October 31, 2007
Indiaretailing.com: Mixed reaction as India opens retail market to foreign investors
By Ranjan Kaplish, Indiaretailing.com
[Editor’s Note: Some local chains in India are anxious as their government increasingly
relaxes rules prohibiting foreign retailers from directly investing in India.
The move comes as refrigerated transportation and modern management practices
has brought hundreds of supermarkets across India, promising to transform
a society where over 95 percent of retail outlets come from small (100 to
500 square feet), single-unit shops. While these mom & pops are worried about
their own livelihood, the emerging local retail chains are concerned about
their continued progress if foreign chains such as Tesco, Carrefour and Wal-Mart
gain easier access to their country.
Through a special arrangement, what follows is an excerpt of an article on the issue from Indiaretailing.com, presented here for discussion.]
There was mixed reaction from retailers to finance minister P Chidambaram’s announcement that India will open up its $330 billion retail market to foreign investors.
“The statement of the minister had no clear signals as to what the government will allow and what it will not, but if the government lets foreign investment in multi-brand retail as well, Reliance will always welcome that,” said Bijou Kurien, president, Reliance Retail, one of India’s biggest retail conglomerates. “The move will create a healthy competitive environment that ultimately results in better performance.”
HS Sidhu, executive vice-president of Koutons, an apparel manufacturing and retailing company, was slightly apprehensive.
“We do welcome foreign investment, and whatever the government plans, it would be always for strengthening the economy,” Mr. Sidhu told Indiaretailing.com. “In competition, performance as well as quality improves as you get to learn a lot from the competitor. The only thing I fear is that foreign brands might make India a dumping ground for their rejected stocks. We must keep a check on this.”
Samir Sahni, managing director at RituWears, another upcoming chain, believes the move should be kept on hold until Indian retailers are able to carve a niche for themselves in the market.
“I do not think that FDI [foreign direct investment] should be allowed so soon,” said Mr. Sahni. “The Indian retail industry has just started to organize itself and the consumer too is just exposed to a new experience. This is the time when the government should make policies more favorable to the Indian retailers, rather than allowing their foreign counterparts to barge into the industry. The FDI should be kept on hold till 2010.”
Himanshu Jain, CEO of Canary London, a local chain expanding aggressively in Central India, is also not in favor of allowing direct investment by foreign retailers.
“This is the time when emerging brands like us have tremendous opportunity to grow,” said Mr. Jain, “But once more experienced foreign players with loads of dough foray into the market, it will be difficult for us as we have just started to move along a track that some biggies have been treading since decades.’
At present, India allows only 51 percent FDI in single-brand retail, while 100 percent foreign investment is allowed in cash-and-carry (wholesaling) and franchising routes. Wal-Mart, for long in the waiting queue to explore India, has already found Bharti, India’s leading telecom player, as its cash-and-carry partner. Carrefour and Tesco are also said to be exploring this option.
There may be many more retail biggies who are waiting for more relaxations, and that is what is making small retailers uncomfortable.
Discussion Questions: Do you think India’s government should wait for local retailers to develop further before allowing foreign retailers to gain greater access to the country? How should India’s local chains be preparing themselves to compete and differentiate themselves against the eventual arrival of foreign chains? What can India learn from past experiences in the U.S.?
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There are several interesting explorations of the situation on http://www.just-food.com, specifically today’s Hot Topic–Indian retailers in battle to win hearts and minds. <P>As there is every likelihood that small retailers will eventually find themselves competing with massive national and international, more experienced, companies with huge buying power, it seems only fair to give the existing market time to get established before the onslaught begins. Hopefully they will build enough loyalty and sufficient understanding of how to operate within their own markets to be able to survive for some time to come. The advantage they have – and always will–is being on the spot and able to control their staff and customers. The latest problems Gap is having with sub-contractors sub-contracting re-inforces the problems that multinationals will continue to have in trying to operate at arm’s length. If the smaller, indigenous retailers have time to find their feet, they will hopefully not be overwhelmed by a tsunami of bigger competitors.
As an outsider looking in from afar, I would agree with Samir Sahni, managing director at RituWears, that the Indian retail industry has just started to organize itself and should be given two or three years to become more established before inviting others in. However, this is clearly a decision for Indian economists to evaluate and determine what works best short term and then beyond for the Indian economy and enterprise system. In any case, for the rest of the world, it’s pretty exciting.
