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Indian, global retailers in mating dance as rule change looms

Indian, global retailers in mating dance as rule change looms
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First Published: Wed, Sep 07 2011. 12 59 PM IST
Updated: Wed, Sep 07 2011. 12 59 PM IST
Mumbai: Struggling Indian chain stores are hoping the long-anticipated opening of the sector to foreign players like Wal-Mart Stores Inc and Tesco provides a lifeline in the form of equity investments and joint venture partnerships.
That has local chains, which make up a small share of a fast-growing retail sector dominated by mom-and-pops, scrambling for tie-ups with western retail giants.
Indian companies like Trent and RPG are local operators with scale expected to seek partnerships with global players preparing to swoop in on Asia’s third largest economy, the head of investment banking at a foreign bank in Mumbai said.
A Carrefour link-up with India’s Pantaloon has long been anticipated.
“Retail offers global players like Carrefour and Tesco a play on the India consumption theme and they have held some initial discussions with retailers here but I would expect talks to get into an advanced stage once all of them have seen the fine-print of the FDI (foreign direct investment) policy,” said the banker, who did not want to be named.
After years of delay due to political opposition, India is inching towards allowing entry to global multi-brand retailers, but with conditions including a 51% ownership cap.
Not all Indian retailers will bite when western giants come fishing.
One player sitting out the mating dance is Reliance Industries, the huge conglomerate controlled by billionaire Mukesh Ambani, whose grocery chain under the Reliance Fresh brand plans to go it alone.
“We have run the distance long enough by ourselves. We have aggressive growth plans and will continue to scale our business on our own,” said Bijou Kurien, president and chief executive of the lifestyle arm of Reliance Retail, which is loss-making.
Small shop owners account for more than 90% of India’s $450 billion retail sector.
Some of these owners have led a chorus of opposition to the arrival of foreign, multi-brand operators for fear of competition.
Most local chains, however, appear to welcome the funding and infrastructure that global partners will be able to bring.
“We are open to the idea of aligning and partnering with global retail majors,” said Sanjiv Goenka, vice-chairman of CESC, a unit of the Kolkata-based RPG Group that owns the Spencer’s chain of convenience stores and hypermarkets.
Goenka said he is in talks with potential equity partners, though he would not identify them.
Wal-Mart, Carrefour and Germany’s Metro AG are limited under current rules to wholesale operations in India.
UK-based Tesco Plc is also looking to enter the wholesale market through its existing tie-up with the Tata group’s Trent chain.
All of them aspire, once rules allow, to sell directly to consumers in Asia’s third-largest economy.
“Once the FDI policy is cleared for the industry we can expect some transaction in the next six months,” said Kishore Biyani, group chief executive and managing director of the Future Group, which owns Pantaloon Retail, India’s largest listed retailer.
Pantaloon, which has a market cap of less than $1.5 billion, has long been reported to be in talks for a tie-up with France’s Carrefour, the world’s No.2 retailer.
Both sides declined to comment on a possible partnership.
“We are convinced that Carrefour in India can contribute to modernize retail, develop partnerships with local producers and make the supply chain more efficient,” said a Carrefour spokeswoman in Paris.
Wal-Mart, which runs a wholesale business in India in partnership with Bharti Enterprises, denied a media report earlier this year that it is shopping around for a new partner.
“We are happy with our current joint venture partnership with Bharti and the pace of our growth in India,” said a spokeswoman for Wal-Mart India, declining to comment on whether the company would look for further partnerships once foreign investment rules are relaxed.
New Delhi is increasingly willing to back foreign direct investment in multi-brand retail despite the objections of farmers and opposition parties in the hope that overseas funding will help modernise an inefficient distribution system that is a key driver of food inflation.
Roughly 30-40% of fresh produce rots before reaching consumers in India due to poor transportation and refrigeration.
Cash Crunch
The timing of the FDI rule change remains unclear. For some in the industry, the quicker it happens, the better.
Many Indian chains are cash-strapped and loss-making, struggling to build scale given high costs, poor supply chains and scarce real estate.
Margins, meanwhile, are razor-thin as chain operators compete with the standalone “kirana” shops and street-side vendors where most Indians buy their groceries. Pricing power is limited, with retailers not allowed to sell a product above a manufacturer’s set retail price.
“We are interested for partnerships, especially on the food side,” Govind Shrikhande, managing director of Shoppers Stop , whose Hypercity food outlets are money-losing.
Shrikhande, like his competitors, declined to identify potential partners but welcomes foreign newcomers.
“The Indian organised market is still very small and with the increasing market size, there is scope for everyone to battle it out. Also it will help retailers who are in need for funds, to raise them and expand,” he said.
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First Published: Wed, Sep 07 2011. 12 59 PM IST
More Topics: Retail | FDI | Wal-Mart | Tesco | Carrefour |