Pressure in India’s retail sector is rapidly mounting. The announcement of Wal-Mart’s cash & carry joint venture with local partner Bharti was like a stone tossed in the Indian retail pond, which led to feverish negotiations between local conglomerates and foreign retailers, and increased activity of local retailers. Despite all activity, India’s retail infrastructure still needs to be built from scratch.

Last February media reports in India announced Congress Party chief Sonia Ghandi raising the alarm over foreign retailers. Allowing these predators access to the Indian market would drive the manifold ‘mom & pop’ stores out of business was roughly her concern. These small stores – from which so many families earn a daily living – are the backbone of India’s traditional retail structure.

However, fear for the alleged disruptive impact of modern (foreign) retailers on India’s socio-economic climate is a bad counsellor. No government can afford an ostrich policy of ignoring change and modernisation trends. These trends are not only imported via foreign retailers but also happen from within. Several Indian business conglomerates announced their intention to modernise the country’s food distribution and one of them – the petrochemical giant Reliance – has already started its operations.
This is therefore not a question of nationality but of adjusting to changing times. Still, the Indian government is hesitant in allowing further liberalisation of its foreign direct investment (FDI) legislation. Like in other emerging markets in Asia – for instance in Thailand – in India the government has difficulty in harmonising the interests of the existing traditional retail structures with the forces of modernisation. In November last year already the Indian Commerce and Industry Minister Kamal Nath said that the country would soon announce further liberalisation of its FDI policy for the retail sector. However, the policy will still aim to ensure that large retail chains do not harm smaller neighbourhood stores, "Retail in India is 97 to 98 per cent concentrated in the neighbourhood shops. Any FDI should not destabilise the small shops”. Mr Nath also said his ministry is keen to further ease FDI restrictions in retail to encourage international retail chains to become suppliers to smaller shops. "You will hear something on that very soon," he said in November last year.

The Wal-Mart effect
Top executives of leading multinational retailers have been lobbying the Indian government like mad, so far without the expected result. This means foreign companies cannot fully control multi-brand retail businesses in India. With the final decision of the Indian government on liberalising FDI still pending, the Indian retail sector is nevertheless heating up like a pressure cooker. Large Indian companies are building a retail infrastructure themselves – like Reliance Industries’ subsidiary Reliance Retail – or are negotiating with foreign retail multinationals to use a loophole in the Indian law and jointly build a retail chain of which the Indian partner holds the majority to comply with the law.
In November 2006, telecommunications giant Bharti announced its intention to team up with Wal-Mart to build a retail business in India. The involvement of the world’s largest retailer immediately triggered the ‘Wal-Mart effect’. Even before both partners disclosed their plans more into detail, the sheer announcement sparked off feverish negotiations of multinationals like Tesco – whose earlier talks with Bharti were unsuccessful – Carrefour, Auchan, Lotte from South Korea and Australian retailer Woolworths.
Their Indian counterparts are companies like:

• Bombay Dying (a textiles subsidiary of the business conglomerate Wadia Group); 
• the Wadia Group at large (next to textiles it also has a low cost airline and a biscuits and snacks business);
• the Tata Group (a conglomerate of 96 companies in seven business sectors a.o. automotive, IT, composites and metals, consumer products, chemicals, power, hotels);
  the Landmark Group (fashion, home decoration, value retail, food, hospitality, leisure electronics – based in Dubai but Indian owned);
• the Aditya Birla Group (a.o. financial services, telecom, metals, petrochemicals, mining, energy, textiles, retail);
• K. Raheja Corporation (real estate, retail, hospitality);
• RPG Enterprises (retail, technology, entertainment, power, transmission, tyres and specialities);
• Reliance Anil Dhirubhai Ambani Group (R-ADAG, an offspring from the same roots as petrochemical company Reliance Industries, this conglomerate comprises businesses in communications, energy, financial services, health care, media and entertainment).