One can surely understand the position of the small retail sector in India–98% of Indian retail is unorganized and under 500 sq. ft. India has the highest retail density in the world with 11 outlets per 1000 people. It is the second largest employer next to agriculture in India, and it serves as a social safety net. This doesn’t even speak to the displacement of tens of millions of entities that serve as intermediaries in an inefficient but socially harmonious supply chain.
Net/net, India has to convince people that the inevitable displacement is in their LT best interest–investments in education and infrastructure thus take on an even more important role.
The local firms such as Reliance already have a jump. The problem lies with the huge number of tiny shops that are being displaced by the retail transformation. There will be continued political pressure to slow things down and there could be quotas or size limits on stores as France did.
India’s shoppers overpay for everything. With well-capitalized competition, prices and margins will decline, raising the living standards for a billion people. Requiring Wal-Mart and other foreign brands to have local partners just raises costs for shoppers. Bharti has no significant retailing expertise. India can protect its working people by requiring all chains to pay a living wage to the staff. Small mom and pop stores are not protected by requiring local partners, because those local partners aren’t mom or pop, they’re huge wealthy businesses. What can mom and pop do to protect themselves? They should sell out ASAP before they’re forced out.
Organized retail by the corporate sector has taken momentum in India within last few years, and is going through a transition phase. Almost 70% of the population (i.e. low income group and scattered) depends upon the agricultural, allied industries, and service of the other 30% of the population. Therefore, consistency in Business Volume and target margin % is going to be a big challenge for both local & international entities.
Apart from a dual government system (i.e. state & central government by different political parties), local laws, property and the right location, and high prices and government support to local traders all may be too complex to handle by any international retailers. Sourcing at low cost by Tesco or Wal-Mart, etc, from India shouldn’t be considered proximity to further explore in the Indian consumer market.
Indian retailers in value retailing are getting top line progressive by the addition of new stores but not bottom line. Now in each state of India there is agitation against corporate retailers, and State Government is intervening to handle the local unemployment situation or trade association’s lobby but the central government is keeping silent.
Unless the central government of India is not declaring retailing as an Industry with a code of conduct, naturally there will be a lot of socio-political threat during post FDI permission in the multi-brand retail business.
I find this discussion very interesting because I have been visiting India every year for the past 11 years and spending significant amount of time in various cities and have seen the retail sector emerge and have worked for a large retailer in the U.S. for 30 years.
I do not think the Government of India should wait for allowing foreign retailers to gain greater access to the markets in the country. Involvement or presence of foreign retailers in India will raise the standards of product quality and customer service and help drive down the prices that the Indian consumer pays for a variety of things. Instead of Indian retailers wasting resources on “reinventing the wheel,” they should work with and/or compete with foreign retailers, learn from them and adopt those practices that would work in an Indian context and move forward. The organized supply chains that will result from foreign retailers’ entry in India will create many jobs.
So far as someone’s concern about India becoming a dumping ground for rejected merchandise from abroad, Indian consumers are not that stupid to accept such a thing. So far Indian consumers accepted sub-standard merchandise and services in many cases because there was monopoly in many cases and shortages in others. In today’s connected world where information travels at a speed of light, foreign retailers would be foolish to take a chance by sending substandard merchandise to India.
Whether small retailers will get hurt and how much is not clear. The modern retailing format in India requires one to have a vehicle and not many families in India have one or can afford one. Therefore, shopping from organized retailers will be limited to a certain class of people in India, resulting in plenty of room for the small -mom & pop stores which are in the proximity of where people live. Some of the small retailers are doing quite well in various suburbs of Mumbai by adapting to new realities. Of course, those who do not, will go out of business.
What can India learn from past experiences in the U.S.? A lot! India can learn a great deal in the areas of supplier development, consumer product (including food) safety, product and service quality. Above all, India can learn that it is the customer that pays wages of all those who are employed in the retail and supply chain and if it weren’t for them, they would not have jobs!
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There are several interesting explorations of the situation on http://www.just-food.com, specifically today’s Hot Topic–Indian retailers in battle to win hearts and minds. <P>As there is every likelihood that small retailers will eventually find themselves competing with massive national and international, more experienced, companies with huge buying power, it seems only fair to give the existing market time to get established before the onslaught begins. Hopefully they will build enough loyalty and sufficient understanding of how to operate within their own markets to be able to survive for some time to come. The advantage they have – and always will–is being on the spot and able to control their staff and customers. The latest problems Gap is having with sub-contractors sub-contracting re-inforces the problems that multinationals will continue to have in trying to operate at arm’s length. If the smaller, indigenous retailers have time to find their feet, they will hopefully not be overwhelmed by a tsunami of bigger competitors.
