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					                CSI Insights Flash
                June 2010




                India’s fast-growing apparel market




India’s apparel market is in the throes of change. Rapid growth and rising urbanization
have spawned a new class of consumers with more money to spend, and a growing passion
for fashion. In India’s high-growth, fast-changing retail clothing market, we see significant
new growth opportunities for foreign and domestic players.


Indian apparel sales are expected to reach
                                               Exhibit 1
an estimated $25 billion this year, having     The future is bright with apparel sales reaching double or triple current levels by 2015
grown in excess of 10 percent over the past
                                                                Likely size of Indian apparel market
5 years1—a growth rate faster than that                         USD Billions
of the overall India retail market—and
                                                                                                                                       55
the trajectory is expected to continue
[Exhibit 1]. In India, apparel is the second                                                                         40
largest retail category (behind food and                                                                                     3x
groceries), representing approximately 10                                                                    2x
                                                                                                      20
percent of the total market. This growth
is being driven by a number of factors:

ƒ   Increase in disposable income.                                                                   2008           2015          2015 (with lower
                                                                                                                                  prices and cost)
    By 2005, 21 million of India’s 210
    million households already earned                            Per capita income
                                                                                                     1,000          1,250             1,250
                                                                 USD
    more than $4,000 a year, qualifying
    them for membership in what we             SOURCE: Bird of Gold; MGI; HHTWS; McKinsey analysis

