Retailing in India

Opening up Indias chaotic, underdeveloped retailing industry to foreign supermarket chains would bring many benefits
Apr 14th 2011 | DELHI AND MUMBAI | from the print edition

AT first sight the Easy Day store in Gurgaon on the outskirts of Delhi seems to be a supermarket like any in the developed world. On a sunny Saturday morning housewives and couples with children push their trolleys down the long, straight aisles, choosing from well-stocked shelves that offer Western brands such as Coca-Cola and Tropicana fruit juice as well as Thums Up and Real, two Indian counterparts. At lunchtime the shop suddenly empties. It is the day of the South Africa v India match in the cricket World Cup (which India later went on to win). Outside the shop a banner wishes the India team good luck. For the managers of the Easy Day store chain, adapting their outlets to the plethora of local rules across the Indian subcontinent, the more than 20 officially recognised languages, 14 main types of cuisine, three main religions and countless religious and ethnic festivals in this most heterogeneous of countriesin which love of cricket is one of the few constantsis a piece of cake compared with the other challenges they face. Indias organised retailers (ie, chains of stores, as opposed to independent, family-run shops) have to operate in the most supermarkethostile environment among big economies in the world. The obstacles they are confronted with

range from complex and sometimes nonsensical regulation to pot-holed roads, inadequate coldstorage facilities and sky-high prices for property.

No wonder then that a shop like Gurgaons Easy Day is still a rarity in India. Chain stores account for only 7% of the countrys $435 billion retailing business, a far lower proportion than in other countries, including Indias BRIC peers (see chart). Most Indians do their shopping at the millions of kirana shops, small independent outfits that are often not much more than a hole in the wall, manned by the owner and maybe a relative, or from handcart hawkers and street vendors. These microbusinesses sell a limited range of goods, in tiny quantities. They are far too small to negotiate good deals with their wholesalers, who are themselves a pretty inefficient bunch. But the majority of Indians, especially in rural areas, shop with themor send their servants to shopbecause kiranas give them credit and are prepared to deliver even the smallest order to their homes. And because they often do not have any choice. Indian policymakers have talked about reforming the retail business for the past two decades, with little to show for it. The most obvious, but most politically sensitive, reform would be to scrap the ban on foreign direct investment (FDI) by multi-brand supermarket chains such as Americas Walmart and Frances Carrefour. (Single-brand retailers such as Nike or Reebok can own a 51% stake in their Indian outlets and multi-brand retailers can open wholesale warehouses, as long as they do not sell directly to consumers.) Ending the ban is fiercely opposed by the millions of kirana owners and their dependents, who are an important electoral constituency of the Hindu nationalist Bharatiya Janata Party. However, the party is not in power at the moment and the ruling Congress party did make encouraging noises by publishing a detailed discussion paper on the benefits of liberalisation last summer. It noted, for example, that heavy investment by big supermarket chains may be the best way to create an efficient chill chain in India, to keep food fresh from the farmers field to the shoppers basket, and thus cut the terrible waste of food caused by the absence of such facilities: perhaps a quarter or more of fruit and vegetables is lost, compared with a tenth or less in countries with better cold storage and transport.

Just before the budget in February, the government published its annual Economic Survey, which proposed a gradual opening, letting foreigners start by setting up multi-brand stores in big cities. Yet the finance minister shot down the proposal, refusing to include it in his budget. While the multinationals continue to wait for fuller access, Walmart is expanding its joint venture with Bharti, an Indian conglomerate, which provides wholesaling and logistics including to Bhartis Easy Day chain. Walmart may be on the verge of forming another alliance, with Future Group, the Mumbai-based owner of Pantaloon Retail, though the behemoth from Bentonville refuses to confirm reports that the two firms are talking. Doug McMillon, the chief executive of Walmarts international division, is tireless in arguing the case for opening Indian retailing to foreign supermarket firms. He says that Walmart would invest heavily in shops, create jobs, plough profits back into food-supply and cold-storage infrastructure and help to tame food inflation by keeping prices for staple foods low. He cites the example of Mexico, which allowed FDI in multi-brand retail in 1991 after a heated debate on whether the move would bankrupt small mom-and-pop shops. Twenty years and many giant superstores later, such small outlets still have about half of the countrys retail market. Given Indias strong growth prospects, the chances are that the kirana shops would be able to hold on to an even higher share. Technopak, a consultancy, reckons that Indias retail market will nearly double to an annual turnover of $850 billion by 2020. Assuming a gradual liberalisation, about 20% of the market then will be controlled by organised retail, predicts Technopak, leaving 80% still in the hands of the microbusinesses. Foreign supermarkets will not have an easy ride if India does lift the restrictions on their entry. Besides such things as the dreadful roads and expensive land, they will have to cope with the requirement in some states to buy from a central market rather than directly from farmers. Then there are the complexities of state taxation: often there are levies on moving goods out of, as well as into, a state, or even ones on moving them within a state. A history of failure, and a success Given these challenges it is not surprising that Indian entrepreneurs have had so little success in opening supermarket chains so far. Maybe the most spectacular failure was that of Subhiksha, a discount retailer. It began operations in 1997 and expanded to 1,600 stores thanks to the exuberance of its founder, who took on heaps of debt. It was closed in 2009 amid accusations of mismanagement and fraud. The biggest success to date is the chain founded by Pantaloon Retails Kishore Biyani. His company, which includes fashion shops and malls as well as supermarkets and hypermarkets, has stores in 73 cities, employs around 30,000 people and is two-and-a-half times the size of its nearest rival. Mr Biyani forecasts his groups revenue to be $4 billion next year and to increase to $20 billion by 2020. Indians are learning to come to consumerism, says Mr Biyani, who, having grown up in a socialist economy, still feels some guilt when he goes shopping. His customers, on the other hand, are taking to choice and consumption like ducks to water. It is the politicians mindset that needs to change.