As an outsider looking in from afar, I would agree with Samir Sahni, managing director at RituWears, that the Indian retail industry has just started to organize itself and should be given two or three years to become more established before inviting others in. However, this is clearly a decision for Indian economists to evaluate and determine what works best short term and then beyond for the Indian economy and enterprise system. In any case, for the rest of the world, it’s pretty exciting.
One can surely understand the position of the small retail sector in India–98% of Indian retail is unorganized and under 500 sq. ft. India has the highest retail density in the world with 11 outlets per 1000 people. It is the second largest employer next to agriculture in India, and it serves as a social safety net. This doesn’t even speak to the displacement of tens of millions of entities that serve as intermediaries in an inefficient but socially harmonious supply chain.
Net/net, India has to convince people that the inevitable displacement is in their LT best interest–investments in education and infrastructure thus take on an even more important role.
The local firms such as Reliance already have a jump. The problem lies with the huge number of tiny shops that are being displaced by the retail transformation. There will be continued political pressure to slow things down and there could be quotas or size limits on stores as France did.
India’s shoppers overpay for everything. With well-capitalized competition, prices and margins will decline, raising the living standards for a billion people. Requiring Wal-Mart and other foreign brands to have local partners just raises costs for shoppers. Bharti has no significant retailing expertise. India can protect its working people by requiring all chains to pay a living wage to the staff. Small mom and pop stores are not protected by requiring local partners, because those local partners aren’t mom or pop, they’re huge wealthy businesses. What can mom and pop do to protect themselves? They should sell out ASAP before they’re forced out.
Organized retail by the corporate sector has taken momentum in India within last few years, and is going through a transition phase. Almost 70% of the population (i.e. low income group and scattered) depends upon the agricultural, allied industries, and service of the other 30% of the population. Therefore, consistency in Business Volume and target margin % is going to be a big challenge for both local & international entities.
Apart from a dual government system (i.e. state & central government by different political parties), local laws, property and the right location, and high prices and government support to local traders all may be too complex to handle by any international retailers. Sourcing at low cost by Tesco or Wal-Mart, etc, from India shouldn’t be considered proximity to further explore in the Indian consumer market.
Indian retailers in value retailing are getting top line progressive by the addition of new stores but not bottom line. Now in each state of India there is agitation against corporate retailers, and State Government is intervening to handle the local unemployment situation or trade association’s lobby but the central government is keeping silent.
Unless the central government of India is not declaring retailing as an Industry with a code of conduct, naturally there will be a lot of socio-political threat during post FDI permission in the multi-brand retail business.
I find this discussion very interesting because I have been visiting India every year for the past 11 years and spending significant amount of time in various cities and have seen the retail sector emerge and have worked for a large retailer in the U.S. for 30 years.
I do not think the Government of India should wait for allowing foreign retailers to gain greater access to the markets in the country. Involvement or presence of foreign retailers in India will raise the standards of product quality and customer service and help drive down the prices that the Indian consumer pays for a variety of things. Instead of Indian retailers wasting resources on “reinventing the wheel,” they should work with and/or compete with foreign retailers, learn from them and adopt those practices that would work in an Indian context and move forward. The organized supply chains that will result from foreign retailers’ entry in India will create many jobs.
So far as someone’s concern about India becoming a dumping ground for rejected merchandise from abroad, Indian consumers are not that stupid to accept such a thing. So far Indian consumers accepted sub-standard merchandise and services in many cases because there was monopoly in many cases and shortages in others. In today’s connected world where information travels at a speed of light, foreign retailers would be foolish to take a chance by sending substandard merchandise to India.
Whether small retailers will get hurt and how much is not clear. The modern retailing format in India requires one to have a vehicle and not many families in India have one or can afford one. Therefore, shopping from organized retailers will be limited to a certain class of people in India, resulting in plenty of room for the small -mom & pop stores which are in the proximity of where people live. Some of the small retailers are doing quite well in various suburbs of Mumbai by adapting to new realities. Of course, those who do not, will go out of business.
What can India learn from past experiences in the U.S.? A lot! India can learn a great deal in the areas of supplier development, consumer product (including food) safety, product and service quality. Above all, India can learn that it is the customer that pays wages of all those who are employed in the retail and supply chain and if it weren’t for them, they would not have jobs!