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  2005 Jul/Aug Issue
   
Cover Story
CentralWorld – A premier shopping paradise in the making
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Retail destination India – Big draw for global players
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Matahari Department Store pursues new growth opportunities
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A tour de force of the region's Top 500 retailers ranking
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Mega 10-in-1 event woos global food-industry players


 




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Retail destination India –
Big draw for global players

 


India, with its massive consumer market, has become a hot favourite for multinational retailers and others looking to expand beyond their boundaries. Shirish Nadkarni reports from Mumbai ...

International retail chains are changing the way they perceive the future of their respective businesses. Carrefour, for one, is withdrawing from several markets, while Tesco and Wal-Mart are expanding aggressively into countries where they have never ventured before. But the three are unanimous in their desire to get into one particular market — India. Other world-renowned retailers like Ahold, Casino and Kingfisher are straining their sinews to get in too.

What makes India so attractive? International management consultancy AT Kearney has labelled retail business the Indian economy’s “rising sun”. It has identified the country, out of 30 up and coming retail markets, as the next most attractive retail destination after China.

Statistics on the Indian retail market are mind-boggling, with AT Kearney valuing it at around Rs4,000 billion (US$92 billion) today and projecting it to double by the start of 2006. The Federation of Indian Chambers of Commerce and Industry (FICCI), however, places the current size at Rs11,000 billion.

Indeed, the growth rate has been phenomenal. AT Kearney reports that the share of corporate houses in retail trade in 1999 was Rs150 billion, estimating that the amount will hit Rs350 billion by year-end. The annual rate of growth of corporate houses in India’s retail trade is 40%.

On the employment front, around 500,000 people are employed in the organised retail sector and 39.7 million in the unorganised sector. The government’s 1999 estimate already showed 17.5 million people employed in the retail trade.

By Indian economists’ calculation, 4% of the country’s population is engaged in retailing, which means about 170 million Indians today are dependent on this sector. The number of retail shops has multiplied in the past five years as a result of falling employment generation in India.

This, then, is the market which top multinational chains aspire to dominate. A top retail chain has estimated the retail trade there could be worth US$300 billion by 2010. FICCI, however, expects the figure will be achieved earlier — by end-2006.

“India is among the five most attractive markets for retailers,” says AT Kearney’s global head of retail practice, Josh Chernoff, who has just concluded a visit to the country. “India’s GDP is expected to post a compound annual growth rate of 3.7% between 2000 and 2015. [This] and India’s favourable demographics are factors that provide a favourable backdrop for retailers.”

Adds AT Kearney’s vice-president, Pavan Gandhok: “The Indian retail industry has been growing at 10% per annum over the past five years, and we believe that organised retail in India can reach 8%-10% of the total retail pie by 2008.

“From a foreign-direct-investment perspective, the retail regulations have indeed been eased and for international retailers, the answer to the question of when to enter is clear: The time is now.”

Clearly, food represents the largest opportunity for retailers. It comprises 45% of the consumer spend. And, while supermarkets are found to be the most important format, hypermarkets are expected to dominate soon. Currently, 11% of the apparel market sells through modern retail outlets, but this is changing.

“Chain stores, which are growing at an incredible 22% annually, are expected to overtake other store formats in sales in the near future,” says Anil Rajpal, director of Delhi-based KSA Technopak, the consultant for the retail industry in India.

“The branded-apparel market represents the largest source of growth: The men’s branded-apparel market is growing at a rate of 21.8%, while branded women’s apparel, which represents 35% of the total branded-apparel market, is growing at an incredible 23% annually.”

Rajpal adds that wealthy Indians are leading the spending spree, which boosted urban consumption by 12% in 2002, 16% in 2003 and 19% in 2004 to account for three-quarters of the country’s total growth.

Shopping malls are multiplying across the nation at a dizzying pace, consumer credit has tripled in five years and Indian psychiatrists are reporting a new condition — obsessive, compulsive shopping.

Luxury brands like Mercedes and Gucci are flocking to the country. International premium luggage brand Louis Vuitton is opening outlets at most of India’s major cities. Wal-Mart, Carrefour, Tesco and Casino have all been actively seeking local partners. According to Chernoff, foreign retailers like Marks & Spencer and Bennetton, which are operating via franchises, will most likely switch to a hybrid business model.

