Hypermarkets Report1

INDIA HYPERMARKET RESEARCH JANUARY 2011
Analyst: SHARAN KARAMCHANDANI Phone & Fax: + 91-22-24643612 Email: sharan@northbridgeasia.com
INDIA HYPERMARKET RESEARCH
NORTHBRIDGE CAPITAL
JANUARY 2011
Northbridge Capital is an Investment Bank(Category I Merchant Bank) regulated by the SEBI Sebi Registration: INM000011500
Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com
Contents
EXECUTIVE SUMMARY .................................................................................................................................. 3 HYPERMARKETS: AN INTRODUCTION ........................................................................................................... 4 GROWTH DRIVERS ........................................................................................................................................ 5 HYPERMARKETS IN INDIA ............................................................................................................................. 8 BIG BAZAAR ................................................................................................................................................... 9 SPAR ............................................................................................................................................................ 11 HYPERCITY ................................................................................................................................................... 13 RELIANCE RETAIL ......................................................................................................................................... 14 MEGA MART................................................................................................................................................ 16 SHOPRITE .................................................................................................................................................... 18 FDI REGULATIONS IN RETAIL ....................................................................................................................... 19 DRAWBACKS OF HYPERMARKETS ............................................................................................................... 21 ABOUT RESEARCH ....................................................................................................................................... 22
EXECUTIVE SUMMARY
India is the fifth largest retail market globally, with a size of US$500bn., and has been growing at 7% per annum. The retail sector is being hailed as Indias industry of the future, incited by the countrys huge urban middle class population. Retail chains owned by large corporate house saw a 34% yo-y growth in FY 10, reflecting buoyed customer sentiment and greater cost control. The focus of retailers has shifted from mindless expansion to profitability. After supermarkets, departmental stores and convenience stores, Indian retail has seen the concept of hypermarkets come of age. 60% of the total domestic investments in retail (estimated to be at $1,011 billion by 2017) would be done in hypermarts and supermarts formats in the years to come. In the next five years, 30% of the new investment in retail is expected to be in the hypermarkets. Increasing incomes have played their part in the hypermarket success story. Indian hypermarkets concept is in the nascent stage. More than 96% retailers function in less than 500 sq. ft area, with India having the lowest per capita retailing space in the world. 1/5th of Indian shoppers are now spending most of their grocery Rupees at supermarkets and hypermarkets. Hypermarkets have their own brands, which allow them to earn higher margins of about 14 15 % as against 8 % for national brands. Hypermarkets, because of their size have the ability to stock around 5000 SKUs as opposed to a few hundred by small retailers, which allows them to take advantage of a large footfall. Vertical integration all the way back to farmers allows hypermarkets to mark up food products by as much as 500%. Given the potential size of Indian market, there is plenty of room for many players.
Growth of Organised Retail
Source: Associated Chambers of Commerce and Industry
Source: Northbridge Capital
HYPERMARKETS: AN INTRODUCTION
Analyst: SHARAN KARAMCHANDANI Phone & Fax: + 91-22-24643612 Email: sharan@northbridgeasia.com
The hypermarket/retail industry in India in the beginning of 2010 was valued at $37-billion. A hypermarket is a combination of a general merchandise store and a supermarket with full lines of groceries; it is a mammoth retail facility. It displays an enormous range of products under one roof.
Typically, a hypermarket is weekend shopping destination that works on low price points and high volumes, covers a large floor area (anything from 40,000 square feet to 200,000 square feet) and has a larger catchment area. Across the world, hypermarkets are usually part of a retail park with other shops, cafeterias and restaurants. A key element of differentiation between the hypermarket and other retail formats (apart of the size) is that hypermarkets are typically destination locations. They are designed to attract customers to a significantly large with their low price offers, unique range and offers.
GROWTH DRIVERS
The future of hypermarkets is looking profitable for a number of reasons , some of them are encapsulated in the diagram below
India ranks 5th on global retail development index, is considered the second fastest growing economy in the world and ranks amongst the top 10 FDI destinations in the world. Making the environment for hypermarket growth in India conducive. A huge opportunity exists in India, especially in the urban and semi-rural areas. Hypermarkets offer a one-stop shop for all customer needs. With an increasing workforce and decreasing spare time amongst the Indian population, hypermarkets are bound to be the beneficiaries.
Today, a fair share of the urban population is equipped with higher income and credit cards, exposure to a new shopping culture of the west, desire to show status and the need for a better standard of living are driving the consumer to spend more. This mentality, in turn is fueling the growth of organized retail in India. Consumer demand for value-for-money products has improved the prospects of hypermarkets. Hypermarkets can offer value for money/cheap products due to their streamlined large scale operations, which reduce per unit costs. The sheer size of hypermarkets gives them immense bargaining power, giving them better margins from suppliers. Technological improvements like bar coding and scanners, credit card payments and internet shopping are causing hypermarkets to easily assess changing consumer patterns and better serve the needs of consumers. Hypermarkets due to their large size can afford sophisticated technology. Liberalization of the Indian economy has led MNC brands like Kellogg's, Unilever and Nestle to make significant inroads into the vast consumer markets by offering a wide range of choices to Indian consumers. The insatiable demand of consumers for new brands can be easily met by hypermarkets. Hypermarkets pick up agro-products from as close to the farmer as possible since the seepage across the distribution channel is high, thus allowing them to mark up products as much as 500%.
