Indiaretailing.com: The politics of organized retail will be short-lived
Commentary by Rajendra K. Aneja
Through a special arrangement, what follows is an excerpt of an article from Indiaretailing.com, presented here for discussion.
The time for retailing in India, as an organized industry, has arrived. The government should immediately permit FDI (foreign direct investment) in retail. This will encourage large retailers like Metro, Tesco and Carrefour to get serious about their India plans. The entry of these international players will usher in a new paradigm in retailing in India.
Retail is poised to be one of the largest employment avenues in India. This will enable provisions of various industrial and labor laws to be applied to the retail industry also, which will help to manage businesses more pragmatically and systematically. Modern trade, in terms of hypermarkets/supermarkets, also improves the quality of service and augments the range of products to consumers. A store like Ikea offers thousands of economically priced products, including furniture and storage spaces, which can revolutionize daily living for the middle and lower income segments of our society.
The government is procrastinating over the FDI policy because it is tentative about the impact of organized retail on the small shops. Why be terrified? Organized retail currently constitutes only two to three percent of the retail business in India. Thus, the dreaded phantom of swamping by large retailers is a figment of political imagination.
Certainly, there will be a fallout. The smaller and marginal outlets will be impacted, and the more incompetent ones may have to shift to other businesses. But then, India abounds in opportunities.
It may interest the government to know that even in many second-world countries like Indonesia, Brazil, Venezuela, Colombia and Saudi Arabia, which abound with international hypermarkets, about 50 to 70 percent of the groceries, vegetable and fruit trade takes place through the traditional stores.
So, hypermarkets and malls will not sound the death-knell for small stores. In fact, many small stores flourish more, because their sales increase. Customers do not visit hypermarkets at the drop of a hat. A visit to a large store has to be planned. For daily grocery purchases, consumers continue to visit the cornershop. Interestingly, with the arrival of modern retailing and hypermarkets, the smaller neighborhood stores invariably spruce up in terms of layout, hygiene, merchandising and customer service. Thus, the entire trade becomes more hygiene- and customer-conscious.
Modern retailing as exemplified through supermarkets and hypermarkets is an imminent phase in India. It can be delayed, not stopped. The government should facilitate, rather than inhibit, it. Why should a billion-strong population not have the freedom of choice, which is the essence of democracy?
Discussion Questions: What do you think of the opportunity for American retailers to expand into India? Is the Indian government justified in their caution concerning a possible adverse affect on smaller stores? How do you think expansion into India might differ from past efforts to expand into regions such as Brazil, China or Mexico?
There is no doubt that there is an opportunity for American retailers in India, but for indications as to how large or better yet, how fast, take a look at what’s already there compared to China. China is eons ahead.
However, we believe that, given the right set of circumstances, including arrangements with local retailers and officials, the opportunity is still immense. But perhaps more importantly, it could potentially be bigger for Indian retailers in the short AND long run. Operations like IndiaBulls have shown a propensity to create inviting retail propositions for a consumer they understand much better than American retailers do and will therefore move much quicker in establishing a presence.
It should be a very exciting and very competitive environment going forward.
Any major potential paradigm shift is bound to be cautiously considered. The Indian government is being cautious about letting foreign retailers, particularly hypermarkets and supermarkets, into the country.
Retailers should also proceed cautiously. As Carrefour discovered in Mexico and Japan, and Wal-Mart discovered in Germany, retailing outside your home country is not as simple as building and stocking stores. Besides employing real estate and demographic experts, they should hire sociologists to understand how the local people think.
India is a huge potential market. It should be open to foreign retailers. But both the country and the retailers should proceed judiciously.
India can be called the next China in terms of economic growth. Simply put, no amount of government intervention will stop the ball rolling. Right now, India is a retail mosaic, littered with small independents with no real consistency. This situation makes it ripe for a large format brand to step in and create a new marketplace. Can Americans succeed in India? Depends on whether they will embrace national and local cultural differences.
I use our communities here in the Greater Toronto Area as a reference point. Many large chains develop local store marketing initiatives that are directed to the diversity within the community they serve. American chains will have to do something different than their European counterparts. But overall the market in India is ready for some big players.
Undoubtedly, the opportunity for organized retail in India is tremendous. Whether it will rival China remains to be seen.
There remain hurdles with government, local business pressures, cultural shift requirements and infrastructure.
Having worked and lived in India for an Indian retailer, I submit there are no international retailers that can “set up shop” without understanding there will be a HUGE expense to develop passable national highways and world class distribution facilities.
The “cost of entry” goes beyond opening stores.
For years India had a a commendable policy of self sufficiency–everything from old Humbers (renamed Ambassador) to film for photography to soft drinks were all made domestically. However, the retail section was mired in the ’20s, if not earlier.
I think Indian consumers are eager to welcome Western products, services, retail channels, etc. Besides, some 80 million are considered middle class–they earn a healthy salary, are “westernized” and highly educated. There’s lots of opportunity for U.S. exporters in India, now and in the long-distance future.
There are ample opportunities for American retailers in India provided they offer “American” products and not run of the mill consumer products made in China. Products and companies like Apple, Dell, Nike, etc. have huge potential because American products and designs are considered aspirational and status symbols.
Interesting topic.
The so-called “politics of organized retailing” are no different from the politics of anything. There are interest-groups and pressure-groups with different objectives, who pull-and-push economic and regulatory policy with varying degrees of success. In that, India is no different from any other country, whether the US or China.
After China began opening up its economy in 1979, it took more than a decade for it to begin allowing foreign retailers to enter the market, and it was not before domestic retailers were given time to scale up.
Even in the US of current times, there are places which would be up in arms at the whiff of a Wal-Mart store proposal.
As we discuss today, in the UK the Competition Commission is preparing a report on how retail consolidation is affecting the sector and the consumer.
So the answer to the question about “the politics of organized retail” is: yes, there is politics involved, and if you are an interested party then there is no option but to be part of the politics.
While on the issue about opportunities in the Indian market, I’m reminded of a couple of conversations, one with a client and another with an associate, who compared the Indian market to the US and the UK, respectively, in the 1970s.
My response to them, and to the question above, is: yes, there is tremendous opportunity in India now, as there was in those markets in the 1970s. Yes, in parts the market, the distribution structure etc. may remind you of the US and the UK in the 1970s. But to assume that it will play out the same way would be dangerous.
There are many other cultural, economic and social factors, apart from the infrastructure, to take into account.
My advice: approach India as India in the 2008, don’t approach it as the US in the 1970s. Or as China, Brazil or Mexico.
Some pointers that may be interesting: “Slicing the Market” and other articles available on www.thirdeyesight.in/.
When well capitalized skillful players enter Indian retailing, they will destroy many mom and pop “stores”. In many cases, those “stores” are simple peddlers selling their wares at the side of the road. India wants to maximize employment. There’s a trade off between allowing every possible form of competition and maximizing employment. A new Wal-Mart might employ 300 people but put 1,000 peddlers out of business. India is a socialist country trying to minimize economic strife. Unlimited free retail competition maximizes economic strife.