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Tesco in India: Will every little help?

[This article appeared in the February 2014 print issue of Retailer, under the headline “Implications of the Tata-Tesco JV“]

India is a civilisation that has borne fruit from thousands of year of international cultural exchange, commerce and investment flowing both inwards and out. It is also one that has suffered from military and as well as economic colonisation over the millennia.

For those reasons, foreign investment into the country is bound to have both vociferous opponents as well as staunch supporters, and this debate is possibly most polarised in the retail sector that touches every Indian’s life daily. Over the last few decades, foreign investment into the retail sector has seen flip-flops from successive governments and political parties across the spectrum, being allowed until the late 1990s, then blocked (by Congress-led UPA), then selectively allowed (by BJP-led NDA, and later by Congress-led UPA). And more recently, with pressures, protests and influences from all sides 2011, 2012 and 2013 have certainly been on/off years during the UPA’s second successive term.

In this time Zara’s joint-venture, set up in 2010, has turned out be one of the most successful and profitable in India. More recently, Ikea announced a €1.5 billion plan for the country, followed by H&M’s US$ 115 million proposal, while Marks & Spencer identified India as its second largest potential market outside the UK. However in October 2013, the world’s largest retailer Wal-Mart decided to call off its joint venture amid investigations of its executives having supported or indulged in corruption and accusations that it had violated foreign investment norms. It decided to acquire Bharti’s stake in the cash-and-carry JV and announced that it would not invest in Bharti’s retail business.

It was soon after, as if to compensate for Wal-Mart’s blow, that India’s Tata Group and British retailer Tesco announced that they would be creating a formal joint venture in India, with Tesco investing US$ 110 million. The Congress-led government went on to quickly approve the proposal, as if to visibly shake off accusations of “policy paralysis”.

Tesco’s investment doesn’t look like much for a country the size of India, especially in the context of Ikea’s ambitious proposal or H&M’s fashion retail business that is possibly less complex than Tesco’s multi-product multi-brand format. However, let’s keep in mind that Tesco is facing tough trading conditions in Europe, took a global write-down of US$3.5 billion last year including its exit from the US market, and merged its Chinese business with retail giant China Resources Enterprise to become a minority partner. In view of all that and the unpredictability of Indian politics, US$ 110 million looks like a reasonable if not disruptive commitment. It also does somewhat limit the downside risk for Tesco if the environment turns FDI-unfriendly after the general elections.

Whenever Tesco expanded into new markets, it has tried to adopt a localised or partner-led approach. In India, since 2007, Tesco has had an arrangement to provide support to Tata’s food and general merchandise retail business. The intent underlying the partnership was clearly to look at a joint retail business when allowed by regulations and not just at back-end operations. The existing structure has provided Tesco with an opportunity to learn about the Indian market and operating environment first-hand while working closely with Tata’s retail team. Tata, in turn, has drawn upon Tesco considerable expertise of operating retail businesses in both developed and emerging markets. At the very least, the FDI inflow from Tesco will deepen this arrangement further, benefiting both partners further.

But there are the inevitable twists in the tale. While the Tesco proposal was in the works, the new Aam Aadmi Party formed a government in surprise victory in Delhi state and announced that it would not allow foreign owned retail businesses in the state of Delhi. This strikes off one of the most lucrative metropolitan markets from the geographic target list at least in the short term. (The central government has pushed back saying that while retail is a state-subject, the decision to allow FDI by the previous Congress government cannot be reversed at will by the current AAP government, but the debate goes on.) BJP-led and BJP ally-led state governments have also indicated their unwillingness to allow foreign retailers into their markets.

So should we even attempt to forecast what Tesco and Tata could do in this environment? I would rather not pre-empt and second-guess the future plans of business executives who are trying to read the intent of politicians who are focussed on elections 4 months in the future! However, whatever the plans, the retailers must comply with the regulations such as they are now and utilise the opportunities that exist. So it is likely that the following scenario will play out.

Tata and Tesco have said that the proposed joint-venture looks at “building on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka”. These are both states where Trent has multiple locations, so a certain critical mass is available. Since current government policy requires the investment to be directed at creating fresh capacity, new stores would also be opened in these states, though the expansion plans look modest, with 3-5 new stores every financial year.

But with the 50 percent investment in back-end also being a regulatory requirement, new procurement, processing and logistics infrastructure which could service stores within these states as well as in other states are is likely to be built. Tesco’s wholesale subsidiary currently supplies merchandise to Star Bazaar stores across states – this relationship is likely to continue as some of Tata’s stores are in states that are not within the FDI ambit. The product mix proposed includes vegetables, fruits, meat, fish, dairy products, tea, coffee, liquor, textiles, footwear, furniture, electronics, jewellery and books.

The norms earlier required FDI proposals to ensure that 30 per cent of product sourcing would be domestic, from small-midsized enterprises. However, in August 2013, the government relaxed this requirement to be applied only at the beginning of the joint-venture operations, and that this requirement would not include fruits and vegetables, an area where Tesco has focussed significant energy. So the immediate focus would be on meeting the domestic sourcing requirements in other categories, and creating a viable business model and scale through an appropriate product mix.