Multi-format responses
India’s leading retailer Pantaloon responded to the Wal-Mart effect by announcing a roll out of its Big Bazaar hypermarket operation. “The market dynamics will change but we are prepared and plan to scale up our number of Big Bazaar stores to 100 by December 2007, before any international retailer opens up its store here,” PlanetRetail quoted Kishore Biyani, Pantaloon Retail’s managing director in a response to the Bharti/Wal-Mart announcement.
In the following months Pantaloon unfolded plans to speed up its multi-format strategy by signing a memorandum of co-operation with Indian Oil to add Food Bazaar stores to Indian Oil’s petrol forecourts and adding petrol stations to a selected number of its malls, hypermarkets and supermarkets. In December last year Pantaloon opened its first wholesale club under the Big Bazaar Wholesale Club banner. In January 2007, Pantaloon retail was also said to be negotiating a franchise agreement with Burger King on the fast-food company’s Indian market entry. The same month Pantaloon’s parent company Future Group clinched a joint venture deal with the American office supplies company Staples.
Last January Reliance Retail’s operations president Raghu Pillai stated that his company would be “a formidable competitor” to Wal-Mart. “Wal-Mart has the advantage of creating a larger-than-life-size track record, but I’m not sure whether in other parts of the world that holds true,” he said, pointing at the US retailer’s forced market exit from South Korea and Germany. Part of Reliance Retail’s ambitious multi-format strategy is building a cash & carry operation for which it attracted Harshe Bahadur – former country manager India for German retailer Metro Group – as chief executive of the C&C division.
Due to the wholesale (cash & carry) nature of its operations, Metro was given approval by the Indian authorities in 2002 to start a business in India. Its operations have, however, been scrutinised by the government in order to prevent Metro from retailing its products. Late 2003 Metro opened its first two cash & carry stores in Bangalore and late 2006 a third outlet was opened in Hyderabad. A further two stores – in Kolkata and Mumbai – are planned this year. In response to the Wal-Mart/Bharti tie-up, Metro said it would stick to its role as cash & carry operator until the Indian government would decide to allow FDI. Still, Metro said it would speed up its cash & carry operations by setting up shop in all 33 cities in India with a population of over one million.

Ninety-eight per cent waste
The Indian business conglomerates that are in talks with foreign retailers are all huge companies representing India’s rapidly growing development as a potentially global economic powerhouse. An emerging middle class with an increasing disposable income all add to the attractiveness of India for both local and foreign retailers. But despite the opportunities, fact is that the country still has a long way to go and that a retail infrastructure – yet a full value chain from farm to consumer – has to be built from scratch.
According to a recent research on India by Deutsche Bank, FDI is badly needed to create an infrastructure to benefit India’s economic development. The power sector would need investment levels of some US$75 billion, telecommunications US$25 billion and some US$50 billion should be invested in airports, seaports and roads.
India’s agricultural sector contributes only 23 per cent to the country’s GDP but it employs 60 per cent of the population, Deutsche Bank states. The primary sector still has to deal with the vagaries of the monsoon and would need huge investments as well.
Speaking at a conference in India last year, KPMG’s head of the European Food & Beverage Industry Group Erwin de Spiegeleire presented some disenchanting facts: despite India’s unique positions as the world’s number three food producer and the second largest producer of fruit and vegetables, 40 per cent of India’s production of fresh produce perishes between farm and producer. Only two per cent of production is processed which means a waste of 98 per cent! Investments of US$28 billion would be needed to reorganise this.
Reliance Retail’s holistic approach, creating a ‘farm-to-fork’ chain to guarantee quality and supply of its Reliance Fresh stores, should be seen in this perspective. Reliance Retail says on its website that it is “[…] aggressively working on introducing a pan-India network of retail outlets in multiple formats.” The needed backward-integration effort includes setting up some 50 ‘rural business hubs’ nationwide to create a procurement area of over 300,000 acres. “Ensuring better returns to Indian farmers and manufacturers and greater value for the Indian consumer, both in quality and quantity, will be an integral feature of this project. By creating value at all levels, we will actively endeavour to contribute to India's growth,” reads Reliance’s website.

Local retail initiatives
Reliance – whose intention it is to build a nationwide multi-format network of some 5,000 stores – is currently the main example of a local retail initiative to modernise India’s food retail on the eve of an expected massive entry of foreign retailers. All local retailers in India are eager to expand their operations and most have expressed ambitious plans. Leading conglomerates are involved like the Aditya Birla Group that last January acquired the Trinethra chain of supermarkets (some 170 stores). The new owner will also build a hypermarket operation under the FabCity banner. The first store measures 5,000 m2 and was opened last January in the city of Mysore. A further three to four FabCity hypermarkets are expected to be opened in the near future. Another conglomerate –  K. Raheja Corp. – opened its first 11,000 m2 Hypercity hypermarket in Mumbai in May 2006. The retailer intends to have a network of 55 hypermarkets in 2008.
Trent is the name of Tata Group’s retail division which was established in 1998 and mainly includes music and video stores under the ‘Landmark’ banner and ‘Westside’ clothing stores. Late 2006, Trent opened its first Star India Bazaar hypermarket in the city of Ahmedabad. Further openings are scheduled for Mumbai and Bangalore.
Subhiksha – based in Chennai – is a discounter with a rapidly growing chain of over 500 stores whose intention it is to double in size this year. It intends to meet this ambitious target by looking at small (200 m2) non-airconditioned locations close to communities and is therefore a strong competitor for the small mom & pop ‘kirana’stores that still dominate India’s retail scene. In each of its target areas which it selects on the combination of high population density and purchasing potential, Subhiksha opens a cluster of stores in close proximity to each other. This enables the chain to cannibalise sales within its own network. Better to lose sales to a colleague than a competitor, is the idea of this strategy which has also been executed by Reliance. Last year Subhiksha postponed plans to go public due to market instability, and according to Planet Retail this did lead to speculation that Subhiksha may well be an acquisition target for Reliance.

