India’s retail revolution begins

Special Correspondent Raj Menon, Mumbai (From TDCTrade.com)

 
With long-term experience in modern supply chains and provisioning, Hong Kong firms in the food and related products sectors – the likes of Heng Tai Consumables and ABS Procurement Co – are sure to be viewing the changing Indian retail scene with more than passing curiosity. Others, like ACM China, the greenhouse specialist, are already getting involved.

Recent news tells a fascinating story: Reliance Retail is to invest US$5.5 billion by 2010-2011, to create 100 million sq ft of retail space. Bharti-Wal-Mart is to invest US$2.5 billion by 2015, to create 10 million sq ft of retail space. Future Group (Pantaloon Retail) will invest US$260 million by 2008, to increase its retail space to 10 million sq ft. The list goes on.

Subhiksha, the US$73 million discount store will set up 1,000 stores in India by the year end, while Metro AG is investing US$400 million over the next three years to set up some 18 stores in the country.

Other giants of the mass provisioning industry are not out of the picture either. The ninth largest food retailer, France’s US$50 billion Auchan, is eyeing the Indian retail market, while Carrefour is in talks for tie-ups with some of the top Indian industrialists.

So also venture the UK’s Tesco and Home Retail – the latter signing an MoU with Shoppers’ Stop and HyperCity, the retail ventures of the K Raheja group to develop Argos Retail Format Stores.

Local groups are shaping up as well, with the Aditya Birla Group and Tata Group among those also finalising new and exciting retail plans.

These retailers have big ideas to speed up the revolution in the US$300 billion Indian retail industry. The sector is expected to increase to US$427 billion by 2010 and to US$637 billion by 2015. Organised retailing, which up to now has accounted for just 3% of the total retail market, will increase its share to up to 18% by 2015.

According to a study by ICICI Property Services-Technopak Advisors, most of the investments being planned are in the supermarket/hypermarket format, where food and other groceries with related household goods will attract maximum investment. Food and other groceries account for 70% of total retail sales in India.

The Indian food and grocery retail market is estimated at US$168 billion, of which foodgrains and unprocessed fruits and vegetables account for half of total food and grocery sales. Given the predominance of the sector, it is understandable that most international and domestic retailers are making a beeline for it. Apparel, home furnishings, furniture, electronics are other product segments of interest, if slightly less lucrative.

With almost all retailers moving into these segments, the need for differentiation, quality enhancement and value for money are all becoming increasingly pressing. Retailers are moving fast to set up supply chain infrastructure and lines with vendors, to spruce up sourcing operations.

Retailers estimate that total investment in supply chain infrastructure is to the tune of US$500 million. Backend operations are taking front seat. Until now, volumes in the organised retail sector were small, which did not require too much investment in supply chain management.

However, every big retailer today is investing in this crucial operation to control costs, improve efficiency, cut down inventories and source quality products.

Another reason for this is the entry of the international retail giant Wal-Mart, through a joint venture with Bharti Group, whereby Wal-Mart will manage the back end operation, and Bharti the front end.

Wal-Mart has stated that it would replicate its global supply chain model in India, while taking into account the unique features of the Indian market. Also, emphasis would be on local sourcing of goods, as far as possible. Wal-Mart officials, after a study of the Indian retail scene, are confident they can offer better prices to Indian consumers.

This has got other retailers moving too, to enhance efficiencies of their own supply chains and bring down costs, while offering consumers the lowest possible prices.

It is well known that Wal-Mart operates on volumes, and can buy the entire production of its vendor plants, thus lowering costs and passing on the benefits to consumers.

Wal-Mart, through its international operations is also in a position to source globally. The company is set to roll out its first set of stores by the first quarter of 2008, in cities that have a population of one million. The formats would be hypermarkets, supermarkets and also partnerships with some existing local stores through franchise.

Food and grocery is expected to account for up to 40% of the venture’s turnover, and the retailer would offer lower pricing on home products, clothing and kitchenware, which are globally sourced.

Wal-Mart claims it will take 35% of the Indian retail market by 2015.

In response to this, India’s Future Group is sprucing up its vendor network. The company has identified up to 40 anchor vendors, each with turnovers of US$45 million, to achieve economies of scale.

The group is keen to ensure that its smaller vendors are able to reach turnovers of around US$1 million and a growth rate of 40% annually, to be able to pass on the benefits of scales. The company is also working towards bringing its 1,200 vendors online, like Wal-Mart.

Reliance Retail looks at the small picture

Reliance Retail has announced plans to set up one store for every 3,000 families within a radius of 2 km across all locations by 2011. The company is competing directly with the large number of traditional local provision stores. Reliance Retail is either going to set up new stores in the identified areas or take over existing stores. The company has already done that in Mumbai and other cities.