The partners are likely to continue working on improving the performance of the existing Star Bazaar stores which are 40,000-80,000 sq ft in size. However, Tata has also launched a new convenience store format, Star Daily sized at about 2,000 sq ft focussed on fresh foods, groceries and essential items. Retailers with foreign investment are now also permitted to open stores in cities with populations under one million from which they had been prohibited previously, so the new small format can provide significant expansion opportunities and more volume for the back-end operations to reach critical mass quicker.

Would there be a change of name on the store fascia? Unlikely, since Tesco has been operating stores under other brands as well in markets outside the UK and a “Tesco” name appearing on the fascia may not significantly change the consumer’s perception of the store. Other than in lifestyle categories or overtly brand-driven products (such as fashion), most Indian consumers focus on utility, quality, local relevance and price as significantly more important purchase drivers than an international name. In fact, a trusted Indian name like Tata carries as much weight or more weight in many categories than an international brand would. So the stores may carry a joint by-line, but the focus is likely to remain on the existing brand names.

And what of several other retailers who are interested in the Indian market? Will they draw inspiration from Tesco and take their plunge into the market, urged on by the outgoing government eager to demonstrate results during its final months?

Wal-Mart, for one, seems to have returned to the table, having set up a new subsidiary, perhaps preparing the ground for a retail launch with another partner. A European retailer, remaining nameless for now, is being mentioned as being the next proposal in the FDI pipeline.

However, it is likely that most will remain in the wait-and-watch mode until the outcome of the national elections is clear. The real issue is not the regulations themselves as much as the unpredictability of the regulatory environment. Policies are being made, turned around, and twisted over in the name of politics, without a clear thought given to the real impact on the country, the economy and the industry of either the original policy formulation or its reversal.

Until that dust settles down, we should expect no dramatic changes in the near term, no sudden rushes into the market. But then, we could be wrong – policy and politics have taken unexpected twists earlier, and could do so again!

Wal-Mart brakes, Indian JV hits the wall

[This article appeared in Daily News & Analysis (DNA) on 10 October 2013, under the headline “Without Wal-Mart, can Bharti play it alone?”]

A year ago, Wal-Mart had called Bharti its natural retail partner in India. But today the companies have jointly and publicly changed their relationship statuses to “single”, calling off the 6-year old marriage. Bharti will buy out or retire Wal-Mart’s debentures in the 200+ store Easyday retail business, while Wal-Mart in turn will acquire Bharti’s stake in the 20-outlet Bestprice cash-and-carry business.

By some estimates, the split was imminent for perhaps a year or longer, as the pressure rose for the two companies due to multiple factors. Several regulatory changes governing foreign investment in the Indian retail sector made it difficult for Wal-Mart to acquire a stake in the existing retail business that the two partners had set up. Anti-corruption investigations in Wal-Mart’s India business (in addition to Mexico, China and Brazil), as well as questions around the legality of US$ 100 million worth of quasi-equity compulsorily convertible debentures issued to Wal-Mart at a time FDI was not allowed in multi-brand retail businesses brought down even more external scrutiny upon the joint business. And finally, pressure against foreign investment in multi-brand retail of basic goods such as food and grocery, continued to exist not just amongst opposition parties but also parties within the ruling coalition and individuals in the government.

The split means that Wal-Mart can now overtly take complete ownership of the Bestprice business, and drive it as it sees fit. The fragmented retail market and the myriad small businesses in India do potentially provide a large customer base for the cash-and-carry business if Wal-Mart chooses to be more aggressive. However, that may not happen immediately. The business has been coasting for over a year without new openings that were already planned and significant personnel changes have happened from the seniormost levels down. Wal-Mart’s investigations of corruption allegations continue and before committing more resources it will definitely want to strengthen systems so as to not be in violation of Indian and US laws.

On the other hand, if it wishes to now enter the retail business, Wal-Mart would also have to look for a new Indian partner to set up new retail stores in a separate company. Retail is capital-hungry so Wal-Mart would need a cash-rich partner who can accept a junior position in the venture in which Wal-Mart would clearly be the driver financially, strategically and operationally.

At this time Wal-Mart seems to have decided to take a step back and evaluate what the Indian market means to it right now and in the future, what sort of investment – both in financial and management terms – it demands, and what returns the investment will bring. It remains to be seen whether it will choose to grow aggressively, coast up incrementally or, in fact, take the next exit out of the market as it has done in some other countries earlier.

And what of Bharti? Will it be able sustain the retail play without Wal-Mart’s close operational guidance and financial participation, or will it choose sell the Easyday operation to another domestic investor? On its part Bharti has stated an ongoing commitment to the business, and has also hired the former CEO of the joint venture, Raj Jain, as a Group Advisor. A 200-plus store chain is sizeable and credible in India’s fragmented food and grocery market, and is seen by the group as “a strong platform to significantly grow the business”.

However, Bharti’s core telecom business is also capital-intensive and highly competitive, and it will be difficult at this time to sustain high-paced growth in another cash-hungry, thin-margin business such as grocery retail. For now the Group’s best bet would possibly be to consolidate operations, unearth more margin opportunities and take a call at a more opportune time whether to further invest in growth or to treat retail as a non-core business and exit it.

