The retail business in India is expected to grow to $750-850 billion (around S$960-1,090 billion) by 2015 from the current $518 billion, according to audit and advisory firm Deloitte’s Indian arm, but organized retail accounts for just 8% of this. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)
The retail business in India is expected to grow to $750-850 billion (around S$960-1,090 billion) by 2015 from the current $518 billion, according to audit and advisory firm Deloitte’s Indian arm, but organized retail accounts for just 8% of this. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

Retail blues | Open for business

The govt has changed rules governing foreign investment in retail in the face of political opposition but is yet to see the kind of response it hoped for from global firms

New Delhi: Ramlila Maidan in the Indian capital is the venue of the annual celebration of Dussehra—the Hindu festival marking the triumph of warrior-god Rama over demon-king Ravana. At the end of an operatic, nine-day performance, a giant effigy of Ravana goes down in flames in a spectacular display of fireworks, symbolizing the destruction of evil.

At other times of the year, Ramlila Maidan is a preferred location for popular protests. In recent years, it has been the venue for campaigns by yoga guru Ramdev and Gandhian activist Anna Hazare against alleged corruption in the government.

On 4 November 2012, it hosted a large meeting, organized by the Congress party, not against anything, but in favour of the government’s policy allowing foreign retail companies to set up supermarkets in the country, with foreign direct investment (FDI) of up to 51%. Congress president Sonia Gandhi spoke in favour of the move. Her son and Congress vice-president Rahul Gandhi did so, too. The move would attract investment to India, create millions of jobs, lower prices for the consumer and ensure farmers get a better price for their produce, the thousands that had been ferried in to listen to the speakers were told.

The meeting was a rare show of strength by a government and a party that have not always seen eye-to-eye and which have spent the better part of the past four years—in the second term in power of the Congress-led United Progressive Alliance (UPA)—fighting allegations of corruption.

Now, 10 months later, it remains just that—a show of strength. The government is yet to receive a single proposal for FDI in multi-brand retail even though trade minister Anand Sharma has held several rounds of meetings, in India and overseas, with prospective foreign investors.

By any measure, that’s a poor return on investment for a proposal that saw the government lose the support of a key albeit fickle ally, the Trinamool Congress, and face a torrid time in Parliament even while it was widely welcomed by analysts as an indication that the policy paralysis that had characterized the UPA was over and that the floodgates had been opened for more economic reforms.

“Before investing hundreds of millions of rupees, companies want to ensure that they are complying with the clauses of the policy," Kumar Rajagopalan, chief executive of the Retailers Association of India (RAI). “No one wants to end up on the wrong side of the law."

Issues pertaining to understanding the policy have persisted, thereby delaying the process for foreign retailers to enter India, Rajagopalan said, adding that investors also need an assurance that there will be no possible reversal in the policy owing to political pressures.

Last month, the department of industrial policy and promotion (DIPP), the commerce ministry arm responsible for framing India’s policy on foreign investment, issued a set of clarifications that only created more confusion and made it more difficult for foreign retailers to open supermarkets in India.

As this newspaper goes to the press, DIPP is preparing to issue another clarification that will dilute norms including those that mandated that 50% of the investment had to go towards building back-end infrastructure; 30% of the sourcing had to be from small enterprises; and that the supermarkets could be opened only in cities with a population in excess of one million.

New Delhi is also considering a proposal on raising the ceiling on investments by foreign retailers to 74% (from 51%).

It isn’t known if the measures will encourage foreign retailers to enter India, but what is known is that the country represents among the last significant frontiers for the business of organized, or modern retail.

The retail business in India is expected to grow to $750-850 billion (around S$960-1,090 billion) by 2015 from the current $518 billion, according to audit and advisory firm Deloitte’s Indian arm, but organized retail accounts for just 8% of this.

Still, even a market worth $60-68 billion (S$77-87 billion) is significant enough to attract the attention of Big Retail, and, despite the recent slowdown—rating agency Crisil Ltd said in a June research note that growth was down from 20% in 2011-12 to 10% in 2012-13—the business is expected to expand. Crisil estimates a growth rate of 14-15% this year and the next.

