In the summer of 1993, less than a year after India’s economy opened up to the world, a little-known supermarket opened its doors at Archana shopping complex in a posh south Delhi neighbourhood. I was barely six at the time, but I still vividly remember the first time I walked through the doors of Nanz Supermarket. The store was larger than anything I had ever seen. Unlike dingy neighbourhood kirana stores, Nanz was brightly lit.

The entire shop floor was seemingly endless aisles of brightly coloured packaged foods, chocolates, and cold drinks from brands, which so far, I had only seen on hoardings of international cricket matches. Sitting in a shopping trolley pushed by my father while my mother filled it up, for the first time I felt no less than our cousins from Australia who kept complaining about the lack of supermarkets when they came to India. Overnight, the most mundane activity of buying household provisions had turned into an enjoyable family outing. But Nanz Supermarket was way ahead of its time. Or perhaps it was in the wrong place at the wrong time.

It struggled to replace your friendly neighbourhood kirana store uncle who remembered your name. And business-wise, rental costs were back-breaking. By the end of the 1990s, Nanz—a joint venture between Germany’s Helmut Nanz, who at the time was at the helm of a $2 billion German retail chain, Don Marsh of former U.S. convenience store Village Pantry, and India’s Nanda business family, the promoters of Escorts Group—had shut shop. A revival in 2002 didn’t last long either.

Jabong Warehouse, Pataudi Road, Gurgaon.      
Jabong Warehouse, Pataudi Road, Gurgaon.     
Image : Sanjay Rawat

While Nanz has faded away, India’s appetite for modern retail has grown exponentially in the 21st century. Today, the urban landscape in many cities is dotted with shopping malls packed with people ready to shop till they drop. Online shopping is also booming in the country of 1.3 billion people, where some 420 million millennials are largely driving consumption because of their spending power and urge to splurge. More than 350 million Indians—more than the total population of the U.S.—are part of a family that has a combined income of more than `25,000 per month. More than 478 million people have access to the Internet and at some point in 2019, India is expected to overtake the United Kingdom as the world’s fifth-largest economy.

No wonder then that when the No. 1 ranked Fortune 500 company Walmart Inc decided to restructure its global operations, it decided to scale back from the U.K. and place its bets on India. It paid a staggering $16 billion to take control of India’s largest e-commerce company, Flipkart, with a 77% stake last year. The deal is the largest in the e-commerce space worldwide, the biggest purchase by Walmart in its 56-year history, and easily the country’s most significant corporate move of 2018. “India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of e-commerce in the market. We are excited by what the future holds,” Doug McMillon, Walmart’s president and chief executive officer, said after the deal was announced last May.

Source: McKinsey Global Institute report titled “Next Big Spenders: India’s Middle Class”
Source: McKinsey Global Institute report titled “Next Big Spenders: India’s Middle Class”

It was in a sense the perfect time for Walmart to enter India. After a failed attempt 10 years ago to set up physical stores in partnership with Bharti Enterprises due to an uncertain regulatory environment, the purchase of Flipkart provided it with a ready-made customer base, infrastructure, and operations to gain a sizeable chunk of the average Indian’s wallet. Walmart stepped on the accelerator from the get-go to integrate Flipkart within the universe of the world’s largest retailer. Compared to other mergers and acquisitions in India, work to integrate Flipkart with Walmart moved at a breakneck speed. Already a major restructuring has occurred within Flipkart: The back-end operations of its two fashion e-commerce portals, Myntra and Jabong, have been integrated and traffic from Jabong will soon also be directed to Myntra.

Barely a few months after the deal, India’s most successful startup entered a new phase of life without its founders. Co-founder Binny Bansal quit as group CEO in November following allegations of personal misconduct; the other co-founder, Sachin Bansal (not related to Binny), had already quit the firm when Walmart entered the fray in May. Although the startup community in Bengaluru was shaken by the exits and looked at the changes with apprehension, Flipkart insiders are brimming with confidence under their new chief executive officer, Kalyan Krishnamurthy. “The deal with Walmart is combining its global expertise with Flipkart’s market leadership, positioning both entities for long-term success. We strongly believe in this partnership’s potential to contribute to the economic growth of India by driving the next wave of retail and by providing quality, affordable goods for customers, while creating new skilled jobs and opportunities for suppliers,” says Rajneesh Kumar, chief corporate affairs officer, Flipkart Group.

Image : Fortune India research

Though Flipkart continues to pile up losses and is expected to remain a drag on Walmart’s results for the near term, Judith McKenna, president and CEO of Walmart International, sought to soothe investors’ worries in November. “We are in India for the long term and we are in India to be successful,” she said. That plan includes a greater focus on private labels, use of data analytics and artificial intelligence to drive efficiencies, and finally the holy grail of every modern retail chain in India—groceries.