    call “the consuming class.” Based
    on McKinsey research, by 2015 the
                                                  wear. Now, with more “socializing”                              years, men have begun to supplement
    number of consuming class households
    will likely triple to 64 million.             opportunities, men are buying more                              those staples with expensive Western-
                                                  sophisticated combinations of outfits:                          style jackets, and collared shirts—some
ƒ   New occasions. As the lifestyles of
                                                  party wear, sports wear, clothes for                            in “funky” patterns and cut for a night
    India’s prospering urban consumers
                                                  hanging out at the mall. Not long ago,                          on the town, others in stripes or checks
    have evolved, their clothing needs
                                                  for example, men from India’s northern                          for casual meetings with important
    have broadened, reflecting more
    varied usage occasions. For men,              regions only required a good dark suit                          business associates. Today, Indians are
    clothing choices once came primarily          or Sherwani, the traditional long coat,                         more inclined than consumers in other
    in three basic categories: home-wear,         to cover big occasions and important                            markets to buy apparel for a specific
    work clothes, and special occasion-           celebrations. But over the past several                         purpose. Indeed, 38 percent of Indian
    respondents to a recent McKinsey
    study said they were highly likely
    to buy apparel for special events – a
    significantly higher proportion than in
    Brazil (5 percent), Russia (3 percent) or
    China (6 percent).2 Family celebrations
    and weddings continue to eat up an
    enormous share of Indian consumers’
    clothing budgets.
ƒ   Growth in the women’s segment.
    Historically, the men’s apparel market
    in India has been significantly larger
    than the women’s apparel market. With
    only 20 percent of India’s urban women
    in the workforce, women’s wardrobes
    have traditionally been limited to home     market to nearly double. The increase                where they will don new styles and
    wear and items for special occasions.       will come partly from continued gains in             fashions to match new lifestyles. A large
    Now, women are more willing to dress        disposable income, but it’s not just that            percentage of these new city dwellers
    differently when they venture beyond
                                                Indians have more to spend. As they                  will be in their twenties, and making
    the home—to shop, for example, or visit
                                                prosper, Indian consumers will naturally             first-time choices for whole categories of
    a school or office.
                                                continue to spend more of what they earn             clothing items including denims, shirts,
ƒ   Fashion increasingly a form of              on what they wear. Our experience suggests           and even shoes.
    self-expression. Increasingly,              consumers worldwide typically spend an
                                                                                                 ƒ   Continued rise of “organized
    Indian consumers are embracing              average of 5-6 percent of total income on
                                                                                                     retail.” Large, branded store chains
    the idea of fashion for its own sake,       apparel, but the figure is often significantly
                                                                                                     where products are systematically
    as a means of self-expression, and          higher in emerging markets. Consumers in
                                                                                                     stocked and displayed, will speed
    not merely as a functional purchase.        China’s larger cities, for example, spend 10
                                                                                                     the transformation of consumer
    Television, movies, advertising             percent of their income on clothing, nearly
                                                                                                     preferences. For now, organized retail
    and the Internet bombard today’s            double what their counterparts in Indian
    Indian consumer with new ideas                                                                   accounts for less than 20 percent of
                                                cities spend.3 That higher propensity to
    about style, even as American-style                                                              all Indian apparel purchases; the rest
                                                spend on clothes has helped to make China’s
    shopping malls lure them away from                                                               takes place in tiny, family-run shops.
                                                apparel market 4-6 times larger than
    traditional marketplaces. Traditional                                                            But over the past five years, scores of
                                                India’s. Brazil’s consumers similarly spend
    clothing remains central to the way                                                              shopping malls have opened on the
                                                more per capita on clothing than either
    consumers dress, and the quality and                                                             outskirts of India’s largest cities and the
                                                India’s or China’s.
    craftsmanship of classic Indian clothing                                                         trend is sure to accelerate. New formats
    have drawn rave reviews in recent                                                                on the scene include “export overrun”
                                                Besides continued momentum from
    years from some of the world’s leading                                                           discounters, international franchises,
                                                the trends mentioned above, we see two
    designers, style magazines, and fashion                                                          hypermarkets, and luxury European
                                                additional forces that will inject further
    blogs. In a recent McKinsey survey of                                                            boutiques.4
                                                growth into India’s apparel sector:
    Indian consumers, 62 percent said they                                                       These changes will have far-reaching
    thought it was important to “keep up        ƒ   Further urbanization and the                 implications for designers, manufacturers,
    with trends.” More than ever, Indian            comparative youth of India’s                 and retailers targeting the Indian apparel
    consumers are experimenting with                population. At present, just 29              market. Spanish fashion giant Inditex
    combining styles, as seen in the recent         percent of India’s population resides in     (Zara) has announced plans to enter India
    “Indo-fusion,” boom, which mixes the
                                                    cities, among the lowest urbanization        this year. Fast Retailing (Uniqlo) has
    silhouettes of the East with the comfort
                                                    rates of any nation in the world. But that   pegged 2012 for market entry.
    cut of the West.
                                                    has been changing. Over the next 20
Over the next five years, we expect this            years, we expect the number of Indians       But as in the fashion industry everywhere,
growth to continue and the size of the              living in cities to grow by 300 million,     success in India will depend on getting
                                                                                                                        competition. We expect that situation
                                                                                                                        to change as India’s fashion industry
                                                                                                                        draws new players and capital in years
                                                                                                                        to come. For one thing, apparel retail in