In the past decade, India’s retail topography has undergone a transformation. Once dominated by small neighbourhood stores that serviced the needs of millions across the country, the market now has a fair share, especially in large cities, of supermarkets, department stores, and hypermarkets.

Through the 2000s, several Indian conglomerates, including Reliance Industries Ltd, the Aditya Birla Group, and the Tata group entered the business, keen to tap the country’s growing middle class. They faced competition from aggressive start-ups, some funded by deep-pocketed private equity investors.

“If you look at the top companies in the world, most are present in retail," said Mohit Bahl, partner for transaction services at KPMG’s India unit. “...retail is a capital-intensive business; the big boys always had the capital and are constantly looking at attractive growth-oriented sectors."

And, in anticipation of the market opening up, German retailer Metro AG, France’s Carrefour SA and, most recently, Wal-Mart Stores Inc., the world’s largest retailer, entered the country with so-called cash-and-carry stores, or stores that serve as wholesalers and sell to other retailers.

Yet, neither the conglomerates nor the cash-and-carry operations of the multinationals have made much headway.

Retail has proved a tough business in India. From issues related to sourcing and supply to high real estate costs to a slowdown in consumption, Indian retailers have had to cope with a variety of problems.

Two start-ups that expanded rapidly, Subhiksha Trading Services Ltd and Vishal Trading Ltd, found their books loaded with debt. The former shut shop and the latter was sold to TPG Capital and Shriram Group in a distress sale.

The Future Group, India’s most high-profile retail company, founded by Kishore Biyani, often called the Indian Sam Walton, was forced to restructure its operations, and sell some of its businesses as it sought to pare debt of 6,985 crore (at the end of 2012).

Devendra Chawla, president, Food Bazaar at Future group said: “We have seen that Indian consumers have increasingly been adaptive to modern trade and the benefits it has offered. Category incubation and market development starts from modern trade for new age categories."

Even Reliance Retail Ltd, an arm of Reliance Industries, managed to turn profitable at the operational level in 2012-13 only after at least three shifts in strategy and several leadership changes.

“They experimented with too many models", explained Bahl. “They pushed the supermarkets to high streets while a sophisticated supply chain and getting last-mile connectivity remained a concern. Being unable to fill shelf spaces with the right products spoilt the plot for domestic retailers," he explained. “The air conditioners were not working, there wasn’t enough space to stock products, retaining people became difficult, and the overall shopping environment was not a pleasant one."

In a January 2013 report, ratings agency India Ratings and Research Pvt. Ltd, the Indian arm of Fitch Ratings, maintained a negative outlook on the Indian retail sector for 2013. “This is driven by continuing weakness in consumer spending due to rising inflation, marginal real wage growth and a weak macroeconomic environment," it said.

Foreign retailers haven’t had it easy either.

Although France’s Decathlon has used the September policy change to good effect, moving from a wholesale model to a retail one, most large firms are still awaiting clarifications from the commerce ministry. And Wal-Mart, which has a joint venture with Bharti Enterprises for a cash-and-carry venture, has run into trouble over several issues including allegations that it flouted India’s retail norms (before they were eased in September) and a disclosure by the company that five of the employees of its Indian operation had been suspended for violating the US Foreign Corrupt Practices Act. In June, Wal-Mart’s India head Raj Jain quit.

“We are still very early in the process on FDI but are excited by the opportunity," Wal-Mart’s head office in the US said in a recent email. “We continue to work with the Government of India to better understand the rules that exist for FDI in multi-brand retail and we appreciate the Government’s willingness to consider our requests for clarity on conditions contained in the new FDI policy."

Even as Wal-Mart’s misfortunes have played out across the front pages of newspapers, France’s Carrefour and UK’s Tesco have been quietly at work. Executives from both have met commerce minister Anand Sharma. Philip Clarke, chief executive officer of Tesco, met Sharma in May and said his company would announce its India plans with its partner Trent Ltd (part of the Tata group) after the ministry clarified several issues.