Creating a substantial, profitable retail business is a long-term play in any part of the world. In India, as retailers are discovering, it takes just that extra dose of patience.

The Year That Could Be

The transition between calendar years offers a pause. We can use it to evaluate what passed in the previous year, chalk out our journey for the next one.

The first response of most people to the question “What happened in the Indian retail sector in 2011” would be probably something like this: lots happened, and then – at the end – nothing did!

That is because one theme ran through the entire year, month after month, fuelled by tremendous interest in the mainstream media as well. This was about the change expected, hoped for, in the policy governing foreign direct investment (FDI) into the retail sector. Hearing the debate go back and forth, on one side it seemed as if FDI was going to cure every ill of the Indian economy, and on the other it seemed as if the country was being sold out to neo-colonists.

It’s worth remembering that not too long ago foreigners could invest in retail businesses in India freely. Benetton ran some of the key locations in the network through its joint-venture which subsequently became a 100 per cent owned subsidiary. Littlewoods (UK) set up a 100 per cent owned operation in India during the 1990s before its home market business collapsed, and its Indian operation was bought by the Tata Group to form Westside. And well before all these, one of the early multi-nationals, Bata, had already built a humongous network of stores across the length, breadth and depth of India.

The motivation for the decision to exclude foreigners from this sector may have been political, economic or mixed – that is not as important as the timing.

By the mid-90s India had just started to attract interest as private consumption was just about picking up steam. Several international apparel, sportswear and quick service brands entered the market during this time. Many of these brands started setting up processes and systems that changed the way the supply chain worked. They gained market share, and more importantly mindshare, with young consumers. In this process some of the domestic brands did suffer, some of them irrecoverably. However, with foreign investment suddenly blocked-off, many brands that wanted direct ownership in the business in India turned away. In their opinion the opportunity just wasn’t big enough to take on the hassle of a partner. Some did enter, but with wholesale distribution structures rather than in retail.

During this last decade, the Indian retail landscape has changed dramatically. During the 2000s the economic boom happened and India became “hot” again. So did retail and real estate, as large corporate houses pumped in significant amounts of capital into setting up modern chains to tap into the fattening consumer wallets. Clearly, FDI was going to come up on the agenda again, but not quite at once. Indian companies needed some headroom to grow; and grow they did, partly with indigenous business models and brands, and partly as partners to international brands.

By 2011, there was more of a clear consensus among the Indian businesses that retail could be opened to FDI and must be. Internationally, too, political and economic heavy-weights from the significant western economies pitched for opening up the retail sector in India to foreign investment. Here’s the small public glimpse of the hectic activity that happened internationally and domestically:

  • January: UK pushes for FDI; Indian ministers say the decision would not be rushed but look forward to attracting $250 billion FDI between 2011 and 2015
  • February: some ministers say that the government is close to a decision but the timing is not yet right
  • March: a senior government official notes that FDI is not essential to bring down inflation, while the finance minister reiterates that there is no decision yet
  • May: another senior government official says that FDI is needed to tame inflation
  • July: the prime minister says that the government is working to build consensus; the Committee of Secretaries recommends relaxation in FDI norms
  • August-October: pronouncements progressively indicate a relaxation, but without a definite time-line
  • November: cabinet approves 100 per cent FDI in single brand retail and 51 per cent in multi-brand, but severe political backlash pushes government to reconsider
  • December: murmurs emerge about the delinking of decisions on single brand and multi-brand retail, so that some progress can be made

Such an anticlimax! For many, 2011 was the year that could have been a turning point. Could have been! If you had slept through the year and woken up on New Year’s Eve, would you have found nothing had really changed?

Ah, that’s the thing! I think most people observing the retail business actually slept through the year, because they were just focused on the FDI dream. Those actually engaged in the retail business know that many other things did change, some of which create the foundation for further growth.

The government did push on with the GST (goods and services tax) agenda. While stuck in politics at the moment, we look forward to incremental changes in harmonizing the taxes and tariffs regime, vital for truly unifying the country in the economic sense. On the downside, excise being levied on the retail price of clothing was a blow to retailers.

Growth continued. Indian’s retail giant, Future Group, grew to around 15 million square feet. The other giant, Reliance, announced renewed vigour and focus on the retail business with additions to the management team partnerships with international brands such as Kenneth Cole, Quiksilver and Roxy. Other new partnerships were announced, including significant American food service brands Starbucks (with the Tata Group) and Dunkin’ Donuts (with Jubilant). The British footwear brand Clark’s announced that it was aiming to make India its second-largest source country and among its top-5 markets within 5 years. Marks & Spencer pushed to expand its chain by more than 50 per cent, adding 10 stores to 19, while Walmart said its focus was on building scale rather than trying to squeeze profitability from its US$ 40 million investment so far. For fashion brands, the Rs 500 crores (US$ 100 million) sales threshold seemed more achievable as they used the accelerated pace of growth.

Many in the retail business talk about “the people problem”. Fortunately, some decided to demonstrate positive leadership, reflected in RAI’s announcement of an ambitious skill development plan for 5 million people in next 4-5 years, and industry veteran BS Nagesh announcing the launch of a non-profit venture, TRRAIN.