Quantum jump
Last February Sunil Bharti Mittal, the chairman of Wal-Mart’s Indian partner Bharti Enterprises, stressed that the joint venture with Wal-Mart would be limited to cash & carry and that it would comply with Indian legislation. This would give Wal-Mart the same status as Metro Group, which operates in India without a local partner.
Wal-Mart opts for a partnership with Bharti but the American retail giant officially has to wait until further liberalisation of FDI legislation becomes fact. In March 2007, Wal-Mart’s vice-chairman Mike Duke met the Indian Commerce and Industry Minister Kamal Nath who still could not say anything about further liberalisation despite his remark in November 2006 that news on FDI would be disclosed “very soon”.
Due to its global size, Wal-Mart can play a trump-card while lobbying with Indian authorities to finally resolve the FDI issue. Minister Nath referred to this after his meeting with Duke. PlanetRetail quoted him as saying: “We have urged Wal-Mart to increase their sourcing by 25 per cent which will be a quantum jump in Wal-Mart’s purchases from India.”
Should FDI regulations in India’s retail sector finally be liberalised somewhere in the future, then Wal-Mart’s buying clout may well have played a role. By then, Wal-Mart could find itself to be in a good position with an established wholesale operation and a local partner which already has built a retail operation via its subsidiary Bharti Retail. Investing US$2.5 billion by 2015, Bharti retail intends to have approximately ten million square feet of retail floor space all over India, employing 60,000 people. Given the frenetic activities of almost all companies involved, the Indian retail sector – like the Indian economy at large – will surely have undergone a metamorphosis by 2015.

Future outlook
According to the consultancy Technopak, India’s retail and supply chain expects investments of at least US$30 billion in the coming five years. The size of modern retail is likely to reach the US$75 billion level by 2011/12. But it also expects hyper-competition by 2008/09, as the store base of India’s top six retailers will show significant overlapping in the country’s top 20-30 towns.
“The growth of the economy and therefore private consumption is increasing at a faster pace – in absolute value – than the investment in modern retail,” says Technopak’s chairman Arvind Singhal. “Hence, while modern retail may touch US$75 billion or more by 2011 from the current US$12 billion, the retail market at large would have increased by US$130 billion to a level of US$460 billion by then.”
Singhal puts the fear for the impact of modern (foreign) retailers on India’s traditional retail backbone in perspective. “Population densities in top 75-80 towns are increasing by the day due to more urbanisation. Hence the city centres still remain the core of residence while the cities expand outwards,” he says. “Modern retail cannot penetrate such cores due to lack of large spaces, and current mom & pop stores will therefore continue to serve the consumers in their immediate vicinity. Some may become franchisees of Subhiksha and Reliance but most will remain independent. Furthermore, rural India now accounts for more than 50 per cent of total consumer spending. Modern retail’s penetration will be minimal there for the next decade, and hence again, the millions of small retailers in India’s 600,000+ villages will have some years of shelter from the impact of large, modern retailers.”
According to Singhal the impact of large format stores will be dramatic in mid-size towns (ranking 100 to 800 in terms of purchasing power). “There displacement will take place of smaller stores. But again, beyond the town # 800, logistically and economically, it would be unviable to establish large format modern chain stores and hence again, small retailers will continue to dot the landscape.”
Technopak calculates that about 600-700 million square feet of additional retail space is needed to reach the predicted growth levels by 2011. Currently however, some 200 million square feet of mainly shopping mall retail space is being built, which means a gap of almost 400 to 500 million square feet. An investment of about US$10 billion is needed to close this gap while efficiently allocating this new retail space to India’s over 1,000 towns and ‘rural hubs’ instead of concentrating it in the country’s top 40-50 cities alone. Also, an additional US$8-10 billon would be needed in retail store fitting and related equipment.
Is FDI needed for these investment levels? “Of the US$30 billion investment we currently forecast in the Indian retail sector, spread over next 4-5 years, almost 70 per cent is from entirely Indian companies,” says Singhal. “The remaining 30 per cent or so will be from companies who can either come on their own (e.g. in Cash & Carry business like Metro or single brand retailing) or through strategic alliances like Wal-Mart and Bharti where the bulk of the back-end investment will be made through joint ventures.”
Singhal says to be “a very strong supporter of unrestricted FDI in retail, which can also bring with it best practices, a more global network of suppliers who will follow the international retailers into India, and other benefits. Further, if Indian companies feel good about being able to buy businesses like Arcelor and Corus, why should Carrefour or Maxeda not be able to invest or buy into Indian businesses?”