Flipkart Supermart, the group’s online groceries foray, has already started trial runs in Bengaluru and is set to expand to other cities soon. “In grocery, we have seen spectacular adoption in Bengaluru (where we cover all the major PIN codes) and we are now focussed on ramping it up in Hyderabad, Chennai, and Pune,” says Kumar. “Our success has been possible because of our problem-solving approach, which led us to recognise the need to set up an independent supply chain for grocery. In addition, our private label in grocery is a farm-to-fork model that empowers farmers and producers.”

Groceries is the new frontier for online shopping. Flipkart’s biggest rival, Amazon, has already tasted success in the segment through Amazon Now, which promises two-hour deliveries using products from its own warehouses and local supermarkets across several cities. Apart from Amazon, startups like BigBasket and Grofers have also had success in the online groceries space.

Judith McKenna, president and chief executive officer international at Walmart Inc.      
Judith McKenna, president and chief executive officer international at Walmart Inc.     
Image : Gettyimages
We are in India for the long term and we are in India to be successful.

While the hunt for profitability is on, Flipkart wants to expand its footprint and get even more customers. It has a mission to add 500 million new customers with 200 million of those expected to come in the next three-five years. “Our aim at Flipkart is to grow the ecommerce industry as a whole across the country by innovating in newer, younger categories and focussing on customers from outside metros. From expanding our logistics network and the PIN codes we service to on-boarding smaller sellers from tier 2 and 3 cities, we are seeing impressive customer adoption in nonmetro cities,” says a Flipkart spokesperson.

Kalyan Krishnamurthy, Chief executive officer of Flipkart       
Kalyan Krishnamurthy, Chief executive officer of Flipkart       
Image : Gettyimages

A target like that would have seemed ambitious a few years ago, but looking back at the last decade, Flipkart’s ambitions seem more realistic. Though several websites like Indiaplaza and eBay India were the first movers in the e-commerce space in the country in the early 2000s, India’s love affair with online shopping was really cemented only towards the beginning of this decade. Today, India’s online retail market is estimated to be over $20 billion and is slated to grow to $200 billion by 2026, nearly 12% of the total retail market, according to a recent study by Morgan Stanley. While it is much smaller than China’s $1.07 trillion and the $511 billion U.S. e-commerce market, India is by far the fastest growing. Overall, India’s retail market size stands at $670 billion but it still remains largely unorganised with most business done through small kirana or mom-and-pop stores. Industry estimates suggest that by 2022, India’s retail market could well be over $1 trillion.

The aspirations of Indians have provided a boost to virtually all sectors with a direct connection to consumers. Whether it is FMCG, fashion retailing or consumer electronics like televisions, washing machines, air conditioners, refrigerators, and other such products, shopping seems to be India’s favourite pastime. A recent report by the World Economic Forum with Bain & Company says India is poised to be the third largest consumer market, behind only the U.S. and China. The report sees consumer spending growing from $1.5 trillion today to $6 trillion by 2030 with the upper-middle and high-income segments expected to grow from one in four to one in two households.

And it is not just e-commerce that is booming. Brick-and-mortar spending, especially in rural areas, is also rising sharply. Most in the FMCG industry feel the Indian consumption growth is at an inflection point where the only way is up. “We have clearly seen an improvement in rural consumption. Overall rural is growing at 1.25 times more than urban and that trend should continue over the coming years,” says Sunil Kataria, chief executive officer of India and SAARC at Godrej Consumer Products Ltd.

Sunil Kataria serves as Chief Executive Officer of India & SAARC at Godrej Consumer Products Limited.
Sunil Kataria serves as Chief Executive Officer of India & SAARC at Godrej Consumer Products Limited.
Image : Courtesy of Godrej Consumer Products
We have clearly seen an improvement in rural consumption.Overall rural is growing at 1.25 times more than urban and that trend should continue over the coming years.     

Rural customers are also increasingly choosing products that traditionally worked only in urban markets. Whether it is cream biscuits and chocolate chip cookies or chips and snacks made by multinationals, the shelf space in small-town stores is increasingly looking similar to that in urban areas. It is a trend that, according to Kataria, will only increase due to the investments in infrastructure made by the government which will help increase distribution to rural areas and make products more accessible.

Saumya Tyagi, Marketing Director, Tetra Pak<em></em>
Saumya Tyagi, Marketing Director, Tetra Pak
Image : Narendra Bisht
A lot of companies are addressing the needs of the bottom of the pyramid, the middle of the pyramid and at the same time, entering premium categories.     