There was some bad news on the issue of shrinkage: a sponsored study placed India at the top of the list of countries suffering from theft. But the level was reported to be lower than the previous study, so there seemed to be hope on the horizon. The study didn’t say whether consumers and employees had become more honest, better security systems were preventing theft, or whether retailers themselves had become better at counting and managing merchandise over time.

A significant highlight was the e-commerce sector, which has found its way to grow within the existing restrictions and regulations, even as the online population is estimated to have grown to 100 million. Flipkart delighted customers with its service and racked up Rs. 50 crores (US$ 10 million) in sales. Deal sites proliferated and media channels celebrated the advertising budgets. Even offline businesses, notable among them pizza-major Domino’s, found their online mojo; Domino’s reported 10 per cent of its total revenues from online bookings within a year of launching the service.

In all of this the biggest story remains untold, which is why I call it an Invisible Revolution. This revolution is made up of the changes that are happening in the supply chain in the entire country, including investment by private companies in massive, large and small facilities to store, move and process products more efficiently. And in spite of the high costs of capital, suppliers are continuing to look at investing in upgrading their production facilities as well as their systems and processes. While the companies at the front-end will no doubt get a lot of the credit for modernizing India’s retail sector, it would be impossible without the support of the foundation that is being built by their suppliers and service providers.

2011 seems to have ended with a whimper. 2012’s beginning will be tainted by large piles of leftover inventory that needs to be cleared. Inflation seems tamer, but consumers have already tightened their belts, anticipating difficult times. The policy flip-flops and the political debates are sustaining the air of uncertainty. So what does 2012 hold?

Remember, the ancient Mayan calendar stops in December 2012, and no doubt there are many predicting doomsday! However, there are several others that see this as a possibility of rejuvenation, renewal.

Hope and fear are both fuel for taking action. Investment cycles are caused by an imbalance of one over the other.

In 2012, we’ll probably continue to see a mix of both. I recommend that we don’t take an overdose of any one of them. Even if you think 2011 was “the year that could have been”, I suggest still treating 2012 as “the year that could be”.

Here’s wishing you a successful New Year!

FDI in Retail: More heat than light

(This piece appeared in the Financial Express on November 26, 2011.)

The debate on allowing more foreign investment in retail reminds me of an incandescent bulb: producing more heat than light. With a variety of agendas at play, the heat has been generated by both sides, for and against foreign investment in retail. Conflicting views have emerged not just outside but from within the government and the civil services as well.

Much time has been spent, multiple studies and consultations carried out, even as behind-the-scenes negotiations have gone on.

We can now all let out our collective breaths. The Indian Cabinet has, with some caveats, approved foreign investment up to 100% in single-brand retail operations and up to 51% in multi-brand businesses.

However, the Cabinet “yes” to 51% foreign investment in multibrand retail and 100% in single brand retail doesn’t quite mean an all-clear to accelerated development of modern retail in the country. The debate is not really over—how can it be when it remains still alive and kicking in some of the most consolidated markets in the West? The states retain the power to allow or disallow foreign-owned retail businesses from operating within their boundaries, and local and regional political parties would certainly have an impact on retailers’ expansion strategies. It also remains to be seen whether this will only affect new stores, or affect investment into existing businesses, too.

Opposition to the expansion of Big Retail is not unique to India. There are enough places within the US where the American giant Walmart has faced opposition, not just in small towns but including large cities such as Boston. Similarly, Tesco has been opposed in several locations within the UK. In fact, there was a huge uproar in the UK in the late-1990s when Walmart entered the country with its acquisition of Asda. The details of such opposition vary from location to location, but the canvas of fears is similar: predatory pricing by large retailers, depressed wages, net loss of jobs in the medium to long term with closure of local businesses, as well as low sensitivity to local social issues when operational and financial decisions are driven from distant headquarters.

Though India is labelled a slow-coach when compared to China, it is worth remembering that China took over 12 years to liberalise its FDI regime, and in stages with reversals as well. It first allowed foreign direct investment in retail in 1992 at 26%, took another 10 years to raise the limit to 49%, and allowed full foreign ownership in 2004, but only in certain cities. It even revoked some previously granted approvals, to reduce the foreign retailers’ footprint.

Anyway, the “policy flywheel” in India has finally moved and is now rolling. Certainly there will be winners and losers in its path.

The losers will include simple intermediaries and low-value wholesalers who have a diminishing role in a better-connected economy. Large suppliers, including multinationals, will gradually find power slipping from their hands. However, the fact is that most of them would anyway be losing in absolute or relative terms to the large Indian retailers over the course of the next few years; it would be naive, even dishonest, to suggest otherwise. And I suspect also that landlords who may be rejoicing the FDI decision could be tearing their hair out when they sit down to negotiate rents with the big boys.

In the other corner, the beneficiaries obviously include the foreign retailers themselves. With a direct relationship to the consumer, retail operations are the most economically valuable link in a supply chain. Foreign retailers can now have access to this with a controlling stake in one of the fastest growing markets.

The second set of winners is the large Indian retailers. In a capital-hungry business, large Indian retailers can use foreign equity and cheaper foreign debt to reduce high-interest domestic debt, and infuse more funds into growing the store footprint. For some, this also allows a potential exit from the business, whether immediate (for instance from the current 51:49 single-brand ventures) or in the future.

