The Great Indian Retail Mela

Ending months of speculation, Bharti has, finally, decided to hitch in with the largest company in the world, Wal-Mart, for its maiden foray into retailing. The American giant beat the British retailing numero uno, Tesco, in this venture- its first ever on Indian shores. The Tesco deal did not come through due to difference in roll-out plans between the two parties. Moreover, Wal-Mart's expertise in running a sophisticated $1.6bn (£830m) sourcing operation in India also helped it to clinch the deal.

All of a sudden, the papers are all about The Great Indian Retail Boom and everyone is vying for a share of the Indian retail pie. This sector is the 2nd largest employer, after the agriculture sector, employing 21 million people, roughly 6% of the country’s total workforce and contributing 13% of the GDP. After being stagnant for years with Lifestyle, Shopper’s Stop, and Pantaloons etc., we are witnessing big players entering the market. The Tatas have recently floated their retail chain, Infiniti Retail, and are collaborating with Australian retailer Woolworth to start their multi-brand durables store, Croma.

The Aditya Birla Group, like Reliance, is going alone and I believe that they have bought space in Punjab for their retail venture. Reliance has, in its characteristic fashion, come up with huge plans – one store in the radius of every 2 km. Its new venture, Reliance Fresh, is currently stocking only vegetables, fruits and diary products but is expected to increase its base slowly, just as Food World had done.

The Indian organized retail market accounts for only 2% of the total retail market as compared to 20% in China. The industry is quite regulated and foreign players cannot directly enter the market. Current norms allow foreign retailers to set up shop in India via the franchisee route, as has been done by the likes of Marks & Spencer and Mango. Foreign retailers are allowed outlets if they manufacture products in India (Benetton) or source their goods domestically. FDI is also permitted in cash-and-carry outlets, where goods are sold only to those who intend using them for commercial purposes (Metro, Shoprite) (Source: The Hindu Business Line).

Retail outlets are, in terms of size, primarily of three types, – you have supermarkets, hypermarkets and the kirana general stores. A hypermarket, pioneered by France’s Carrefour chain, is a supermarket departmental store which carries a huge range of products under its roof, like Giant and Big Bazaar. They occupy huge space and are few in number. Supermarkets, like Reliance Fresh and Food World, are generally smaller and sell primarily household items. They are generally based in residential centres with a decent purchasing power. Kirana stores are the small unbranded departmental stores which are spread everywhere and require less investment.

Returning to the Wal-Mart story, its overseas strategy has been a mixed bag and its struggles in Germany, Japan and Korea have been a cause of concern. A sluggish retail US market has forced it to look overseas, especially the giant Indian and Chinese markets. It has done pretty well in China and is bullish about India too. The market regulations have forced it to enter India as a faceless partner, something it would never have done a few years back.

Wal-Mart’s JV with Bharti entry gives it an opportunity to explore the Indian retail market without too much investment. Bharti has no retail expertise to run this business and therefore, would serve as the front end to the back end logistics support provided by Wal-Mart. This will help Wal-Mart set up shop in future, whenever it chooses to venture out alone and also help in understanding the local culture, which has been its Achilles heel in other markets.

The fear of foreign retailers threatening the local stores is probably unfounded because of the difference in their value propositions and customer segments they cater to. Their entry threatens the bigger Indian players and not the kirana stores. So, the loss of labour point does not stand good; local stores face greater competition from Indian retailers than foreign ones.

For the Indian retailers to succeed, they need to invest in more efficient supply chains, cold chains and increased farmer relationships which call for greater investment which can come through FDI. Increasing real estate prices also calls for heavy investment and the inflows are slow. Footfalls need not translate into revenues and margins are low because of the competition involved and the high fixed costs.

The Food Worlds and Big Bazaars still count on the small base of higher middle classes and upper classes as their customers. While brand loyalty is not a strong factor in the grocery industry, local stores are able to retain their customers because of their personal relationship and rapport with customers. They provide goods on credit to customers and also do free home deliveries. This customer relationship differentiates them from branded retail outlets which are generally frequented by customers, who are willing to pay for the convenience of one-stop shop, the brand value, high end products and the scope for window shopping.

The consumer would eventually benefit because of the choices available to him. There are, of course, fears of predatory pricing (another Wal-Mart’s legacy) and labour problems caused by the entry of foreign players. Wal-Mart’s strategy of “Everyday Low Pricing” has caused a lot of heart-burn not only among local retailers which try to attract customers with promotional strategies and differential pricing but also its suppliers by squeezing them relentlessly. A lot of criticism has also been levelled against the labour and market practices of these big retailers, including low wages, poor work conditions and unhealthy monopolistic practices.

The problems that Indian retailers face would be in finding the right kind of format for the Indian consumer. The Indian consumer is himself not a one-dimensional entity; he has varied tastes dictated by substantial geographical and cultural differences. A Food World in Mumbai may not stock the same products as a Food world in Hyderabad and this may filter down to differences even within its outlets in Hyderabad, say Banjara Hills and Habshiguda. There are also infrastructural problems in terms of parking space, poor logistics and a low focus on CRM which have to be addressed by them.

E-retailing has not caught the fancy of retailers here and the expertise of foreign retailers will help in bridging this technology and supply chain gap. There are also very few players in the semi-urban and rural markets despite all the talk about the fortune at the bottom of the pyramid which clearly suggests a huge untapped market.

So, is there a successful Indian retail model which can be used as the benchmark for all further retailing activities? There may never be so and this, probably, presents the biggest challenge for the Indian retail industry.