The Crisil report said foreign supermarket operators may take two-three years for identifying appropriate store locations and rolling out back-end infrastructure before starting operations.

“Uncertainty in both the global and Indian economies will delay the entry of foreign players in Indian retail in the short term. Further, many global retailers are facing pressures on profitability in their home markets, and are unlikely to commit aggressive investments in foreign markets in the near future," the report said.

When they do enter the market, overseas supermarket operators aren’t likely to see overnight success, given that even domestic retailers have been struggling to turn profitable, said a retail analyst on condition of anonymity.

Overseas investment in retail is also controversial in India because of the widespread resistance to it. Those opposed to it regard it as hurting local businesses and the employment prospects of those who work in the so-called unorganized retail sector. Those who back overseas investment in retail say it will mean remunerative prices for farmers, besides leading to the creation of more jobs. The danger of a backlash, like what happened in 2007, when local traders attacked stores of Reliance Fresh and Spencer’s in Uttar Pradesh alleging loss of livelihood, continues to loom large.

Organized retail may end up benefiting consumers, but, much like telecom, it won’t be kind on the financials of the companies in the business, according to Deep Mukherjee, director, India Ratings and Research, a Fitch Group company.

Structurally, the business is different from that Big Retail is used to in developed markets, say experts. For instance, around 40% of the cost of an Indian retailer comes from real estate. The corresponding proportion in the US and European markets would range from 10-20%, depending on the format.

“High occupancy costs continue to be a big deterrent to the market as well as an obstruction in profit-generating capabilities of retail companies," said Fitch’s Mukherjee.

“You can’t open large format stores and expect the consumer to pay for it." added Mohit Kampani, chief executive at Spencer’s Retail Ltd that operates a mix of 140 hypermarkets and convenience stores across India. He adds that companies need to work out store sizes that work best in a given area.

That may be difficult for some foreign retailers that just want to follow their international templates here, said an executive at an Indian retail company who asked not to be identified. This “copy-paste" is not the “best way to go about it", this person added.

Experts also attribute at least some of the woes of large Indian conglomerates that have struggled in the retail business to a desire to turn things around quickly and a lack of understanding of the Indian consumer.

“You have to have a long-term view for the Indian market to be in the retail business," said Amitabh Mall, partner and director at Boston Consulting Group (BCG).

But there is definitely a future. Indian consumers are willing to spend more and many are beginning to shop for branded products, which means they will start feeling comfortable walking into modern retail stores, said Damodar Mall, chief customer strategy officer, value retail, Reliance.

This trend will be amplified by urbanization. According to BCG, by 2020, the proportion of India’s population living in the cities will rise to 35% from 31% in 2011.

And average household income will grow three-fold in the same period.

To succeed, though, Big Retail (both foreign and Indian) will have to learn to deal with the uniqueness of the Indian market.

One way in which India is different is that food and groceries still account for 60% of the retail trade. That means investing in cold-chain infrastructure and getting the supply chain right.

Another is that there aren’t enough different products to stock in a 100,000 sq. ft store. “You can’t open a large store 10km away and expect consumers to drive down," said Bijou Kurien, chairman of the retail committee at industry body Federation of Indian Chambers of Commerce and Industry (Ficci), referring to a strategy popular among most retailers in the early phase of modern retail in India.

Indeed, this assumes that people will buy in bulk but, given the relatively smaller size of Indian homes (as compared with, say, US ones), that’s not how consumers shop here, said Sumita Kale, chief economist at New Delhi based Indicus Analytics.

“We are telling retailers to be flexible with what formats they bring in," said BCG’s Mall.

Given these differences, it isn’t surprising that pure food and grocery retailers have done badly in India. On the contrary, non-food retailers “have managed to work around costs and inventory" and succeeded, said Amitabh Mall.

This could well explain Ikea’s decision to invest 10,500 crore in India and apparel company H&M’s (Hennes and Mauritz AB) plan to invest 700 crore here.

Those, though, are in single-brand retail. What India is waiting for is a large investment in multi-brand retail.

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