“The last decade (2005-2015) was about reaching the rural markets. With the improvement in infrastructure and road connectivity, we have already reached there. In the next decade, we will see consumers at rural and semi-urban levels try out products that conventionally were thought to be for only urban consumers,” says Mayank Shah, products category head at Parlé. Shah suggests that growing Internet penetration is increasing the aspirations of rural and semi-urban consumers.

Rising aspirations mean greater premiumisation in products offered to Indian consumers. Saumya Tyagi, director-marketing, India and South Asia markets, Tetra Pak, says far greater affluence has come into the Indian market in the last 10 years and this is reshaping the way Indians shop. “In every category, premium brands have emerged. Take fashion, for example. We have seen the likes of ZARA, H&M, Marks & Spencer and others enter the market. Even in the ice cream market, Magnum from Kwality has entered the market,” says Tyagi. “Today, a lot of companies are addressing the needs of the bottom of the pyramid, the middle of the pyramid and, at the same time, entering premium categories.

The combination of these conditions has created the perfect environment for big-ticket investments in consumerdriven industries like retail, e-commerce, and FMCG. Tetra Pak’s Tyagi points to the deals of 2018 as an example of how rising incomes and aspirations have made India’s consumer space an attractive investment destination. He is also convinced that investment from foreign entities will grow and the consumer space will be one of the most attractive industries.

While Walmart’s purchase of Flipkart was the landmark deal of 2018, the year will also be remembered for large investments into companies with a direct reach to Indian consumers. Deals like Unilever’s purchase of GlaxoSmithKline Consumer Healthcare and the Horlicks brand, Zydus Cadila’s acquisition of the Complan brand from Kraft Heinz, and investments in companies like Swiggy, Grofers, and BigBasket highlight the appetite for investing in India’s consumer space. Overall, more than $20 billion was invested in either acquiring companies or picking up a stake in firms in the e-commerce, FMCG, and retail space. “India is certainly one of the strategic markets on the radar of companies that have global ambitions, and there are few such large markets with similar growth prospects in the foreseeable future,” says Devangshu Dutta, chief executive of retail consultancy Third Eyesight.

Consumption in India has really grown after years of socialist-era deprivation before the economy was thrown open. “These deals are essentially highlighting the consumer story of India where we are seeing an increasing middle class, rising demand for health-related products, fashion products, and branded products,” says Pankaj Chopda, director, Grant Thornton India. “In the health space—across food, drinks, and organic food—we are seeing a lot of interest from companies wanting to make large bets,” adds Ausang Shukla, managing director, corporate finance, Ambit Capital. “Consumers are shifting a lot more towards healthier alternatives and for food companies, within all categories of consumption, the healthier alternatives are a big focus.”

Yet, no matter how robust the fundamentals, every industry has its risks. Some looming threats to the Indian consumption growth story are the seemingly uncontrollable farm distress, the need to create enough jobs, and regulatory uncertainties. One of the big hurdles has been the restriction on foreign direct investment in retail. In 2012, the United Progressive Alliance-II government tried to liberalise the policy and retail was split into two formats: multi-brand and single-brand. While 100% FDI was allowed in single-brand retailing, which allowed firms like Ikea and Uniqlo to invest in India, multi-brand retail was restricted to 51% and had several riders. The final call on allowing FDI in multi-brand retail was also left in the hands of state governments. As a result, the likes of Walmart and Carrefour stayed away from India. The growth of e-commerce opened a new window, but a cloud of uncertainty has emerged on foreign investment in the space.

The e-commerce industry is particularly concerned after the Department of Industrial Policy and Promotion tweaked foreign direct investment norms for e-commerce firms. It seeks to stop e-commerce companies from selling products of entities in which they have an equity stake and restricted online marketplaces (such as Amazon India, Flipkart) from selling any product exclusively on their platform. The revised norms will be effective from February 1.

K. Ganesh—Bengaluru-based promoter of ecommerce companies such as BigBasket, Bluestone, FreshMenu, and Homelane—feels some changes to the FDI policy in e-commerce go against the principles of free market economics. “This will negatively impact all the milestones achieved in the last 10 years during which billions of dollars of FDI have come in, millions of small sellers have had the opportunity to sell their products across India thanks to well-funded marketplaces, [and] lakhs of new jobs were created at the entry level,” he says.

Such short-term hurdles haven’t dampened long-term optimism about Indian consumption growth. Despite a global recession, demonetisation, and the rollout of the goods and services tax, over the past 10 years stocks of companies in the consumer space have outperformed the S&P BSE Sensex. So if you thought overcrowded malls during Christmas were a one-off phenomenon, think again. There is a long way to go before the Indian consumer’s appetite is satiated.

(Additional reporting by Arnika Thakur, Debojyoti Ghosh, and Rozelle Laha)

(This story was originally published in the January 2019 issue of the magazine)

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