There would be winners among suppliers as well, including packaged and processed foods for which modern retail is a great platform to reach the “income-rich, time-poor” urban consumers, technology companies and service providers including the larger logistics companies, as well as foreign suppliers who would benefit from the trust that they enjoy with the international retailers in other markets.

The government can certainly benefit in terms of indirect and direct tax collection, from these more structured, “on-the-books” businesses.

And the consumer would be at the receiving end of a much better product choice and better shopping environments.

Where India as a whole can potentially derive the biggest benefit from foreign retailers is in developing agricultural practices and supply chains that comply with global requirements. If channelled well, this can create tremendous export possibilities (‘agricultural produce outsourcing’), and help to propel rural incomes upwards, creating a wider economic impact.

However, I think the critical things that have been debated most hotly will also be the slowest to be impacted: foreign retailers contributing to bringing prices down, and on the other hand, potentially damaging local competitors.

If the efficiency is simply a matter of scale, and if building up scale is simply a function of having deeper pockets from which to invest, it is obvious that the largest global retailers will squeeze their smaller Indian counterparts out of business, one way or the other. However, retail is not a global business or even a ‘national’ business: it is an intensely local business. Sheer financial muscle can be used to bulldoze competitors, but the consumer chooses to shop at a particular retailer for several reasons, many of which are not influenced by the size of the retailer’s balance sheet. So, local retailers have more than a fighting chance. Walmart, Carrefour and Tesco are the only three foreign retailers in China’s top-10, although two of them have been there for more than 15 years.

The growth of modern retail is an outcome of the development of the economy and a better supply chain, and a working population that is seeking food in more convenient and safe forms; it doesn’t necessarily drive supply chain improvements itself. Indeed, in India, during the last decade, modern retailers have deployed money and management more on opening stores in a drive to capture market share, than actually in supply chain improvements and operational efficiencies.

However, without investments in the supply chain, neither can the quality of products be significantly improved nor their cost significantly reduced. The new FDI policy partly addresses this issue, as it requires a minimum investment of $50 million in the ‘back-end, which cannot include land, rentals or front-end storage. While the final notification should be clearer on the exact implications, for now one can assume that this investment is envisioned in the storage, processing and transportation infrastructure. However, the impact this can have on a $450 billion retail market will be too small to be immediately meaningful.

Clearly, FDI in retail is not a panacea for growth and efficiency. There is much the government itself still needs to do.

The modernisation of retail doesn’t just lead to consolidation of sales turnover, but also enormous concentration of economic power. Therefore, a tilt towards modern retail must be accompanied by the government taking on the active role of a competition oversight body that can maintain an environment of fair competition. So far, the government has played this role mainly in consolidated industries; retail will require it to play this role in a fragmented market as well, and between buyers and suppliers also rather than only between direct competitors.

We also cannot run 21st century supply chains on dirt roads, with unpowered storage and a poorly educated workforce. The benefits of FDI in retail will remain largely unrealised for the nation overall if there is no simultaneous investment by the government in three key areas: transport infrastructure, electricity and education. The Indian government must be a ‘co-investor’ and active partner in developing and maintaining these aspects much more aggressively.

Lastly, several other regulatory changes are needed to unfetter domestic businesses, too. These include, among others, land and real estate reforms so that we are not constantly living with a mindset of scarcity and ridiculous real estate prices, rationalisation of tax structures, and simplifying the certifications and approvals needed to run business on a day-to-day basis.

Unless these aspects of governance are managed actively and consciously, Indian businesses — small or large — will not be completely free to grow and to complete effectively, and FDI could well turn out to be a Faustian bargain for India.

A Thousand Miles

The last three years have been a roller coaster ride for food & grocery modern retail in India.

Progressive Grocer’s India edition was launched in September 2007, during what was an excellent series of years for the modern retail trade in the country.

It was a year after the launch of Reliance Fresh, and a few months after the acquisition of Trinethra’s chain of 170 stores by the traditionally conservative Aditya Birla Group. Spencer’s announced its plans to raise capital for expansion, while Food Bazaar together with its value-format non-food twin Big Bazaar already accounted for more than half the Future Group’s sales.

Other than the established corporate groups, new entrants such as Wadhawan were also well into growth through mergers and acquisitions, including their purchase of Sangam, Hindustan Unilever’s experiment at retailing directly to consumers, Sabka Bazaar and The Home Store.

The four largest foreign retailers were also making their presence felt through Walmart’s announcement of a joint-venture with Bharti in August, Tesco’s and Carrefour’s intensive investigations of the market and negotiations with potential partners, and Metro’s announcement of its planned growth to 100 outlets.

The modern retail engine seemed to be chugging along strongly. But there were also spots of trouble in paradise.

Protests against the opening of corporate chain stores were seen in a few states. In some cases state administrations even formally stepped in to ask for closure of corporate chains to avoid civic trouble, and it looked as if the lights were going out even before the party had really started!

Along with the battle between modern and traditional, both sides of the debate on foreign direct investment (FDI) into the Indian retail sector were also ramping up their arguments. There was vocal opposition from emerging large Indian retailers, as well as the small traders group, while investors and some of the prominent retailers championed the cause of foreign investment.

