Retail Revolution in India: M&A’s and Bracing for Foreign Investment

Discussion
Jan 22, 2007

By Ritesh
Gupta

The buzz around the topic of retail revolution in India continues
to get stronger with every passing day.


Following Wal-Mart’s joint venture with New Delhi-based Bharti Enterprises
in late November, the local players, especially big conglomerates, have started
to showcase their finance strength.

There are already signs of consolidation in this country primarily served
by mom and pop operators, as the country’s organized sector gears up to expand
its share from mere three percent in 2006.

Technopak Advisors, a management
consulting company specializing in consumer goods and retail sectors, expects
retail sales to soar from US$300 billion in 2006 to US$427 by 2010 and $637
billion by 2015. The share of the organized sector is expected to grow from
three percent in 2006 to 16 percent in 2011.

In the recent past, in the organized sector, the likes of Reliance Retail
and the Aditya Birla Group have invested in Adani Retail Limited (ARL) and
Trinethra Superretail Limited, respectively.

As far as foreign players are
concerned, the current Indian law does not allow FDIs (foreign direct investment)
in front-end retail and allows only 51 percent foreign investment in single-brand
retail with prior government permission. Cash-and-carry is seen as an interesting
business proposition for international retailers being that when the restrictions
on the retail industry in India are lifted, international retailers will
be in a prime position to easily convert their cash-and-carry stores into highly
profitable supermarkets and hypermarkets.

Currently, the two most prominent players in the Indian cash-and-carry business include the German chain, Metro, and the African food retail chain, Shoprite.

Discussion Questions: What are the short and long term prospects for international retailers in India? What will be the role of domestic Indian chains as partners and competitors of global interests?

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has already suggested a cautious approach before the domestic retail sector is opened up for overseas investments in one go. The ASSOCHAM has opposed 100 percent foreign equity in the first instance, arguing that the domestic industry needs a minimum of three years for its consolidation before being prepared to take on global competition.



The
ASSOCHAM reminded the government of the example of China, which opened up
its retail sector to FDI only after the domestic organized retail industry
was large enough to face competition from the foreign players.



Besides, the domestic players suffer from lack of infrastructure – the biggest bottleneck being the prohibitive prices of large retail spaces in the upmarket or central locations in the large Indian cities.


The analysts feel, as in case of Wal-Mart and Bharti JV, in which Bharti will be Wal-Mart’s franchisee and wholly own the front-end system, the Indian franchisee knows the Indian landscape and understands the demographics in this country and also where to get the real estate for the business. It has domain knowledge about the country and thus franchising is an attractive option for the foreign players.


When it comes to consumers, analysts feel the familiarity to shopping through
large stores is already there. For foreign players, the JVs with Indian partners
will make the cultural transition easy.

Please practice The RetailWire Golden Rule when submitting your comments.

Join the Discussion!

10 Comments on "Retail Revolution in India: M&A’s and Bracing for Foreign Investment"


Sort by:   newest | oldest | most voted
Syed Moiz
Guest
Syed Moiz
15 years 4 months ago

Retail is a budding business sector of India and will supplement the growing Indian economy in the near future. A large and growing, self-sufficient Indian middle class will be the key driver for India’s retail revolution.

The Bharati group is one of top leaders in the telecommunication industry. Wal-Mart’s collaboration with Bharati will integrate Wal-Mart retail expertise with Bharati’s local reach and provide easy access to the Bharti Group dealer network spread throughout India.

Hope and wish that this alliance succeeds and encourages other world famous retailers to enter the Indian market.

Pradip V. Mehta, P.E.
Guest
Pradip V. Mehta, P.E.
15 years 4 months ago

Long term prospects in India for global retailers are excellent in branded products because Indian middle class and above is hungry for the world class products. In other products, global retailers will have to carve out their own niche based on culture and preference of Indian consumers. The global retailers should not lose sight of the fact that India is a considerably diverse country and therefore there are some strong regional preferences. Therefore a “cookie cutter” approach by global retailers will not work in India. This is where the role of domestic chain as a partner becomes valuable for the global retailer.

Camille P. Schuster, Ph.D.
Guest
15 years 4 months ago
First, in response to Mark’s comment–it is not necessarily a good strategy to have a local retailer as a partner. Relationships are critical in India and industries are dominated by specific families. The smart entrant to Indian will find the family with the strongest position in local retailing or the family wanting to be strong in that industry and create a partnership with the family regardless of what companies are available choices in today’s market. Second, many manufacturing companies decided to enter either India or China because the start-up costs and time required to be successful in either are extremely high. The exception in the retail industry is Metro, which has some stores in both China and India. The saying is that if you think the US has a lot of red tape, in India you will find 100 times more paperwork. This is not an easy market to penetrate. Third, the potential in India is growing fast with a middle class that is in creasing quickly. Tapping into this position will not be easy.… Read more »
Mark Lilien
Guest
15 years 4 months ago

Wal-Mart signed a joint venture agreement with Bharti. Bharti is a telecommunications company, not a retailer. Wouldn’t it make more sense to have an Indian retailer as a partner?