There are several reasons why hypermarkets score over the local retail store, some of them are
HYPERMARKETS IN INDIA
Hypermarkets are operated by a few large corporate houses and retailers in India. In India, the hypermarket concept is in the nascent stage, retailers like Pantaloons and RPG have started hypermarket operations and they are aggressively expanding to all regions of India. Recent years have seen the entry of international retailers like SPAR entering as a hypermarket. Hypermarkets are also expanding into B class towns and are emerging as major competitors for both unorganized and organized retailers. The major cities where these hypermarkets are coming up are Delhi, Pune, Bangalore, Hyderabad, Mumbai and Chennai. Some of the major players in hypermarkets are as follows
BIG BAZAAR
Big Bazaar is one of the most established hypermarkets in India with 133 stores all over India. It is a subsidiary of the Future Group lead by Kishore Biyani, who has a wealth of experience in retail and is widely considered as a retail guru. Kishore Biyani also operates other retail brands like Futurebazaar, eZONE and Pantaloons. BigBazaar caters to every need of the family and where Big Bazaar scores over other stores is its value for money proposition for the Indian customers. BigBazaar's USP is to give customers the "Best products at the best prices". Big Bazaar is increasingly opening its doors to different product categories like apparel and general merchandise including home furnishings, utensils, crockery, and cutlery and sports goods. BigBazaar has various value added services like buying goods over the phone and through the internet, to which BigBazaar gives within 7 day delivery guarantee with free shipping. The hypermarket targets higher and upper middle class customers. It also specifically targets working women and home makers who are the primary decision makers.
Outlet Distribution:
Product Composition:
Big Bazaar offers a wide array of products categorized into various departments. The products sold by Big Bazaar can be broadly categorized as follows
As can been seen above, Big Bazaar offers a one-stop shop to its customers, making the shopping experience a complete and comprehensive one. Since Big Bazaar has to keep low margins on the food products, it is increasingly stacking up nonfood items or merchandise where the margins are higher compared to the food and groceries. Many hypermarkets are now keeping 40-60 ratios in their stock, whereby 40% of the stock includes food items and 60% includes general merchandise. Allowing these hypermarkets to become more profitable without hurting consumer sensitivities.
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SPAR
SPAR is the world's largest independent food retail chain spread across 35 countries. It is aiming to bring an international shopping experience at Indian prices to its Indian customers, with great attention to aesthetics. SPAR India is the result of a license agreement between the Dubai based Landmark Group's Max Hypermarket India Pvt. Ltd. and SPAR International. After a phase of consolidation, SPAR plans to expand its presence to new geographies and open 25 hypermarkets by 2012. This will result in a 10-fold increase in the companys retail spacefrom 120,000 sq ft currently to 1.2 million sq ft. SPAR lays great emphasis on food items, which form an integral part of the customer's shopping basket. It uses advanced procurement methods for vegetables and fruits, sourcing them directly from farmers and maintaining them at controlled temperatures till they reach the store, within an 18 hour timeframe. It attempts to bring value to its customers by offering them the best quality products and giving them value for money. SPAR also has various offers and promotions like an 'Every Day Low Price' concept, whereby SPAR offers the lowest price on certain products that are fast moving and are an integral part of the housewife's shopping list. SPAR assures its' customers world class service by making their stores customer oriented (like making wide aisles for easy trolley movement from the entrance to the parking area and fast billing processes). SPAR aims to provide customers with an unmatched shopping experience.
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Outlet distribution
SPAR plans to open 6-7 stores each year through 2012, which will all be large format stores with an average size of 50,000 sq ft. The hypermarket in Mangalore, which opened on April 25th last year, is the third largest mall in South India. This hypermarket has a robust supply chain in place and has strong relationships between buyers and suppliers in the Mangalore region.
Product Composition
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HYPERCITY
HyperCity as a hypermarket distinguishes itself by offering products sourced from both local and international markets, and providing a truly international shopping experience. HyperCity aims at providing an experience where the customer can shop in comfort in a large, modern and exiting environment. HyperCity lays emphasis on wide and contemporary range of innovative products, and has a large number of electronics and gadgets in its stores. The hypermarket recently won the Coca Cola Golden Spoon Award in 2009 for excellence in food retailing. It also offers facilities like an ATM, a gaming zone, a cricket net, a demo kitchen and a home theatre demo room in most of its malls. HyperCity's products are categorized into Food & Grocery, Home, Hi-Tech, Home Entertainment, Appliances, Fashion, Toys, Sports and Furniture.
Outlet Distribution:
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RELIANCE RETAIL
Reliance Retail is a subsidiary of Mukesh Ambani led Reliance Industries Limited (RIL), and since its inception in 2006 Reliance Retail Limited (RRL) has grown into an organisation that caters to millions of customers and thousands of farmers and vendors. Reliance Retail is broadly divided into the following three segments
