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India rides a retail
wave
By Anil Sharma
JAIPUR -
Size does matter. The sheer size of India's billion-plus
population and its changing lifestyle continue to pique
the interest of major international retail chains, even
though they face foreign investment obstacles.
The US$180 billion Indian retail sector has
undergone a complete transformation in recent times.
From supermarkets and hypermarkets to department stores
and convenience stores and one-stop shops, a retailing
wave is currently sweeping the country. From food to
music and apparel to tea and coffee bars, companies of
all hues are indulging in retailspeak.
Since the
eighties, retailing in India, then best characterized as
mom-and-pop operations, has evolved into a full-blown
business as lifestyles in India have changed, with more
emphasis on the concept of value for money.
India's first true shopping mall, Crossroads,
complete with food courts, recreation facilities and a
large parking lot - was inaugurated in 1999 in Mumbai.
Big domestic industrial houses such as the Tatas, the
RPG group, ITC and HLL, realizing the potential of the
retail business, are now scrambling for a place in this
segment. Over the past five years, these groups have set
up a number of chain stores, for instance, West Side by
the Tatas, Foodworld by RPG and Shoppers' Stop
(Rahejas).
Given the developments, foreign
companies are understandably keen to cash in, but they
will have to be patient, and selective of their mode of
entry into the market.
Since 1997, the
government has barred foreign participation in the
retail sector, except for the cash-and-carry wholesale
route where wholesalers cannot open retail shops to sell
to consumers directly, 100 percent foreign ownership is
permitted, and for franchising. Prior to 1997, FDI was
allowed in only two retail ventures - Nanz Food Products
in 1992 and Spencer and Company Ltd in 1996. Germany's
Metro AG was the first foreign company to enter India
with a cash-and-carry venture.
International
retail majors such as Benetton, Dairy Farm and Levi's
have chosen the franchise option to gain a foothold in
India, as has the UK's Marks & Spencer. A typical
franchisee must pay Rs 5 million (US$105,000) to Rs 10
million per unit.
Big names like McDonald's,
TGIF and Pizza Hut have also begun extensive operations.
Typically, they grant a "master franchise" covering a
particular area for a front-end franchise fee. The
master franchiser on his part is then responsible for
appointing further individual franchisees within the
particular area. Another variant is the royalty system,
under which the franchise holder (say Pizza Hut) grants
individual franchises and then claims royalties from
each branch.
"Even though India has well over 5
million retail outlets of all sizes and styles, the
country sorely lacks anything that can resemble a
retailing industry in the modern sense of the term. This
presents international retailing specialists with a
great opportunity," says Anurag Singh, a trade analyst.
No surprise then that global retail chains,
including Shoprite Holding (a South African food
retailer), Casa Castillo, the Mexican food giant; Imax
Theaters and Yorkshire Global Restaurants are also
considering entering the Indian retail industry.
Subway, a $5-billion American fast food giant,
is also finalizing an aggressive strategy for the Indian
market. The company has already set up a wholly owned
subsidiary, Subway Systems India Pvt Ltd. It has also
targeted setting up 200 stores within seven years in
India, with 12 new outlets in the next calendar year.
The company is taking the franchisee route, with each
outlet requiring an investment of about Rs 4-6 million.
An Indian subsidiary has been established to facilitate
the franchising of the outlets.
The Indian
retail sector is estimated to be about $180 billion a
year, of which the organized sector accounts for just 2
percent, but with a potential to grow up to 10 percent
over the next few years.
According to a report
prepared by McKinsey and the Confederation of Indian
Industry (CII), India is set to witness a retail boom,
with the potential to become a $300 billion per year
market by 2010 and attract large investments from global
retail giants such as Tesco, Metro, Kingfisher,
Carrefour and Ahold if the sector is thrown open to
foreign investment.
The report said that with
certain structural reforms - such as removing supply
chain constraints, tax rationalization and allowing
foreign direct investment in the retail business,
retailing in India could be as large as $450-500 billion
a year. According to the report, 40-45 percent of
purchases in urban centers will switch to organized
channels, and these channels would be able to capture a
substantial part of demand from middle-income people.
Stressing the need to attract foreign
investment, the report said that in Thailand, for
example, seven of the top 10 retailers have foreign
equity. A similar picture is seen in other developing
markets, such as China, Brazil and Poland, it said,
adding that joint ventures help to develop high quality
retailing.
Retail is considered the world's
largest private industry with total sales of $6.6
trillion. With close to 12 million outlets, India has
the largest retail outlet density in the world. In terms
of turnover, of the $180 billion yearly turnover, much
of it is fragmented and unorganized.
The
big-ticket growth drivers in India's retail industry are
considered to be household groceries and apparel.
Grocery is the largest segment, taking up nearly 72
percent of retail consumption. Unlike in the West, where
organized retailing plays a larger role; in India it has
yet to evolve in a big way. With global food markets
becoming increasingly saturated, global food retailers
are looking for new markets for growth, and India is
"the" market for them.
However, there is strong
opposition to the opening of the retail sector for FDI.
Some trade bodies have already opposed it. Even the
high-powered NK Singh panel, which was set up to
appraise the country's FDI policy, has recommended to
continue with the existing ban on FDI in retail trade,
as the retail sector in India "is dispersed,
labor-intensive and disorganized".
It may be
noted that India's share of FDI inflows has hovered at
the one- to two-percent mark, a paltry figure for such a
large country. During 2001-02, FDI inflows showed some
improvement, growing by 65 percent over the previous
year. But even with this improvement, FDI as a
percentage of total gross domestic product is only about
1 percent. Among leading developing countries, this is
the lowest in the world.
(©2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com
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