e-commerce platforms to help them penetrate smaller towns and villages. "A major retailer has already operationalised its retail e-commerce platform in the apparel category, while another retailer has announced plans to create an omni-channel footprint starting with the electronics category," says Rajat Wahi, partner and head, Consumer Markets, KPMG in India.
In the e-commerce retail segment, the year 2015 has started seeing the shift of e-retailers away from the deep-discounting strategy. While significant consolidation has been seen in the overall e-commerce retail space, the online grocery retail segment, which has seen the entry of a significant number of players in the past two years, is expected to witness consolidation in the coming year.
The second half of the year also saw some e-retailers performing course-correction in their business strategies by re-sizing or re-aligning their businesses, which is expected to continue through to 2016 as investors focus on returns on their investments.
The luxury retail is expected to grow significantly, driven not only by demand but also by increasing availability of space. "We estimate that supply of retail space for the luxury segment would double by 2019, and with current demand significantly higher than the supply, the growth in this segment is expected to continue in the coming years," says Wahi.
In addition to luxury retail, investments in travel retail are expected to grow in 2016 with the government approving 100 per cent in duty free shops under the automatic route, as well as due to upgradation of airports.
Trends seen in 2015
The retail sector is expected to have grown at 10 per cent in FY15, which is faster than its growth in FY14. However, the growth rate of general trade in FY15 was more than that of modern trade. Modern trade expanded at a rate slower than general trade due to cut-back in discretionary spends by consumers, competition from e-commerce/online sales, and a general slowdown that has seen brick and mortar retailers closing stores.
The e-commerce retail sector continued on its growth trajectory, and is projected to touch $15-20 billion by the end of 2015, with almost 50 million people buying merchandise online.
As of September 2015, $70 million of FDI was received in retail trading, taking the total amount of FDI in the sector to $345 million since January 2000. In 2014, the overall FDI in retail was $177 million.
The retail sector saw new brands in the apparel and luxury space enter India in 2015. However, FDI in retail this year has been lower this year as of September 2015, compared to 2014. In addition, the proposals on FDI in single brand retail trading approved by the Foreign Investment Promotion Board (FIPB) in retail have declined year-on-year, but this should pick up in the coming months on the back of the recently announced FDI norms. As of November 2015, the FIPB had approved proposals in single brand retail trading worth INR870 million, compared to proposals worth Rs 2.84 billion in 2014.
The year 2015 has seen lower foreign investment compared to 2014, but with the relaxation of FDI norms in retail in November 2015, as well as expected recovery in consumer demand in 2016, FDI investments in retail are expected to be higher next year.
Domestic retailers, especially multi-brand retailers, have focused on rationalizing stores as a result a decline in sales and high operating costs.
Expectations in 2016
The KPMG report said that the revised FDI policy on retail is expected to bring in global brands in the consumer electronics and luxury categories as well as allow brands in other categories to expand their footprint through their own e-commerce retail operations. In addition, the relaxed sourcing norms would make it easier for retailers to start their operations, and we could see some major retailers that have announced plans to enter India start their operations in 2016. As a result, investments in 2016 are expected to further pick up pace after slowing down in 2015.
Retailers are expected to focus primarily on omni-channel strategies to expand their footprint, with some of the top retailers already having operationalised this strategy starting with a single segment, like apparel or electronics. Existing players in the luxury and travel retail segments are expected to benefit from increased supply of retail space and high consumer demand and have charted aggressive expansion plans. In addition, with focus moving away from China, luxury brand retailers are focusing on countries like India to drive growth.
"The organized retail space, both online and offline, has seen significant consolidation in 2015. The online grocery segment at present has a large number of players and is expected to see consolidation in 2016," says Wahi.
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