Of the four million sq ft of retail space to be created under the “Reliance Fresh” brand (for groceries), one million will be through acquisitions. The retailer is also moving into laundry, personal care and apparel product lines, in which it plans to launch private labels.

Reliance is planning to roll out its specialty format stores this year, beginning with consumer durables, for which it has struck sourcing deals with companies in Hong Kong, the Chinese mainland and with Videocon in India.

To strengthen its links with farmers, the company is setting up integrated agri-retail business centres, which include three processing and distribution centres, 51 retail outlets for farmers and 75 rural business hubs, all with an investment of US$445 million.

Many companies, looking at the retail boom in food and grocery, are setting up ventures to help retailers source these goods.

Field Fresh, a joint venture between Bharti Group and NM Rothschild, is providing premium quality fresh produce to markets worldwide, has over 5,000 acres of land under cultivation all over the country producing many varieties of fruits and vegetables and is planning to double land under cultivation by the end of 2007.

The company is to supply fresh produce to the Bharti-Wal-Mart venture. To ensure best qualities and varieties, Field Fresh has engaged ACM China, an industry leader in building greenhouses, to set up state-of-the-art glass-based greenhouses at the FieldFresh Agri Centre of Excellence in the Punjab.

Field Fresh is also planning investments to the tune of US$220 million in the backend, including investments in cold chains and warehouses.

The Indian fresh produce marketing, till now controlled by state-owned Agriculture Produce Marketing Cooperatives (APMCs), is also changing with reforms in the APMC Act in many states. This has opened up the space for private players, and all major retailers are planning to set up private ‘mandis’ (marketplaces/bazaars), from where they can directly source their requirements of fresh foods.

Bharti’s Field Fresh will enter this segment within the next three months. A number of companies are also venturing into this segment to service the backend needs of retailers. For instance, DCM Shriram Consolidated Ltd (DSCL) finds that sourcing fresh foods for major retailers is big business and is in the process of tying up with them to source fruits and vegetables from farmers and supply to the retail chains.

DSCL is already doing this for Future Group’s Food Bazaar, south based Subhiksha and RPG’s Spencer. The new tie-ups would help the company to operate on economies of scale, and to operate all over the country.

Importers have a ramshackle infrastructure

Almost all retailers in the food and other groceries segment have a section for imported fresh fruits and vegetables from Hong Kong, the Chinese mainland and some European countries. These are normally costlier than the Indian goods, and quality is almost always never good, because of lack of warehousing infrastructure on landing in India.

Being novelty products, however, these are finding a place in Indian kitchens. Realising this, Indian companies, through their contract manufacturing, have begun growing the same in Indian farms.

Brands such as Godrej Nature’s Basket are planning to begin global sourcing directly, to ensure better quality, product mix, handling, and continuity in supplies. Subhiksha, which is expanding its retail outlets very rapidly, has a separate team that continuously looks for best prices in groceries across the world. Reliance Retail has stated that it stocks over 100 international brands, which are not available in other formats.

The retail boom is creating a flurry in the other product segments too – apparel, furnishings and furniture, electronics. While global sourcing in these segments is only 5% of total merchandise, it is growing at a rate of 50% per annum.

According to Devangshu Dutta, a retail consultant with Third Eyesight: “most of the international retailers would prefer to have localised sourcing as quality, inventory, cost is better managed. However, there is the issue of whether Indian manufacturers can supply the volumes that Wal-Mart, Reliance Retail, and others will demand over the next few years.”

Almost all retailers, big and small, have some percentage of goods which are sourced mainly from Hong Kong, the Chinese mainland, Thailand, Malaysia, Indonesia, the Middle East and Europe.

Future Group (formerly Pantaloon) has recently set up a sourcing office in Hong Kong as well as on the Chinese mainland. The main items sourced are apparel, fashion accessories, furniture and furnishings and electronics.

Meanwhile, almost every Indian apparel exporter has begun supplying to domestic retailers too. And most of these exporters – Orient Craft, Texport Syndicate, Leela Lace, Kaytee Corporation and Creative Outerwear – are set to increase their production for domestic supplies.

Of the non-food domestic products stocked by larger retailers, a lot of furniture is also being sourced internationally, again from China, Malaysia and Indonesia. Specialty stores such as Durian in India source almost 90% of their merchandise internationally.

Also, some Italian companies have entered the Indian market, and are retailing from some of the big retail chains such as Shoppers’ Stop. Tata Trent Ltd, which has set up Westside chain stores, sources a large part of its kitchenware and fashion accessories from Hong Kong and the Chinese mainland.

Industry circles feel as domestic retailers grow in size, more and more chains will look at the option of setting up overseas global sourcing hubs, mainly in Hong Kong and some selected centres on the Chinese mainland.

However, global sourcing would still remain small in Indian retail due to continued the high import duties in India. “The sourcing happening today is mainly to bring in variety that is not available within the country,” says Dutta.