VPC Newsletter | OCTOBER – 2017

The Month That Was…….


COUNTRY, FINANCE, MACROECONOMY, POLICY AND POLITICS

  • At its meeting which transpired on October 4 th , The Monetary Policy Committee kept its policy rate unchanged at 6%. RBI Governor Urjit Patel spoke of volatile inflation, which has increased by over 200 basis points over the past two months, as the underlying reason for the pause. The RBI mentioned that it will watch closely inflation figures and trends over the next 6 months to determine any adjusting course of action. To provide some liquidity boost, the Cash Reserve Ratio has been decreased by 50 basis points to 19.5% of the deposit base.
  • About 60 goods and services are likely to get cheaper, with Finance Minister Arun Jaitley expected to push for big tax rate cuts in the GST Council as part of a broader strategy to boost the economy.
  • Positive signs are emerging after an initial dull period post GST implementation. Index of Industrial Production came in at 4.3% in August, a nine month high, while the Consumer Price Inflation rate remained steady at 3.28%. Whether this is due to sustainable underlying economic green shots or re-stocking post inventory clearance in the face of the GST roll out and its attributable uncertainty, as well as the upcoming festive season, we will see in the coming months.
  • In September, merchandise exports grew by 25.7%, the fastest pace in six months, to reach US$ 28.6 Billion. The figure brought the trade deficit to a seven month low of US$ 8.9 billion.
  • Wholesale inflation rose 2.6% y-o- y in September, slower than the 3.24% recorded for August. Retail inflation remained unchanged at 3.28% in September.
  • On October 24 th the Government unveiled an almost Euro 30 Billion package to recapitalize public sector banks. The aim will be to spur new lending to adequate borrowers in view of the freeze owing to the pile of stressed assets and NPAs said banks are sitting on.
  • Prime Minister Narendra Modi has announced plans to develop an online platform that will be utilised for all government purchases of goods and services. In a further sign of the Government’s commitment to tackle corruption, the online platform will be expected to host all procurement requirements of government departments.

VPC SECTORS

Apparel, Fashion & Luxury

  • The Department of Industrial Policy and Promotion (DIPP), the nodal department for all FDI proposals since the abolition of the erstwhile Foreign Investment Promotion Board, has approved luxury brand Louis Vuitton’s proposal for addition of products it is allowed to sell.
  • Leading fashion brand Mango opened its first store in Delhi on October 5 th . The brand will be run via its partnership with leading online player Myntra in India. Myntra is expected to pull out the red carpet for the brand on its online platform, while using its overall knowledge of the Indian consumer and specialised retailers to also develop its offline presence.
  • French high fashion luxury goods player Hermes is set to open its second store in the country. After its first store opening in Mumbai ten years ago, the Company is now set to open its second store in Delhi.
  • Reliance Brands, a division of Reliance Retail, has purchased a 40% stake in Genesis Luxury, its direct competitor in the Indian luxury space. Genesis retails brands like Jimmy Choo, Paul Smith and Armani, while Reliance Brands is the Indian partner for Ermenegildo Zegna, Bally and Brooks Brothers. The deal now brings forth one clear consolidated leader in the luxury / bridge to luxury apparel space of India.
  • Reliance Industries has tied up with VF Corporation, one of the world’s largest denim makers, to manufacture products for the latter’s Wrangler brand to be sold in the Asian market beginning spring-summer 2018. The umbrella brand `R|Elan’ will be used to venture into co-branded apparels, and the tie-up is part of this strategy.
  • Japan-based luxury fashion brand Onitsuka Tiger has forayed into the Indian market by opening its first store in Mumbai. The company is looking to further ramp its presence by establishing 12 brand stores in tier-I cities by 2020. Asics, owner of the brand, is aiming to establish its Onitsuka Tiger brand in the Indian market as the company is sensing a good opportunity with a growing aspirational class in metro cities.
  • The Department of Industrial Policy and Promotion has approved Reebok’s application for opening its own stores under 100% FDI. Previously, the brand was promoted in India through its controlling company, the German shoes and apparel leader Adidas AG.