Retail in India

Still not open for business

Mar 3rd 2011, 17:56 by S.C. | LONDON IN THE weeks leading up to India's annual budget, a familiar scene plays out in the country's media. Financial pages and news channels are full of advice and wish lists from corporate executives, economists and the occasional "common man" on what they would like to see in the budget. This year was no different. But one sector in particularglobal retailers such as Walmart and Tescohad high hopes that the country would finally allow foreign investment into "multi brand retail stores" or supermarkets and department stores. It is easy to see the attraction to the Indian market. The share of trade (inclusive of wholesale and retail in the organised and unorganised sectors) in the country's GDP is around 15%. Estimates put the retail industry's size at just $450m of which only a tiny fraction, 5%, is organised. But rapid economic growth in the past decade has increased the disposable income of the middle class. It is this urban consumer that the global chains are eyeing. Opening up the retail space to foreign investment would help in overhauling the country's antiquated supply chain. Shortcomings in the distribution systems have created huge differences between wholesale and retail prices. Inefficiencies are common. The government estimates that 40% of the fruit and vegetable production in country is lost due to inadequate storage and transport infrastructure. Waste of this magnitude, troubling in the best of times, is appalling as the country battles double-digit inflation. Yet, despite a consensus among policymakers that opening up of the retail sector to foreign investment has benefits both in the near and long term, the government shied away from reaching a decision. The reason behind the hesitation is the political clout of existing traders. An estimated 35m people or 7.3% of Indias workforce, are employed in the unorganised retail sector. The traders have been very vocal about their opposition to any form of organised retail and have regularly conducted mass protests and ransacked supermarkets to make their sentiments known. They fear that the arrival of big-box retailers will price the corner grocery stores out of business. There is some truth to this. As this article notes, the advent of an organised retailer can lead to reduced sales in the first year. But after a few years the stores are more or less back to where they started. Any decision that affects such a large workforce needs to be taken carefully. But the government has been mulling this question for over four years now. During this time the Indian economy has been denied the gains that result from increased competition and improved efficiencies in the supply chain. Holding hundreds of millions of consumers hostage to the fears of one group, however loud, is not a viable solution.

INDIAN RETAIL, IS IN DENIAL! Modern trade, i.e. hypermarkets/supermarkets can add tremendous value to the Indian economy via job creation and taxes. It also improves service to consumers. Supermarkets being in the organized and visible, pay taxes diligently, unlike many small private traders. Being larger in size, they are governed by labor laws, unlike smaller traders who hire and fire staff at whim. Supermarkets also have tremendous potential in India. The market spending is estimated at over 300 USD Bn. These stores generate many jobs. An average grocery supermodel generates about 5-7 direct jobs per store of 1,000 square feet. For every such job created, there are about 7 jobs created indirectly i.e. transporters, drivers, loaders, watchmen, etc. Thus for every 1,000 square feet of retail space created, about 35 to 50 new jobs would be generated in the economy. So a store of 100,000 square feet, could generate about 5,000 jobs. India could easily do with about 10,000 such stores, thus creating millions of jobs! And this could happen in about 5-10 years. When did India create such large-scale employment, in the past, ever? Consumers are assured of good quality products and hygiene, because hypermarkets clean, grade their wares like fruits and vegetables to merchandise them. One of the biggest nightmares in India is to shop for vegetables and fruits. They are generally sold on pavements, coated with dust and soot. Supermarkets offer better prices to the consumers. They buy in bulk, and are able to negotiate better prices from the farmers and suppliers. Since the market is very competitive, such savings are normally passed on to consumers. Staff who work in hyper/supermarkets undergo regular training and development, which enhances their skills. If the staff working in such stores perform well, they van have careers in retailing i.e. literally graduate from floor salesmen to managers. As supermarkets and retailers grow, they also follow socially responsible policies. Marks and Spencer follow very sensible policies, e.g. when they select a new supplier, they first check the toilets and dining facilities of the staff. Only if the supplier clears this acid test, they proceed further. Which small trader, even thinks of toilets or food for his staff? They are only pivoted on the cash in the till at the end of each day. The more enlightened retailers and supermarkets become partners with their suppliers. They collaborate to improve the basic product itself. For instance, the McDonalds research center, works with farmers, to improve the quality of the potato they use for their French fries. The new supermarket operators in India should have, absorbed employed some of the vendors (who could be displaced), as suppliers, so that they would also be ensured of continued livelihoods.

The organized retail i.e. supermarkets currently constitute only 2-3% of the retail business in India. Thus, the dreaded phantom of swamping by large retailers, is a figment of political imagination. The Indian retail industry is estimated at USD 312 Bn., with the organized sector contributing only USD 8.7 Bn. The industry accounts for 10% of India's GDP, though, Wall Mart alone, accounts for a vital part of the GDP of the USA. So, if the USA Government is not petrified of Wall Mart, why is the Indian government, terrified about some supermarkets selling fresh vegetables? India, should foster modern trade for the economic value added to the economy, the employment generated and the improved customer offerings. Modern retailing as exemplified through supermarkets and hypermarkets is an imminent phase in India. The Government should facilitate, rather than stunt it. RAJENDRA ANEJA FORMER CEO, A LARGE RETAIL GROUP OPERATING GLOBALLY