                                                                                                                        India relies heavily on sales promotions
                                                                                                                        and special events. Tempting as it
                                                                                                                        will be to bring Western concepts like
                                                                                                                        “fast fashion” and large assortments to
                                                                                                                        India out of the gate, innovation has its
                                                                                                                        risks, including higher markdowns and
                                                                                                                        lower sell-throughs if the new offer or
                                                                                                                        collection is not a hit. And uncertainty
                                                                                                                        on inventory management and ordering
                                                                                                                        in the absence of historical sales data
                                                                                                                        is likely to be the norm. Winners will
                                                                                                                        need to get the back-end operations
                                                                                                                        right much earlier than the scale of the
                                                                                                                        market suggests: managing margin
                                                                                                                        through smarter in-season markdowns,
                                                                                                                        a disciplined balance between core-
many things right at once: figuring out what             Van Heusen and Arrow recently                                  fashion and high fashion, managing
consumers want, developing a profitable                  launched 100 percent organic lines made                        inventory through a proper mix of
retail concept, and building a solid team.               of cotton, linen, and natural dyes.5                           made-to-order and later engagement
How, then, to compete in this promising                                                                                 rates, and keeping 50 to 60 percent of
                                                  ƒ      Focus on inventory and                                         regularly restocked items at the core
but fast-changing market? We see three
                                                         markdown management: Today,                                    have become part of a winning retail
success factors:
                                                         apparel is one of India’s most attractive                      formula. Though optimum margins
ƒ   Shape the category. Winners                          business segments due to its high                              on these pieces of clothing may not
    will innovate occasions, looks, and                  margins [Exhibit 2]. Looking at an                             be as much as the more expensive,
    wardrobes; the focus will therefore be               index based on the cost of a basic white                       high-impact fashion pieces, they keep
    broader than just building brands. This              shirt, we have found that Indian apparel                       customers coming back regularly. The
    is already being done in some areas: over            prices have doubled over the last                              high fashion range should be advertised
    the past three years, for instance, major            decade, and tend to be 25 to 30 percent                        and showcased, but kept only to 10 to
    jewelry brands have revived a 5,000                  higher than in China as a result of supply                     15 percent of inventory to reduce the
    year-old “sacred” day known as “Akshay               chain inefficiencies and restricted                            impact of markdowns.
    Tritha,” which now accounts for the
    largest single-day jewelry sales in India.
                                                      Exhibit 2
    Similarly, the “Friday dressing” concept,         Apparel is the most profitable segment of the Indian retail market today
    introduced by one apparel brand, asked
    young professionals to buy brighter                                    Typical retailer
                                                        Category           margins            Description
    colors for Fridays, expanding the
    wardrobe in the process. Equally critical           Food                      15-20%        More than 80% organized retail in India is food – however margins are not
                                                                                                as high
    will be innovating styles: saree-suits, for
    example, and other fusion approaches                Apparel                   35-50%        Highest retailer margins through apparel
                                                                                                The more organized segments like men’s formals provide the highest
    that simplify otherwise difficult-to-                                                       returns
    wear apparel have thus far proven more
    successful than typical Western suits               Electronics               5-10%         Household appliances may provide as much as 8-10%; however categories
                                                                                                like cell phones may be as low as 5-6%
    and evening dresses. There is even a
    place for more cutting-edge trends such
                                                      SOURCE: McKinsey research
    as organic clothing: apparel retailers
ƒ   Take a segmented view of the
    market. As in many other emerging
    markets, not all consumer segments
    or geographies are the same. Our
    research, for example, shows that some
    segments of apparel shoppers spent 20
    times more than others—driven not
    only by income, but also by lifestyle. For
    example, consumers in the north tend
    to spend more than in other regions
    due to cooler climates and different
    approaches to social occasions.
    Similarly, retailers cannot ignore the
    smaller cities, which will drive apparel
    growth opportunities, even for more
    expensive brands. Benetton, for
    example, recently hit $100 million in
    sales in India, and is targeting $250
    million within the next 3-4 years,
    largely by targeting smaller cities,
    which are already contributing about            Ireena Vittal is a partner in the Mumbai
    20 percent to the company’s growth              office.
    and growing much more quickly than
    in the larger markets.6 Winners who             CSI Insights Flash is a publication of
    want to build real scale in India will be       McKinsey & Company’s Consumer
    those who understand the market in a            & Shopper Insights Practice. For
    granular manner, and then “own” the             more information please contact us at
    customer throughout their lifecycle             McKinseyCSI@McKinsey.com.
    with a portfolio of brands, price points,
    and formats.                                    Please visit us at http://csia.mckinsey.com




1   According to the India Ministry of Textile, apparel sales for 2008 were $ 20 billion; Datamonitor.
2   How Half The World Shops (McKinsey propriety market research).
3   Chinese figures are from 2006 and from the National Bureau of Statistics, People’s Republic of China. In India, per capita GDP spending on
    apparel increased to 5.8 percent in 2006 from 4.9 percent in 2003. However that number is higher in the major cities.
4   India’s Foreign Direct Investment rules essentially only allow FDI in wholesale, or cash-and-carry, enterprises. Foreign retailers can, however,
    enter retail through franchise agreements with domestic players, and can own up to approximately half in single-brand retail.
5   “Two major Indian apparel brands go organic,” The Hindu, April 14, 2010.
6   Economic Times, April 15, 2010, “Benetton India revenue likely to touch $250 m in 4 years”.

				
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