India Gears up for Retail

Editor’s note:India’s growing economy is attracting worldwide interest, evidenced by Wal-Mart Stores’ announcement in November 2006 of a joint venture with New Delhi-based Bharti Enterprises. Ritesh Gupta, a New Delhi-based reporter, filed this report for Chain Store Age on the country’s evolving retail marketplace.

Wal-Mart’s announcement of its agreement with Bharti Enterprises has resulted in plenty of activity. Much has been written in India about the repercussions of the “Wal-Mart Effect,” even though the U.S. retail giant’s role in the joint venture is restricted to only providing back-end support to its Indian partner (Bharti will be setting up the stores on its own, on a franchise basis).

But considering the fact that there are 12 million retailers in India, all the hullabaloo resulting from the Wal-Mart announcement is quite understandable. Especially when one considers that 97% of the total figure falls in the mom-and-pop retail category. What will happen to these millions of stores? Will the entry of global players result in a reduction of jobs?

Such concerns have resulted in an uproar. India’s Communist Party of India-Marxist (CPM), which provides support to the Congress-led United Progressive Alliance ruling government in India, has stated that a large number of small-scale players may go out of business.

Despite strong opposition to foreign involvement in India’s retail market, recent developments are quite encouraging. Traditionally, foreign direct investment (FDI) in India has been allowed only in the cash-and-carry segment (cash-and-carry stores are based around bulk buying and are mainly for wholesale customers) and single-brand retail. But in the last week of December, it appeared that India may allow FDI up to 51% in multibrand retail in specific sectors, such as electronics, sporting goods, stationery and building equipment.

Overall, analysts are bullish about the growth of retail in India. Technopak Advisors, a management-consulting company, expects retail sales to soar from US$300 billion in 2006 to US$427 by 2010 and $637 billion by 2015.

According to New Delhi-based Arvind Singhal, chairman, Technopak Advisors, rural India accounted for 55% of the retail market in 2006. The urban sector will receive 92% of the expected investments over the next five years. The share of chain retail is slated to grow from 3% in 2006 to 16% in 2011.

Singhal feels the Bharti-Wal-Mart joint venture will set a precedent for other established retailers to come to India.

“In the past, several international retailers decided not to enter India, believing that lack of FDI permissions was a deterrent,” he said. “With Woolworths [which signed technical and sourcing collaboration with Tata Sons’ Infiniti Retail] and Wal-Mart having decided to come to India through this kind of an arrangement, it can provide some confidence to other retailers to enter India through this mechanism.”

The feeling is that when the FDI restrictions on the retail industry in India are lifted, international retailers will be in a prime position to easily convert their cash-and-carry stores into highly profitable supermarkets and hypermarkets.

As Singhal sees it, the biggest challenge for international retailers entering India is not FDI restrictions, but the ability to adapt to Indian consumer buying habits, to the Indian landscape and its constraints, e.g., availability of quality locations, logistics infrastructure and relatively weak sourcing infrastructure. In the process of this adaptation, foreigners must learn how to develop India-specific retail business models and Indian consumer-specific business-value propositions.

In terms of retail real estate, Singhal said, in the near term, all new entrants will end up paying some premium.

“However, there are several business models that can be economically viable despite these constraints,” he added. “The only common link for most of these models is that they have to be pan-India and focus not only on the top 15 to 20 cities in India, but the top 150 to 200 cities at the very least.”

Asitava Sen, retail industry specialist, PricewaterhouseCoopers Pvt. Ltd., said, “Infrastructure is a significant challenge, especially while managing fresh produce, where producers are fragmented and there is multiple level of intermediation causing waste of up to 30% to 40% in the supply chain. Real estate is scarce and expensive in comparison to the quality being offered. An inadequate supply of skilled and trained people is another significant challenge.”

The selection of cities is problematic as well.

“In the urban market, the top 62 cities together cater to only 50% of the total urban market,” Sen said. “This clearly shows that India is an extremely fragmented market. Most organized retailers will find it difficult to penetrate smaller towns and rural areas in the initial phase of development. Some players, though, could strategically focus on the relatively untapped non-urban market.”

Naresh Priyadarshi, business group director and head of business consulting, Synovate, noted that in two main cities, Delhi and Mumbai and their suburbs, there are about 100 malls. Of the 700 new malls under development all over India, 40% are concentrated in the smaller cities, he said.

“Organized retailing in small-town India is growing at a staggering 50% to 60% a year compared to 35% to 40% in the large cities. Small towns, such as Dehradun, Vijayawada, Lucknow and Nasik, will power India up the retail rankings soon,” said Priyadarshi. “The rural market—which has the largest base—has been the starting point for the consumption splurge, where customized products have given way to organized retailing. Rural retailing is expected to pick up in a big way and still has a huge untapped potential.”

In terms of product categories, it is estimated that food, beverages and tobacco currently account for US$195 billion out of US$300 billion retail sales.

“Food and grocery will remain one of the key areas attracting fresh investment,” noted PricewaterhouseCooper’s Sen. “However, opportunities are immense in almost every single product category and format—ranging from hypermarkets to specialty stores. Many categories (such as mother and child care or oversized apparel) are virtually untapped yet. Given the geographically dispersed market, inadequate infrastructure and existing shopping habits of consumers, smaller formats offering greater accessibility and convenience might do well in the initial phase of development.”

Ritesh Gupta is a New Delhi-based reporter.