RRL firmly believes in backward integration and has made significant progress towards building an entire value chain starting from the farmer to its end consumer for its Reliance Fresh stores. Reliance Mart is essentially RRL's all under one roof supermarket/hypermarket concept. Reliance Mart deals in mainly in home and kitchen appliances, mobile phones, cameras and other electronics. Reliance Mart has also opened in small towns and the small town stores has facilities like a tailor, shoe repair centre and a laundry.
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They occupy such large spaces in small towns that they are also known as 'Reliance Town Centres' in such towns. This store, like most of the other hypermarkets caters to the needs of the entire family and offers the following product categories
Reliance Mart aims to provide an international shopping experience to all its customers at 'unmatched affordability, guaranteed quality and choice of products and services'. The hypermarkets have a large number of check out counters as well as express check out counters to reduce customer waiting time. Reliance also offers its customers a membership and loyalty program which is aimed to keep a hold of regular shoppers by making them earn points on all their shopping in the stores. It already has a membership base of more than 3.5 million customers.
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MEGA MART
Megamart is considered to be the pioneer in the apparel value-retail segment, as it started operations in 1996, when multi-brand discount outlets were unheard of. It is owned by Arvind Ltd. and is spread over 60 cities with around 160 stores across India. Megamart believes in offering great ambience, customer friendly-store layouts and well designed interiors. One of the ways Megamart has been successful over the years and has been in operations since 1996 is because Megamart believes in keeping overheads and other costs at a minimum, and is willing to pass on the maximum savings to the customers in terms of affordable prices. Today, Megamart is considered the largest player of the apparel value-retail segment. Megamart has 2 formats Megamart stores that occupy around 2,000 - 4,000 sq. ft. and BIG Megamart stores that occupy 30,000 60,000 sq. ft. The BIG Megamart stores have on offer more than 200 brands, both national and international. The Megamart stores can also be franchised out, with the franchisee having a minimum investment of $60,000 and 1,200-1,500 sq. ft. of prime retail space across tier 2/3 towns.
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Outlet Distribution
From the above diagram it can seen that Megamart has a large presence in the south of India. The product categories offered by Megamart are as follows
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SHOPRITE
Shoprite is South Africa's largest grocery chain, which recently sold its Indian operations to The Future Group, led by Kishore Biyani after cancelling its JV with Nirmal Lifestyle Group in February last year. So far Shoprite has just a single store located in Mumbai, which is spread over 55,000 sq. ft. Shoprite hypermarket in India offers a wide variety of good quality basic food items as well as household items at the most affordable prices. Shoprite mostly stocks food items and also has a bakery. The store has 85 % food items. With varied shopping formats, the Shoprite group caters to the requirements of people from all income levels. Shoprite deals in other products like playthings, kitchen wares, apparels and toiletries. Shoprite has also made a position as a sourcing base for other countries with their ready-mix processed products like South Indian delicacies, vegetable oils and fruits.
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FDI REGULATIONS IN RETAIL
India has kept the retail sector largely closed to outsiders to safeguard the livelihood of nearly 15 million small storeowners and only allows 51 per cent foreign investment in single-brand retail with prior Government permission. The policy makers continue to explore areas where FDI can be invited without hurting the interest of local retail community. Organized retail also operates with several other limitations such as poor infrastructure, high real estate costs, inefficient supply chain, complex taxation systems and rigid labour laws. At present entry into Indias retail sector can be done through three different routes. The chart below shows the current formats permitted by the Government of India for the international players.
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The franchisee route is the most widely used and hypermarkets like Megamart are open to the franchising out their malls to suitable investors. Strategic license agreement involves a foreign company entering into a license agreement with a domestic retailer or partnering with Indian promoter-owned companies. Shoprite (a South-African hypermarket) used this route to enter India, through a joint venture with Nirmal Lifestyle. FDI of upto 51% is permissible in the retail trade of single brand products subject to the conditions that 1. The products to be sold should be of a 'Single Brand' only 2. products should be sold under the same brand internationally The retail industry in India, according to experts, will be a major employment generator in the future; hence the government restrictions are bound to reduce in the years to come.
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DRAWBACKS OF HYPERMARKETS
Apart from the stringent FDI regulations and other difficulties encountered by hypermarkets, hypermarkets by themselves have some inherent limitations. Since hypermarkets occupy a large floor space, their largest costs are in the form of rentals. This restricts them from entering prime locations where the consumers have the maximum buying power.
For hypermarkets to attract customers their prices have to be less than the existing retailers. Even if hypermarkets are able to offer lesser prices for food and grocery (which form a large portion of the products sold) items to attract customers, the margins on these can be quite less. Some hypermarkets like Subhiksha have shut down previously as they were unable to sustain the low prices and increasing the prices meant the loss of customers. Traditional grocery stores continue to dominate the Indian retail scene and are frequented more often by Indian shoppers.
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ABOUT RESEARCH
Northbridge Capitals Research team generates Sector and Company research for Indian companies. Should you wish to request a specific research report, please contact Pranjal Sanghvi at pranjal@northbridgeasia.com Northbridge Capitals Research team also published several periodic updates of relevance to foreign and Indian companies including M&A activity, Debt and IPO issuance etc Research reports on sectors, stocks are also available to clients online and can be accessed at www.northbridgeasia.com
ABOUT NORTHBRIDGE CAPITAL