In both debates, international examples of the damage wrought by large or foreign retailers to local economies were quoted by those opposed to corporate retailers. And in both, the developmental aspects of modern retail were quoted by proponents of modern retail and FDI.

At Third Eyesight, in early 2007 we had carried out a study (“From Ripples to Waves”) on the increasing impact of modern retail on the supply chain. Amongst the study’s respondents, both retailers and suppliers had favourable things to say about the growth of modern retail and its impact on the supply chains for various products. There was not just talk of efficiency with fewer layers of transactions and lower costs, but also of effectiveness, with suppliers reporting 10-25% higher per square foot sales in modern retail stores as compared to their displays in traditional independent stores.

After years of resisting the impending changes to their ordering and servicing structures, major Indian FMCG and food brands became busy setting up or strengthening teams focussed on the modern trade or ‘organised’ corporate customers.

The market was rich with format experimentation for food and general merchandise retail, typically between 1,000 sq ft and 10,000 sq ft, but also with a gradual growing emphasis on 20,000-80,000 sq ft supermarkets and hypermarkets.

Literally hundreds of food brands from other countries actively sought to tap into the growing Indian market, and modern retailers offered them a familiar environment and a well-managed platform for launch.

At the same time, plenty of respondents also said that they had not made any significant changes to their business. Either inertia or fear of channel conflict was preventing them from pushing ahead with newer business models.

In short, there was no dearth of action and contradiction, no matter where you looked.

However, towards the end of 2007 and beginning of 2008, we had a sense of foreboding. With the rush to expand the store network to get first to some yet-invisible finish line, both property acquisition and human resource costs were driven up by a feeling of a shortage in both. I recall writing a column around that time, urging retailers to look at store productivity as their first priority (See: Priority #1: Store Productivity, Same Store Growth).

By the middle of 2008 the crisis was evident. There was a lot of square footage, much of it in the wrong places. There were issues with the supply chain for managing fresh and perishables, those very products that drive frequent footfall into a food store. More importantly, the global financial storm had started gathering strength, reducing liquidity in the market and making investors and lenders look more closely at existing business models.

The spectacular meltdown of Subhiksha in 2008, and the more gradual but equally deep impact on other businesses was visible. And worrying. Players as disparate as Reliance, with its ambitious plans to grow into a Rs. 300 billion retail juggernaut, and the Shopper’s Stop premium format Hypercity seem to take a break to rethink.

2008 and 2009 were years that I am sure many retailers would like to forget, but they were also very valuable. Some people have compared these years to the churning of the ocean (manthan) by the devas and the asuras in Indian mythology, with the deadly poison halahal coming to the surface before the divine nectar amrit could be reached.

In these two years, we have seen stores closed, formats changed, and organisations made slimmer. Store staff have discovered how to live with small changes like higher ambient air-conditioning temperatures, and are learning the more important science of higher transaction values, even with leaner inventories. Management teams are becoming more accustomed to looking at retail metrics other than only sales growth that could be achieved from new square footage. Vendors are finding newer ways to make their brands more relevant to consumers and to the retailers.

More importantly, these years have also underlined the importance of India as a growth market to non-Indian companies.

2010 so far seems a far happier year. Income and GDP growth figures look much healthier. Real estate inventories in malls that were not released in 2007-2009 are coming on the market, many at terms that are more favourable than earlier. Retailers’ financial results look healthier.

There could always be the temptation to rush headlong into growth again. But I don’t think food retailers or their vendors should drop their guard yet.

The coming months and years need significant sharpening up of customer insight, merchandise and inventory planning capabilities and supply chains. Operational assessments, analytics, organisational capability building, are all tools which will need to be looked at closely.

We are at the cusp of the next growth curve, as the population grows and matures, and the market become more sophisticated.

Though the large-small, local-foreign debate isn’t closed yet, the much-awaited approval from the government to allow foreign investment into multi-brand retail businesses may be around the corner.

Even if FDI doesn’t happen immediately, the majors are already in or preparing to enter and ride the consumption growth that will logically happen. In addition to its support to Bharti’s Easyday chain, Walmart has launched its cash and carry operation, Bestprice. Carrefour reportedly is looking to open its first Indian (wholesale) outlet by November in New Delhi on its own, even as rumours of a partnership with the Future Group fly thick and fast. And Tesco is steadily steaming ahead with the Tata group.

And practically every month we are seeing new products and even new brands being launched by Indian and non-Indian companies.

An old saying goes: the journey of a thousand miles begins with a single step.

From the tumultuous events of the last three years, it seems that the Indian food retail sector must have travelled at least a few hundred miles already. In one sense it has. Many of the developments that we’ve seen in three years would have taken at least a couple of decades in the more mature markets.

However, in another sense, the food and grocery modern retail sector in India has only taken the first few steps, with much to be accomplished still. The sector remains fragmented, and wide swathes of the market are yet to be penetrated – not just by modern trade, but even by brands that already supply traditional retail. The blend of players and business models, not to forget the spicy regional mix of different market segments, promises valuable lessons not only for those in India but potentially for other markets in the world.

