Global Retail Giants are Eager to Enter India

Recently I went to a movie in Bangalore. It had been quite some time since I did that - for the fact that I was in London. In the last 6 months so many things have changed in Bangalore - that I was surprised by all the new development. Old buildings have been torn down and new one being built all the time. And these new buildings are housing new shops, offices - that I had seen in the US & UK. A walk in a shopping Mall in Bangalore reveled so many international retail stores - Marks & Spencer's, Swaroski, Lewi’s, Bose, Nike, Reebok, Sony, D’mas, etc. All these started operations in last 2-3 years. But the real surprise is the fact that 100’s of global retailers are eager to enter India.

According to AT Kerney’s report, India is the most favored destination for global retailers. AT Kerney’s Global Retail Development Index 2005 puts India at the top.

India Offers a Vast Opportunity

The sheer size of Indian retail segment - almost $1 trillion! - and growing at 15% is exciting enough for all global retailers. Wal-Mart recently entered into a JV with Bharti and will soon be setting shop in India. Other retailers waiting on the wings are: TESCO, Carrefour, IKEA, Target, VF brands, etc. The rush to enter India intensified in 2006, when government opened up Foreign Direct Investment in retail sector. Added to this is the fact that Indian consumers are under served by the existing retailers. A vast portion of Indian population lives in Villages or non-metro cities - which are poorly served. This implies that almost 70% of Indian consumers do not have access to quality retail markets - And that segment is worth more than $350 Billion.

Opportunity has Road Blocks too

However, foreign retailers are subject to host of regulations. For example, only single brand retailers can now own upto 51% of the equity - this forces them to enter into JV with a local partner(s). Large format discount retailers - like Wal-Mart, Sears, Target are still not allowed in India. Yet global retail giants are eagerly waiting. Wal-Mart had setup two offices in India - mainly to study the Indian market. TESCO has setup an office to source from India and to learn the local operations.

Another big problem in setting up operations in India is the availability of real estate space. Traditional Indian shops have been small ~ 1000 sq. feet. Many of the inner city buildings are old & depilated and is unfit for global retailers. This is forcing retailers to build in the outskirts of the city and hope that people come to them. Metro built huge stores at the edge of the city - these stores are in Cash-and-carry format catering to small shops. Setting up new super stores on outskirts of the city is not easy either. Tax laws in the country and social pressures have caused fragmentation of land holdings. So if one wants to buy a large plot of land, one has to negotiate with hundreds of land owners - which will take time and endless negotiations.

The next problem in setting up organized retail operations is that of supply chain logistics. India lacks a strong supply chain when compared to Europe or the USA. The existing supply chain has too many intermediaries: Typical supply chain looks like:- Manufacturer - National distributor - Regional distributor - Local wholesaler - Retailer - Consumer. This implies that global retail chains will have to build a supply chain network from scratch. Which might run foul with the existing supply chain operators. In addition to fragmented supply chain, the trucking and transportation system is antiquated. The concept of container trucks, automated warehousing are yet to take root in India. The result: Significant losses/damages during shipping.

A surprising challenge for Organized retailers - especially global retailers in India is shortage of talent. Yes, for all the population that exists in India and for all the shops, India has a serious shortage of experienced people resource for retailing. Number of people experienced in managing complex supply chain, people who have basic merchandising skills, people with store planning skills are very few. As a result, most of the existing retail stores have poorly organized merchandise, inadequate inventory, and excessive inventory - leading to lost sales and increased capital requirements. (see: Increasing Sales in a Retail Store - An Indian Context ) Global retail giants will have to spend substantial resources in terms of time & money to train local workforce and bring them on par with their global standards.

The Hidden Challenge

Lastly, there is a HUGE hidden challenge. The challenges mentioned above are just the tip of an iceberg. The biggest challenges are well hidden: and that is cultural differences, political challenges, policy regulations, and ethical standards.

Indian consumers are different. The cultural differences have to be accounted when designing the store, setting up the merchandising mix, servicing the customer in the store etc. These cultural factors come in several flavors depending on which part of India you are looking at. Writing about all the cultural factors that pose a challenge to global retailers is beyond the scope of this article. I will write about them in future. The cultural nuances of the Indian consumer is so complex that it cannot be documented in a blog - instead one needs to write a whole book on that topic.

Political challenges are something which the global retailers will have to deal with. India is a federal state. With a national government at the center and state governments ruling the states. This implies that there are multiple sets of political and governmental clearances are needed for retailers. Having a national license from New Delhi will not suffice. One also needs clearances from various state governments, city corporations, district administration etc. Negotiating this for a global retailer will prove to be a challenge. For example, POSCO - Korean steel manufacturer found out to their dismay - that having a Government clearance is not enough in India.

Another challenge for most retailers is that of ethics. Global companies tend to have a different ethical standards - which may be against giving bribes or supporting local political candidates etc. But adhering to these standards in India will surely cause lot of problems to their local operations. How companies go about resolving this problem is a serious question. Many companies therefore prefer to have a local partner who can take care of these issues - but this has some serious implications.

India is a socialistic democratic country with a strong labor union movement. Global retailers will have to deal with the concept of unions. US based companies such as Wal-Mart has a strict policy of no unions in their company. However that policy will be severely tested in India in the long run. Local unions will not impose themselves on the global retailers in the beginning - but over a period of time, unions tend to creep in. Even in ITES/BPO sector, unions are trying to muscle their way - but is being resisted by the government and investors.

Hidden Competition

On the first appearance, the fragmented Indian retail sector looks like it may not offer serious challenge to the global giants. But the truth is far from it. Indian retailers are a resilient lot and will offer intense competition - against which the global giants will find it tough. It will be more like an army of ants bringing down an elephant. To understand this consider the case of Metro - the German retail giant in India. Metro entered India in 2003 with a superstore format. Metro wanted to sell to other small shop owners/retailers on a cash-and-carry basis. Initially Metro was able to give a significant price discount when compared to other retailers - but soon that advantage disappeared. Local retailers are now able to beat Metro on price on most items.

Closing Thoughts

India offers the greatest opportunity for retail business - But it also offers the most complex challenge for them. Global retailers who have succeeded abroad in multiple countries will struggle in India. But the size of Indian opportunity is so much that global retailers will take their chances. Success in India will depend on the local partners, consultants and executive leadership.

Also See:

Trans-cultural Business Failure: Wal-Mart Exits Germany
Increasing Sales in a Retail Store - An Indian Context
Wal-Mart is in Trouble in UK too!
Partnerships for Increasing Business Opportunities