Mark Hunter
Guest
Mark Hunter
15 years 4 months ago

The Indian market is too large to ignore and the level of disposable income is going to be increasing dramatically in the next 30 years as this massive democracy begins to come of age. Entering India through a JV is essential and taking the time to learn the cash and carry business is also essential. The Indian culture is very complex and many could argue that among countries that are democracies it is the most complex one in the world. Therefore it will be very easy for a foreign entity to stumble and fall if they don’t allow their JV partner to control everything. Finally, India has been an exporter of intellectual knowledge for the past 25 years. As the country grows internally, this intellectual knowledge will begin to return which will accelerate the ability for foreign investors working through JVs to grow even faster.

Prince Chacko
Guest
Prince Chacko
15 years 4 months ago

When considering the global retail market and prospects of retail chain growth in the past decade, the huge retailers already saw the big purchasing power opportunities of economies like India and other developing countries.

The moves have started for capturing the untapped 97% of the retail business in the sub continent. As the present system prevails, joint ventures are the only way for a multi national to enter into the Indian market. If you have the right professionals who have experience in organised retail business like hyper markets and super markets, plus infrastructural and logistics and enough money from mncs and good local support (which is brought by the companies like Bharthi), there is a feel of a big cake waiting to be cut by prudent investors. After all, investment brings into economies money or disposable income which in turn generates more money.

John Roberts
Guest
John Roberts
15 years 4 months ago

India is potentially huge and in fact we will see some reversal of the people movement–historically Indians move overseas to the Silicon Valley, etc. to take up positions. Now the West has the accumulated retail knowledge in abundance and the savvy local retailers should supplement their ranks with retail specialists (ex-pats with international experience) in the various functional disciplines and build best practices as they grow. In years to come, you may end up with Indian retailers then becoming global players and giving Tesco, Ahold and Makro a run for their money.

Bhupesh Shah
Guest
Bhupesh Shah
15 years 4 months ago

A JV with a local retailer would be a risk for Wal-Mart as they could be supporting the growth and brand recognition of a potential future competitor.

One of Wal-Mart’s core strengths is their retail supply chain expertise. Partnering with a non-retailer who has local market knowledge is prudent as it will help them to avoid establishing themselves in areas where the infrastructure cannot support Wal-Mart’s business model.

In the long-term, if domestic retailers lose sight of what their consumers value, international retailers will be able to capture a large share of the market.

venkata velugubanti
Guest
venkata velugubanti
15 years 4 months ago
The Indian retail market is small when compared to the likes of the U.S. But overall, the retail market and share of organized retail are growing at a pace which is not seen in mature retail markets like U.S. and Europe. This growth provides opportunities for the foreign retailers’ entry into prospective large retail market. Joint venture is the only option for MNCs to enter the Indian market at present as FDI is not allowed in Front-End retail. Having a clear understanding of objectives of JV partners by both the parties is crucial for the long term success of the JV. It becomes all the more important because the regulatory framework is likely to change in favour of FDI as time passes by. Organized Indian retailers changed the front end of the retail industry but none of them could bring in any supply chain efficiencies. Hence, margins available to Indian retailers in many product categories are less compared to developed markets like the U.S. and Europe. JVs would be successful only if they can generate… Read more »
Devangshu Dutta
Guest
Devangshu Dutta
15 years 3 months ago
Fresh out of a meeting with a large international retailer this morning, I would like to share something that I mentioned to them: that the Indian market is not as large as it seemed to most people 2-3-5 years ago (whatever base figures they may be using to calculate potential market size); neither is it as small as it seems today to brands that entered the market 10-15 years ago. There are significantly different dynamics at play (some of the insights are available through articles available on our website on open-access), which make the Indian market totally different from the growth curve you might have been accustomed to in the history of the US, Europe, or even more recently, China. However, some fundamental realities remain common on the consumer side: – Given choices, consumers will choose – Given better environments, consumers generally will migrate to them – Given lower prices for comparable products, consumers will compare, and choose not to spend beyond what is necessary – A better merchandise mix will win out over a… Read more »
wpDiscuz

Take Our Instant Poll

How do you rate the prospects for U.S.-based retailers of expansion into the Indian retail market in the next 5 years?

View Results

Loading ... Loading ...