There are very big questions seeking answers. How to improve agricultural productivity so that food security is ensured. How to save the abundant harvests rather than letting them rot in unprotected storage dumps. How to ensure adequate calories and nutrition get delivered not just to the wealthy and the middle class, but also to the poorest in the country.

On the retail side, the Indian versions of Walmart, Carrefour and Tesco are possibly still in the making, and may yet surprise us with their origins and growth stories. And e-commerce is a work-in-progress that may be the dark horse, or forever the black sheep.

I think the big stories are yet to unfold, and the unfolding will be exciting, whether we are just watching or actively participating in the modernisation of the Indian food retail business.

Retreating Retailers, Crumbling BRICs?

Trade, of course, has been global for millennia, so it seemed hardly unusual for retailers in the US, and in Europe to begin sourcing from distant countries in Asia where certain items were more readily available or significantly cheaper. Imports have also been encouraged as a political and developmental vehicle to aid friendly countries.

So, on the sourcing-end, large retailers have been comfortably operating beyond international borders for several decades even while the stores-end of their business was entirely domestic.

For most large modern retailers however, after the post-Second World War economic boom their core markets have grown relatively slowly (and rather predictably). While the sheer size of the US market kept American retailers busy domestically, planning and legal restrictions in terms of store size, locations, market share etc. limited manoeuvrability for retailers in Europe.

Among the current major retailers, the early retail explorer, Carrefour set out into neighbouring Spain in 1973 and then into distant Brazil in 1975. Soon after, Dutch retailer Ahold landed in the USA in 1977.

However, it took the opening up of East European economies in the 1990s to really prime the pump for growth of international retail. Suddenly, many more millions of consumers became available to European retailers close to their existing markets – both geographically and culturally – and western European retailers jumped at the opportunity.

At the same time, China seemed to have become steadily more open over the previous decade and in the early-1990s India looked accessible again. Some of the Latin American markets were also steaming up.

And, obviously, the prospect of 3-4 billion new consumers in emerging or developing markets was clearly not going to be ignored. In 2001, post dot-com, another inspiring idea hit the business world that was desperately looking for hope – the golden BRICs – the four countries focussed upon by Goldman Sachs as the biggest economies of the future: Brazil, Russia, India and China.

As incomes grew in these “developing” or “emerging markets”, the hypothesis was that consumer would want products and services similar to those in the more developed markets, creating the opportunity for retailers to cross borders. In the last 15 years or so, retail internationalization (and gradually “globalization”) has become an increasingly acceptable theme – in conceptual thinking, in retail boardrooms, in white papers, and finally in trade and mainstream media. The world has witnessed a network of retail subsidiaries, joint-ventures, franchise and other relationships spreading across continents.

Certainly, through the 1990s and 2000s, growing tele-connectivity, fashion, portable TV programming concepts, movies and print media seemed to give the impression that consumers around the world are becoming more similar, and can be reached by common formats and brands. Led by the FMCG companies on the one hand and fashion brands on the other, insights, concepts, products, formats, advertising campaigns are routinely extended across countries. (Unilever’s TV commercial for Close-Up in West Asia is a great example of this – an Anglo-Dutch company’s international brand of toothpaste, Indian models in Thailand, an Arabic voiceover and a Hindi song (“Paas Aao” – “Come Closer”) by Sona Mohapatra – surely you don’t get more global than that?)

But wait! Is the picture really as clear as that?

In 2006 Wal-Mart pulled the plug on its €2 billion German business that was a combination of German chains that it had acquired. In Russia it still has only a development presence since 2005, though it is reported to be looking at opening 10-15 stores in the following three years. According to Newsweek, Wal-Mart’s 13 year old Chinese business – even after an acquisition that is still to be approved – will have fewer stores than it would have opened in the US just in 2009. In the past it has struggled in Japan and Brazil.

In June 2009, Carrefour opened its first 86,000 sq. ft. hypermarket in Moscow, and a second one soon after that. In September, the company affirmed that the BRIC markets were its highest priority for international growth. However, in October it announced that it was pulling out of Russia. Within 4 months of the first store, Russia has gone from a market with “outstanding long term potential” to being a market to exit. In previous years the company has moved out of Japan, South Korea and Mexico. The Economist reports that significant Carrefour’s shareholders are forcing it to look at selling its Chinese business as well – obviously a move that would be politically very sensitive in China. The same shareholders are also reported to be urging a sale of its Latin American business. For now, the official statement from the company maintains an ongoing interest in all these markets.

Ikea has decided to freeze further investments in Russia, and has decided not to enter India until the Indian government allows 100 per cent foreign ownership of retail operations. It entered China in 1998, and has only 7 stores so far.

Even as Carrefour and Ikea announce plans to pull out of Russia, Russian retailers have pulled out from Ukraine, while Metro is cautious in its outlook about that country. French retailer Auchan has opened three stores in Ukraine since 2007, while the German retailer Rewe has opened all of nine since 2000.

Could the juggernaut of global retail be slowing, stopping or even – shock! – reversing? Are the BRICs and emerging markets falling out of favour?

Before we jump to conclusions, as they say in the television world: please don’t adjust your sets. As the French author Karr wrote: “plus ça change, plus c’est la même chose” (the more things change, the more they are the same).

