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 an estimated $25 billion this year, having grown in excess of 10 percent over the past 5 years1—a growth rate faster than that of the overall India retail market—and the trajectory is expected to continue [Exhibit 1]. In India, apparel is the second largest retail category (behind food and groceries), representing approximately 10 percent of the total market. This growth is being driven by a number of factors:

  • Increase in disposable income. By 2005, 21 million of India’s 210 million households already earned more than $4,000 a year, qualifying them for membership in what we call “the consuming class.” Based on McKinsey research, by 2015 the number of consuming class households will likely triple to 64 million. 
  • New occasions. As the lifestyles of India’s prospering urban consumers have evolved, their clothing needs have broadened, reflecting more varied usage occasions. For men, clothing choices once came primarily in three basic categories: home-wear, work clothes, and special occasionwear. Now, with more “socializing” opportunities, men are buying more sophisticated combinations of outfits: party wear, sports wear, clothes for hanging out at the mall. Not long ago, for example, men from India’s northern regions only required a good dark suit or Sherwani, the traditional long coat, to cover big occasions and important celebrations. But over the past several years, men have begun to supplement those staples with expensive Westernstyle jackets, and collared shirts—some in “funky” patterns and cut for a night on the town, others in stripes or checks for casual meetings with important business associates. Today, Indians are more inclined than consumers in other markets to buy apparel for a specific 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. 
  • 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 wear and items for special occasions. Now, women are more willing to dress differently when they venture beyond the home—to shop, for example, or visit a school or office. 
  • Fashion increasingly a form of self-expression. Increasingly, Indian consumers are embracing the idea of fashion for its own sake, as a means of self-expression, and not merely as a functional purchase. Television, movies, advertising and the Internet bombard today’s Indian consumer with new ideas about style, even as American-style shopping malls lure them away from traditional marketplaces. Traditional clothing remains central to the way consumers dress, and the quality and craftsmanship of classic Indian clothing have drawn rave reviews in recent years from some of the world’s leading designers, style magazines, and fashion blogs. In a recent McKinsey survey of Indian consumers, 62 percent said they thought it was important to “keep up with trends.” More than ever, Indian consumers are experimenting with combining styles, as seen in the recent “Indo-fusion,” boom, which mixes the silhouettes of the East with the comfort cut of the West.

Over the next five years, we expect this growth to continue and the size of the market to nearly double. The increase will come partly from continued gains in disposable income, but it’s not just that Indians have more to spend. As they prosper, Indian consumers will naturally continue to spend more of what they earn on what they wear. Our experience suggests consumers worldwide typically spend an average of 5-6 percent of total income on apparel, but the figure is often significantly higher in emerging markets. Consumers in China’s larger cities, for example, spend 10 percent of their income on clothing, nearly double what their counterparts in Indian cities spend.3 That higher propensity to spend on clothes has helped to make China’s apparel market 4-6 times larger than India’s. Brazil’s consumers similarly spend more per capita on clothing than either India’s or China’s.

Besides continued momentum from the trends mentioned above, we see two additional forces that will inject further growth into India’s apparel sector: 

  • Further urbanization and the comparative youth of India’s population. At present, just 29 percent of India’s population resides in cities, among the lowest urbanization rates of any nation in the world. But that has been changing. Over the next 20 years, we expect the number of Indians living in cities to grow by 300 million, where they will don new styles and fashions to match new lifestyles. A large percentage of these new city dwellers will be in their twenties, and making first-time choices for whole categories of clothing items including denims, shirts, and even shoes. 
  • Continued rise of “organized retail.” Large, branded store chains where products are systematically stocked and displayed, will speed the transformation of consumer preferences. For now, organized retail accounts for less than 20 percent of all Indian apparel purchases; the rest takes place in tiny, family-run shops. But over the past five years, scores of shopping malls have opened on the outskirts of India’s largest cities and the trend is sure to accelerate. New formats on the scene include “export overrun” discounters, international franchises, hypermarkets, and luxury European boutiques.4

These changes will have far-reaching implications for designers, manufacturers, and retailers targeting the Indian apparel market. Spanish fashion giant Inditex (Zara) has announced plans to enter India this year. Fast Retailing (Uniqlo) has pegged 2012 for market entry.

But as in the fashion industry everywhere, success in India will depend on getting many things right at once: figuring out what consumers want, developing a profitable retail concept, and building a solid team. How, then, to compete in this promising but fast-changing market? We see three success factors: 

  • Shape the category. Winners will innovate occasions, looks, and wardrobes; the focus will therefore be broader than just building brands. This is already being done in some areas: over the past three years, for instance, major jewelry brands have revived a 5,000 year-old “sacred” day known as “Akshay Tritha,” which now accounts for the largest single-day jewelry sales in India. Similarly, the “Friday dressing” concept, introduced by one apparel brand, asked young professionals to buy brighter colors for Fridays, expanding the wardrobe in the process. Equally critical will be innovating styles: saree-suits, for example, and other fusion approaches that simplify otherwise difficult-towear apparel have thus far proven more successful than typical Western suits and evening dresses. There is even a place for more cutting-edge trends such as organic clothing: apparel retailers Van Heusen and Arrow recently launched 100 percent organic lines made of cotton, linen, and natural dyes.5 
  • Focus on inventory and markdown management. Today, apparel is one of India’s most attractive business segments due to its high margins [Exhibit 2]. Looking at an index based on the cost of a basic white shirt, we have found that Indian apparel prices have doubled over the last decade, and tend to be 25 to 30 percent higher than in China as a result of supply chain inefficiencies and restricted 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 corefashion and high fashion, managing inventory through a proper mix of made-to-order and later engagement rates, and keeping 50 to 60 percent of regularly restocked items at the core have become part of a winning retail formula. Though optimum margins on these pieces of clothing may not be as much as the more expensive, high-impact fashion pieces, they keep customers coming back regularly. The high fashion range should be advertised and showcased, but kept only to 10 to 15 percent of inventory to reduce the impact of markdowns.
  • 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 20 percent to the company’s growth and growing much more quickly than in the larger markets.6 Winners who want to build real scale in India will be those who understand the market in a granular manner, and then “own” the customer throughout their lifecycle with a portfolio of brands, price points, and formats.

Ireena Vittal is a partner in the Mumbai office. 

For more information please contact us at McKinseyCSI@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”.