Consumer Durables

  • Mircomax, the Indian mobile maker, has announced plans to enter the washing machine, refrigerator and microwave segments as it looks to become a complete consumer electronics player.
  • India has become the world’s second largest smart phone market, surpassing the USA, with more than 40 Million units shipped in the July – September quarter.
  • Japanese conglomerate Sony is making its plans to re-enter India’s smartphone market. Plans are in the works lo launch two smartphone models priced in the cluttered yet attractive and fast growing Euro 200-250 price segment. Sony will not set up its own facilities but rather will leverage the world’s largest contract manufacturer Foxconn’s manufacturing facilities in Andhra Pradesh for its production requirements.

E-commerce and Offline Retail E-commerce

  • Albeit the flirting has been going on for a few years, the Central Government seems seriously intent on opening up the multibrand retail sector to 100% FDI. Today the Government allows 51% FDI in the sector, albeit with several riders such as investment required in back end and logistics, as well as local sourcing norms. Politically sensitive because of the influential traders, middle men, and numerous small shop owners, it is a hot potato that most parties in power have avoided. The turning of the face however is no longer an option as the economy needs stimulus, and the country needs a new sector to drive employment after IT and infrastructure did their part. Multibrand retail remains one of the least few areas where 100% FDI is not allowed, other sectors include oil & gas, insurance, private banking, print media and broadcasting.
  • Future Retail is set to acquire HyperCity, a premium chain of 19 hypermarkets from Shoppers Stop for ~ 90 Million Euros. This will help India’s largest offline retailer consolidate its footprint in western India and penetrate a more premium segment of the market.
  • India has approved smartphones maker Oppo’s request to open single-brand retail stores in the country, paving the way for the Chinese firm to sell directly to consumers and add to its existing wholesale business.
  • After much speculation, the participants have all formalised and announced plans to battle for the next category of growth in the online space, groceries and other FMCG categories. With Amazon already operational, Flipkart is close to launching its own service, while current online grocery market leader BigBasket is in final talks for raising funds from Chinese behemoth Alibaba and Paytm. Albeit the market is expected to be worth ~1 Billion US$ in 2017, it is projected to grow 60% y-o- y for the next few years. Furthermore, what is attractive for the larger players offering a host of other products and services, is the frequency of the purchases and hence the numbers of visits made by each customer, with evident cross fertilisation opportunities that arise. Interestingly, Amazon is promoting its customers to undertake a needs based consumption approach, whereas BigBasket encourages its clientele to buy groceries for a week or even longer periods.
  • Owing to higher margins in private label business, Flipkart has decided to launch its own brand for large household appliances. The launch coincided with the Diwali sales season, the brand’s name is MarQ.
  • Flipkart has made a solid commitment to its digital payments platform PhonePe by committing US$ 500 million worth of investments to the vertical.
  • Decathlon has inked a deal with Flipkart to start selling all its products on the online marketplace. All brands and product categories under the Decathlon umbrella will be made available, and prices will be the same as its offline offering. As more Indians from every corner of the country begin exploring new sports and demand for specialised equipment and apparel, Flipkart will enable Decathlon to reach its more than 100 million customers from all across the country.
  • A recent report by Morgan Stanley has projected the Indian e-commerce market to grow by 30% CAGR, to reach US$ 200 billion by 2026. One of the underlying drivers rests on the fact that India currently has 60 million online buyers, 14% of the internet user base, within the projection it is expected that this will grow to 50%.
  • PayTM had a very successful Diwali. In the period from September 20 th to October 20 th the digital payment platform clocked US$ 1.6 Billion worth of transactions, with a 3.5x increase in volume. In parallel, its e-commerce vertical also came away with very impressive numbers, claiming a 20% market share of total e-commerce festive sales.