Not that it will be a “veni, vidi, vici” (Julius Caesar’s famous “I came, I saw, I conquered!”) situation. Domestic retail chains, which have had a head start on overseas competition, are not going to yield ground easily.

In fact, many, like Shoppers Stop and Pantaloons, are unveiling ambitious expansion plans and heading for initial public offering to fund their growth. Shoppers Stop has 16 malls in various Indian cities and is planning to add four more this year while Chennai-based RPG Enterprises already has 343 stores nationwide.

“Leading domestic retailers are becoming more firmly entrenched, increasing their scale of operations, and stabilising their logistics and technology initiatives,” says Gandhok.

“India is crowded with over 12 million mom-and-pop stores, which [make up] the majority of its retail landscape. This group is unlikely to remain quiet as it sees its business getting eroded,” he adds.

According to Rajpal, domestic retailers boast several advantages: Knowledge of the domestic retail and supply markets; low overhead costs; support from the local community; and a good understanding of domestic politics and economics.

“India is not a homogeneous market, and domestic businesses will have a better understanding of what will work and in which areas,” he says. “In India, local market knowledge will differentiate winners from losers.”

“FROM A FOREIGN-DIRECT-INVESTMENT PERSPECTIVE, THE RETAIL
REGULATIONS HAVE INDEED BEEN EASED AND FOR INTERNATIONAL
RETAILERS, THE ANSWER TO THE QUESTION OF WHEN TO ENTER IS
CLEAR: THE TIME IS NOW.”

— JOSH CHERNOFF, GLOBAL HEAD OF RETAIL PRACTICE, AT KEARNEY

Internationally, it is noted that two out of three retailers fail to meet their initial financial targets in the developing countries they enter. This is because of competition from local players, which are increasingly becoming a key threat as they consolidate or create alliances, — like the Bailan group in China, the Comercial Mexicana alliance in Mexico, the Six Sevens and 7th Continent alliance in Russia.

Not that this will stop chains such as Wal-Mart and Tesco from flexing their muscles and parading their deep pockets in India. As it is, saturated home markets, fierce competition and restrictive legislation in western countries are relentlessly pushing their major food retailers into the globalisation mode to focus increasingly on emerging markets.

“Going into emerging markets is an essential element of top retailers’ growth strategies,” says Chernoff. Today, the top five revenue earners among global retailers get on average 33% of their revenues from outside their home markets, compared with 15% of the next 10 retailers, he maintains.

And, the Tescos and Wal-Marts of the world will have their work cut out for them in India, especially on the supply- chain front where the infrastructure is far from adequate. For example, 40% of perishables grown in India rot while being transported due to a lack of refrigerated distribution networks.

Large retailers recognise the importance of creating a market niche for themselves. For instance, in China, where the infrastructure and distribution network are poor, relative to those in the US or Europe, multinationals entering the market have invested in developing the infrastructure and creating their own private distribution network.

“Supply-chain costs for Wal-Mart or Tesco are typically around 10% of the turnover,” projects Chernoff. “As the initial investment is huge, and is in areas like developing transportation systems, warehousing and information systems, these retailers often work with local partners so that they can share the asset or cost.

“The capital investment is around 2% of the turnover; and in the grand scheme of things, the cost of adding two or three new distribution centres in an emerging economy is minuscule for the US$300-billion Wal-Mart, which will be adding 50 million sqf of retail space this year [in India].”

There is then the question of the format combination by which multinational chains will choose to enter India: Hypermarket and discount; hypermarket and supermarket; or supermarket and discount?

The mix varies according to the retailer and region. Carrefour and Tesco, for example, favour a hypermarket- supermarket mix in Eastern Europe, with Carrefour primarily going for the hypermarket-and-discount format in Asia while, in Latin America, Carrefour and Casino both sell through hypermarkets, supermarkets and discount stores.

“Hedging your bets on dual formats isn’t enough to limit risk; changing circumstances may mandate the consideration of additional formats,” says Chernoff. “The key, therefore, is in timing the switch from one format to another.

“Last December, I noticed a large number of dollar stores in Delhi. Dollar stores are among the fastest-growing formats in the US but the concept is a bit different in India. What was interesting was the experimentation with formats. My guess is that only one-third of them will be successful, while the remaining two-thirds will provide a learning platform and stimulate growth.”

 


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