Global

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  • Industry: Retail, Food, Drink & Consumer Goods
  • Type: Business and industry issue
  • Date: 12/14/2012

India’s retail race is on 

India’s retail race is on
Opening retail to foreign investors is a huge opportunity, says Mohit Bahl, a Consumer Markets Partner at KPMG in India. Do they really comprehend the challenge?

To understand why the liberalization of Indian retail has caused such excitement, you need only to look at the numbers: a country of 1.2 billion, 350m of them potential customers. A market that has been estimated at between US$500bn and US$1 trillion. Access for foreign retailers is a great opportunity for multinationals – but on the ground, a more fractured picture emerges.



Liberalization in India is a once in-a-lifetime opportunity for multinationals


Branded goods and main street stores are no strangers to larger cities, but ‘modern’ retail still accounts for no more than 5-7% of the market. Opposition centers on the potential damage to India’s vast network of ‘mom and pop’ stores and lingering resentment about foreign interests ‘taking over’.


A landmark 2011 announcement was humiliatingly reversed after six days as the ruling party failed to build consensus. The issues never went away, despite investment from conglomerates such as Tata and Reliance who have tried different retail business models without finding the requisite scale.


The government’s September 2012 announcement that it will allow 51% foreign direct investment in multi-brand retail (MBR), and full ownership of single brand retail, is calculated to succeed, though it unleashed protests just as frenzied as in 2011, when a furious politician threatened to burn down supermarkets.


It will allow some existing loose alliances to convert to proper joint ventures. However, there remain significant implementational challenges, not least that state governments must give specific permission for MBR projects. Ten have indicated they are likely to offer a green light, but states cannot be controlled from the center and no one is sure whether a change in local leadership could legally reverse those decisions.


States are disparate, and if a significant number turn down MBR, it won’t simplify the supply chain or help likely foreign investors such as Metro and Carrefour scale up. What’s more, 30% of their products must be sourced from “small-scale” suppliers – defined as those with less than US$1m in capex – a requirement that has been criticized as impractical but must be seen in the context of the Indian market, where tastes are so specific that a majority of products have to be locally sourced anyway.


The type of shoppers multinationals will target are likely to react positively to modern retail, and the pricing benefit and sheer scale of SKUs will eventually be great for the consumer. Farmers are likely to gain, too. The emergence of larger intermediaries should keep more cash in rural pockets and reduce shocking inefficiency in the supply chain (some say 40% of food never reaches consumers).


If the opportunity is huge, the cultural change should not be underestimated. Consumers weaned on personal service won’t easily be persuaded to make a weekly supermarket trip or load up on shopping bags. India will forge its own path – and the winners will be those who understand consumers as well as business models.

 

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