It is a fact that, no matter how international or global a company becomes, when it gets to the business of retail, it needs to be intensely local. While elements of the business – concepts, products, people, money – can travel across borders, it is extremely difficult to take across an intact retail mix and expect to address a significant portion of the population in the new country. And given how important scale is to mass retailers, lack of localization would be a significant hurdle.

A company sourcing products from a developing country can fully expect his suppliers to adapt to his practices and customs. On the other hand, the same company entering that country as a retailer needs to do exactly that – adapt to the customers – rather than expecting them to fall in line because the “best practice” manual dictates certain processes or because central merchandising found some deals that were great for the home market which are totally irrelevant in the new market.

However, there are encouraging signs that retailers looking to grow internationally understand this more and more. Tesco, for one, has been following a localized approach in Thailand and South Korea, while Carrefour, Ikea, Wal-Mart have all steadily modified their approach in China and other markets. Wal-Mart’s cautious steps in India, including the stores opened by its joint-venture partner Bharti, are a complete contrast to the aggressive “plans” that were being reported in the press 2006-onwards. Recently Wal-Mart’s international chief C. Douglas McMillon was quoted by BusinessWeek as saying “we know you can’t run the world from one place”.

For the larger international retailers this means that, the benefits from international scale would be limited by the amount of localization that they carry out in their operations. For smaller and local competitors that are based in an emerging market this means a fighting chance to remain in business and even remain market leaders.

Lastly, as far as all the dark clouds gathered over international retailing and all the retreats being announced – stay tuned – this weather will change, too.

The Politics of Organized Retail

Recently there was some discussion online about the so-called “politics of organized retailing” in India (on Retailwire).

I believe these are no different from the politics of anything else. There are interest-groups and pressure-groups with different objectives, who pull-and-push economic and regulatory policy with varying degrees of success. In that, India is no different from any other country, whether the US or China.

After China began opening up its economy in 1979, it took more than a decade for it to begin allowing foreign retailers to enter the market, and it was not before domestic retailers were given time to scale up.

Even in the US of current times, there are places where the community would be up in arms at the slightest whiff of a Wal-Mart store proposal.

Even in the UK, the Competition Commission is preparing a report on how retail consolidation is affecting the sector and the consumer.

So the answer to the question about “the politics of organized retail” is: yes, there is politics involved, and if you are an interested party then there is no option but to be part of the politics.

While on the issue about opportunities in the Indian market, I’m reminded of a couple of conversations, one with a client and another with an associate, who compared the Indian market to the US and the UK, respectively, in the 1970s.

My response to them, and to the question above, is: yes, there is tremendous opportunity in India now, as there was in those markets in the 1970s. Yes, in parts the market, the distribution structure etc. may remind you of the US and the UK in the 1970s. But to assume that it will play out the same way would be dangerous.

There are many other cultural, economic and social factors, apart from the infrastructure, to take into account.

My advice to international brands and retailers is as always: approach India as India in the 2008, don’t approach it as the US in the 1970s. Or as China, Brazil or Mexico.

Some pointers that may be interesting: “Slicing the Market” and other articles available elsewhere on the Third Eyesight website.

Retail models are not global, and global certainly not inevitable

Many pundits have passed judgement on the inevitability of ‘organised retail’. Yet, around the world, independents continue to thrive.

One may think that at least in difficult economic phases – such as the one facing economies around the world right now – large retailers are better equipped to survive. Yet, often it is the flexibility of the owner-driven small business that rides out the trough. Service levels and personalisation – that are increasingly critical in an impersonal world – are often far better delivered by a small retailer. [See “Playing with the Big Boys”]

And when it comes to business across borders, I can’t think of any retailer that is truly global. Most retailers that have successfully run international businesses in multiple countries (Carrefour, increasingly Tesco and others) have had to localise significantly – often sacrificing scale to achieve localisation.

A well-written article by Paul Chapman in Mint (February 18, 2007) raises some of these points using India as an illustration. Worth a read: The Rocky Route to Modern Retail.

Celebrating Entrepreneurship

Creating an entrepreneurial ecosystem is absolutely critical to a healthy and vigorous society and economy.

Creating a “democratic” entrepreneurial ecosystem is even more critical to sustaining that health. A democratic entrepreneurial system is like all other democracies – inclusive and widespread – and vital to improving the baseline quality of life.

As we’ve pointed out elsewhere, retailing is not just a fundamentally entrepreneurial business, it also offers up a platform for the birth and growth of other entrepreneurial businesses.

Obviously, big retailers offer a change for companies to scale up faster, once they meet the performance criteria set by the retailers.

The interesting thing is that small retailers offer an even more interesting growth opportunity since, as their own business grows, they grow their supply partners as well.

Countless companies and brands have been launched on the back of the likes of Wal-Mart, Carrefour, Tesco, Marks & Spencer, and in India retailers such as Pantaloon’s and Spencer’s (and even some of the early modern retailers in India that don’t exist anymore).

In view of this, it is wonderful to see 2-9 February 2008 being celebrated as Entrepreneurship Week (on the National Entrepreneurship Network’s website) and also its powerfully worded pledge.