o o o o o o Northbridge Capital is an Investment Bank(Category I Merchant Bank) regulated by the Securities & Exchange Board of India.(Sebi Registration: INM000011500) We assist companies with capital raising through various debt and equity instruments in public and private markets and M&As With offices in Hong Kong, Bangkok and Mumbai, Northbridge assist global companies with M&As, identifying local partners, India entry strategies and other merchant banking activities Northbridge assists domestic companies with raising capital in India and overseas both in equity and debt markets and with Acquisitions in India and abroad Northbridge Capital has 6 Practice areas and offers buy side and sell side advice across these areas: Consumer Technology Financial Services Life Sciences Industrials Real Estate
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CONTACT INFORMATION
INDIA OFFICE Pranjal Sanghvi Email: pranjal@northbridgeasia.com Tel: +91-22-22901715 Fax: +91-22-42643612 Northbridge Capital Ltd R-501, Remi Bizcourt Shah Industrial Area Off Veera Desai Road Andheri (West), Mumbai 400 053, India Website: http://www.northbridgeasia.com HONG KONG OFFICE Sam Farrimond Email: sam.farrimond@northbridgeasia.com Tel: +852-28628053 Fax: +852-22909154 Northbridge Partners (Asia) Ltd 22/F, 3 Lockhart Road Wanchai, Hong Kong
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DISCLAIMER -This information is for Institutional Investors and Northbridge Capital clients only. It is not meant for public circulation - No transmission of this information in any form or medium is allowed without the written authorization of Northbridge Capital -This is not a solicitation to buy or sell any security in any jurisdiction
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INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: + 91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

Growth of Organised Retail

Source: Associated Chambers of Commerce and Industry

Source: Northbridge Capital

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: + 91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

FDI REGULATIONS IN RETAIL

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

ABOUT NORTHBRIDGE CAPITAL

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

INDIA HYPERMARKET RESEARCH JANUARY 2011

Analyst: SHARAN KARAMCHANDANI Phone & Fax: +91-22-24643612 Email: sharan@northbridgeasia.com

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