Offline Retail

  • As further evidence of the uniqueness of India’s consumer markets’ ecosystem, kirana shops (local neighbourhood shops that are typically below 10 square meter in size) still account for more than three fourths of the FMCG market. Fears of their fall due to the penetration of organized retail are proving to be unwarranted. The convenience and historical relationships these shops have with their customers is proving resilient. So much so that Nielsen has recently tied hands with Bangalore based start-up Snapbizz to digitise kirana shops to enable better inventory management and customers to pre-order online, amongst other downstream benefits.
  • Metro Cash & Carry will start B2B online sales as it looks to expand in the growing segment. The company also plans to add more stores to its network. To woo small neighbourhood shops, the company has also started giving them credit ranging upwards of Euro twenty thousand on their purchases besides delivering products at their stores.
  • The blow for blow competition between India’s two largest online platforms is spilling into the offline space. It is rumoured that Flipkart is in discussions to acquire a stake in Kishore Biyani’s Future Lifestyle Fashions, the listed fashion arm of the Future Group. Amazon recently announced a 5% stake acquisition of comparable Shoppers Stop from the K Raheja Corp. Group. The deal comes in the wake of growing belief that omni-channel presence is vital for increasing growth capacity of both online and offline players. Rather than fierce competitors, incumbents from both worlds are starting to see and seek ways to explore synergies that may come from their respective ecosystems.

Fast Moving Consumer Goods

  • Hershey is the latest leading confectionary player to announce plans of expanding its India portfolio, both by way of different formats to its existing products but also by bringing new brands from its international portfolio. With a current market value of ~1.1 Billion Euros, the chocolate segment is of particular interest to the likes of Hersheys, Nestle, Mondelez, Mars and Ferrero. The overall chocolate market is growing at ~12-13%, while the premium segment which represents 30% of the overall pie, is growing at an even faster pace of 20% annually.
  • LT Foods, a leading supplier of rice, grains, beans and pulses, has forayed into healthy snacks via a JV with Japan’s Kameda Seika. The exclusive 51:49 JV (Majority owned by LT Foods), will manufacture and market rice based healthy snacks positioned in the premium segment albeit with a very good price / quality proposition. In the initial stages, the products will be sold in Delhi-NCR, Mumbai and Bengaluru, with further expansion thereafter.

HoReCa

  • In a boon to the sector which has been reeling under the imposition of 18% GST on restaurants with air conditioning, the Government is close to officialising a decrease to 12%. GST for non-AC restaurants is presently at 12% and 18% for AC restaurants.

Others

  • Premium beer maker “Bira 91” announces the launch of its 5 th beer in the Indian market which will be an Indian Pale Ale variant. After the resounding success of Bira White and Bira Blonde, the company has positioned the new beer in 250 bars and restaurants across NCR-Delhi, Mumbai, Pune and Bangaluru to start with. Founder and CEO Ankur Jain resonates IPA’s history as the first beer that the British made specifically for India, and hence labelling it as a sort of homecoming for the beer variant. It is expected that Bira IPA will also be focused on export markets, with plans to also penetrate the competitive and consumer sophisticated US market.
  • India’s leading mobile operator Bharti Airtel has acquired the wireless business of the Tata Group, Tata Teleservices. The deal is a continuation of the consolidation in the industry that started a little over two years ago. The deal brings 40 million new wireless customers to Airtel and gives them additional spectrum in 19 circles.
  • In the construction and earth moving industry, motor graders have seen an important pick-up in demand. In 2017 the motor graders market is expected to grow by 20% to 1200 units. Owing to the 24 th of October announcement by the Government that Euro 100 Billion will be allocated to the road sector, VPC is projecting the market to grow by more than 18% over the next three years to reach close to 2,000 units.
  • Mahindra & Mahindra displayed and will soon launch the first-ever Indian driverless tractor. With this launch, Mahindra becomes the pioneer in the Indian tractor industry with the unique proposition of a driverless tractor. The company expects this innovation to impact the future of farming by increasing productivity and reducing dependence on manual labour.
Value Prism Consulting
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