Indian retail space is wide open
NEW DELHI - By any reckoning India's fast-growing middle class is poorly served by its retail sector, still dominated by small "mom and pop" outlets. That is about to change as the international giants Wal-Mart, Woolworths and Carrefour team up with local partners to bring big-box shopping to India.
Ending months of speculation, an Indian telecom major, the US$2.5 billion Bharti Group, has announced that it will foray into the retail business through a joint venture with the $300 billion global retail giant Wal-Mart.
It will roll out its first retail outlet in the next seven months, Sunil Mittal, chairman and managing director of Bharti Group, said on Monday on the sidelines of the India Economic Summit in New Delhi. "It is a partnership of equals. Big investments are in the pipeline," said Mittal.
Bharti had been negotiating with Tesco, the biggest British food retailer, but it seems that Wal-Mart, the world's largest retailer, known worldwide for its bargains to the consumer, has emerged as the eventual winner. Carrefour, the world's second-largest retailer, is also seeking local partners.
"Bharti, with its deep knowledge of India's fast-growing consumer market, and Wal-Mart, with its extensive global retail experience, share the same commitment to building relationships with producers in order to provide great quality at reasonable prices to consumers every day," said a statement from Bharti.
According to some observers, Bharti is likely to pay a royalty (about 2-3% of sales) to Wal-Mart for using the brand name, though Mittal has said there is no such arrangement. The venture is likely to invest about Rs100 billion ($2.2 billion). Recently, Bharti said the contribution of telecom to its overall revenues would come down to 75-80% by 2010 and retail and agriculture would acquire strategic importance. The first few stores will be rolled out in Mumbai, Bangalore and Delhi.
As per the agreement, Bharti will own the company running the front-end retail operations, while both Wal-Mart and Bharti will invest jointly in another company, which will engage in cash-and-carry, logistics, supply chain and sourcing, areas in which foreign direct investment (FDI) up to 100% is allowed.
"Foreign companies come with their own aspirations. We have our own, which is to make this partnership work," said Mittal. "The good thing is that the top executives at Wal-Mart are now stressing the importance of local partners to gain knowledge of the local markets."
Wal-Mart already operates a procurement center in Bangalore and exports products worth close to $2 billion to Wal-Mart stores worldwide, mainly leather apparel, textiles, home furnishings and jewelry. Wal-Mart, headquartered in the US state of Arkansas, has no stores in India as foreign retailers are only permitted to operate through an Indian partner.
India is yet to open the retail sector fully because of lack of political consensus (and some resistance by domestic players who fear being swamped by foreign outfits), but it allows 51% foreign investment in single-brand retail with prior government permission. FDI is also allowed in the wholesale business.
Single-brand retailers such as Nokia, Adidas, Reebok, Calvin Klein, Tommy Hilfiger, Versace, Chanel, Nina Ricci, Hugo Boss, Louis Vuitton, Aigner, LG, Sony and Samsung can operate now on their own. However, major international retailers that sell everything from food to automobiles under the same roof have to seek an Indian partner. Some (including Wal-Mart) have been waiting for more changes in the FDI regime, but are choosing to take the Indian plunge now to establish a foothold in the vast market.
Bharti has moved, even if a little late, to take on the might of Reliance. It may be recalled that this July, Mukesh Ambani, head of Reliance Industries Ltd (RIL), announced that that his company planned to invest nearly $6 billion in setting up a retail subsidiary that would cover 1,500 cities and towns in India and open 1,500 supermarkets and 1,000 hypermarkets. Ambani has set an annual sales target of $25 billion by 2011 to make his company a "Wal-Mart in India".
Ambani, who is often referred to as India's Sam Walton (the founder of Wal-Mart), had this to say about the Bharti-Wal-Mart arrangement: "There's place for six or seven large players in the retail sector. Sunil [Mittal] is a dear friend, and we will work together to make Indian retail strong.
"One of the biggest opportunities from retail was that it would create purchasing power, even at the bottom of the pyramid. As many as 10 [million to] 15 million jobs would also be generated over the next three to five years due to the explosion in retail sector,' Ambani said.
Until Bharti-Wal-Mart, RIL has had no immediate competitors, considering the proposed size of its investment. Private players such as the AV Birla Group, Tata and RPG in food superstores, Raheja's Shopper's Stop and the Pantaloon Group, which owns the popular Big Bazaars, have more than doubled business over the past couple of years.
In a flurry of activity in the recent past, India's second-largest corporate house, Tata Group, has announced an alliance with Australian retail major Woolworths to start a specialized retail chain for consumer durables, while the Dubai-based Landmark Group, which runs Lifestyle stores in India, is in talks with Europe's biggest retailer, French-based Carrefour, for acquiring its franchise in India.
But it is Wal-Mart, with the reputation of extending benefit to the consumer to the last cent, that will pose the real challenge to Reliance.
This year Wal-Mart International chief executive officer Michael Duke said on a visit to India: "We are not perturbed by them [Reliance]. The Indian consumer is significantly under-served, and there's room for many players." Last year, the group's then international president, John Menzer, met with Prime Minster Manmohan Singh and Commerce Minister Kamal Nath.
Indeed, there is a lot to vie for. Global consulting firm A T Kearney has said organized retail sales are projected to grow threefold by 2010 to $23 billion from the current $7 billion. According to industry observers, the retail opportunity in India is expected to increase to $440 billion by 2010 from the existing $300 billion, while investments in the sector are slated to go up nearly 10 times to $25 billion over the next five years.
The global real-estate consulting group Knight Frank has ranked India fifth in the list of 30 emerging retail markets and predicted a 20% growth rate for the organized retail segment by 2010.
According to the KPMG report "Consumer Markets in India - the Next Big Thing?" on the Indian retail sector's future, organized retail is expected to rise by 20-25% by 2010 and the retail sector to grow faster than gross domestic product. Over the past few years, retail sales in India have been hovering around 33-35% of GDP as compared with about 20% in the US.
At present, India's retail sector is largely unorganized, with an estimated 15 million tiny outlets catering to individual needs and employing the second-largest number of people after agriculture. What they lack is the complete "shopping experience'.' The retail giants are targeting the 300 million in the "middle classes' and the additional 200 million in rural areas, who form a consumer market worth more than $100 billion.
Leftist parties and right-wing traders, however, have stymied moves to open the sector further, which they fear would kill the local kirana store. According to a study, jewelry, watches, health and beauty-care services, mobile telephones, footwear and entertainment are the main categories that attract the mall visitor. The neighborhood store does not stock any of these. Further, organized retailing in India is mainly an urban phenomenon accounting for only 12-20% of the urban retail landscape and just 2% of the entire sector.
It seems that given the climate of encouraging private enterprise, FDI in retail should happen. The question is: In what manner will it evolve? Will the 15 million retail outlets in India be taken over by the big fish? Will arrangements such as Bharti-Wal-Mart fall apart? Will India convert to a more US-like system with only 900,000 outlets servicing a market almost 15 times as big? Or will India go the China way, where more than 70% of the world's largest retail chains have set up shop, but occupy 5-8% of the market share; and where Chinese concerns grow by 33% and foreign concerns by 21%?
The Indian retail space is still quite wide open.
Siddharth Srivastava is a New Delhi-based journalist.
Siddharth Srivastava is WSN Editor India.