India's Store Wars E-Book

Geoff Hiscock

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 324

Veröffentlichungsjahr: 2012

Beschreibung

As India's middle class grows and disposable incomes rise, "modern" retail is becoming the next hot sector of the Indian economy. Hundreds of millions of new consumers will join this retail revolution, venturing into supermarkets, department stores and air-conditioned shopping malls for the first time. But instead of just window shopping, many of them will be serious buyers with money to spend. To cater for their needs, established players in the modern retail sector such as Biyani, Raheja and Goenka are being joined by the big names of Indian business - Reliance, Birla, Bharti, Tata etc - who plan to spend billions over the next few years rolling out supermarkets, big-box outlets and specialty stores. At the same time, property developers are getting on with the "malling" of India, and looking for high profile anchor tenants to lure customers. On the sidelines of this Indian retail revolution are big overseas players such as Wal-Mart, which already has a tie-up with Bharti to provide much-needed "back office" support. But what Wal-Mart really wants is the right to set up its own stores in India. The same goes for Tesco, Carrefour, Metro and other international players. While the macro outlook appears bright, the problems are astronomical for India retail industry. There is no reliable cold chain, transport logistics are appalling, there is a huge lack of managerial talent, there is no consistency for quality and quantity of supply, there is political opposition from groups such as market middlemen, the mom and pop "kirana" corner stores have to be catered for, as do the farmers who grow the produce that is integral to a successful retail revolution. How well will these disparate players cope with the various pressures of a dynamic and fast-moving industry?

Leseprobe

Contents

Acknowledgements

Introduction

Chapter 1 The Golden Bird

Birth of a new bazaar

Momentous challenges

Rural role

Different outlook

Chapter 2 What Do Consumers Want?

90 billion transactions

Big business

Class structure

Chapter 3 The Incumbents: Biyani, Raheja, Goenka

Big aspirations

Retail maverick

Consumer finance

A share of every rupee

Great rival

RPG and Spencer’s Retail

Chapter 4 Newcomers: Reliance the Goliath

Aiming high

Multiple formats

Franchise offer

Vanishing margins

Political fallout

Chapter 5 Newcomers: Bharti’s Way with Wal-Mart

The next big focus

Brooding presence

Wal-Mart’s way

Fields of green

Chapter 6 Old houses, New Ambitions: Tata and Birla

International profile

Potential successor

Logistics entry

More, please

Job creator

Chapter 7 Shock of The New: Muscling Up in The Regions

Bastion of tradition

Expansion time

Step-by-step growth

Global example

Cheap and cheerful

No franchising

Not the end game

Chapter 8 Meet You at the Mall

Heading for a fall

Critical success factor

Reality gap

Setting the standard

Finding a theme

Chapter 9 The Rural Scene: Is There Life Beyond The Metros?

Urban myths?

Defining poverty

Hariyali Kisaan Bazaar

Harvard case study

The e-Choupal story

Project Shakti

Godrej Aadhaar

Conditions ripe

Chapter 10 Supply Chain Dilemma: Horn Please, Ok?

Golden Quadrilateral

Risks on the road

More upgrades

Food to go

Focus on supply

Channel masters

Reaching the poor

Outsourcing role

Chapter 11 The Search For Talent

Hard to find

Passionate people

Compensation and motivation

“Explosion” of jobs

Chapter 12 Scanning a New Horizon

The top 10

International presence

Indian aspirants

Intense competition

Problems ahead

Will the kirana survive?

Bibliography

Articles and reports

Books

Index

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Acknowledgements

The concept for a book on the Indian retail scene arose from research and interviews I conducted for my previous book, India’s Global Wealth Club, published at the end of 2007. Time and again, when I spoke to Indian business leaders, analysts and industry observers during the mid-2000s, I was told that “modern” or “organized” retail would be among the next big growth sectors. Their comments confirmed what I was seeing everywhere I traveled in India: more people were being drawn to the new supermarkets, shopping centers and malls that were springing up. By the end of 2006, it was clear that Reliance Industries, the Bharti Group and the Aditya V. Birla Group were just some of India’s largest enterprises who intended to enter the retail scene in a big way. In early 2007, I had the opportunity to hear. Mukesh Ambani expand on his retail plans for Reliance. A few months later, an interview with Arvind Singhal, chairman of retail industry consultants Technopak Advisors, validated what everyone was saying and what the figures reflected: Indian consumer spending was gathering momentum and modern retail was well and truly on the rise.

This book draws on interviews and material gathered during working visits I have made to India, primarily in 2007–08. Some of the material extends back to earlier assignments for CNN.com International and The Australian newspaper in the period 2000–06. I would like to thank all of the people in India who have granted me interviews over the years. My greatest debt is to Arvind Singhal, India’s foremost expert on retail matters. He has been most generous with his time, advice, background material and referrals. There are numerous references in this book to the vast array of material that Arvind Singhal and other Technopak executives have presented at conferences or published as part of the group’s coverage of modern retail. Other Technopak people, including Preeti Reddy and Sendil Meiyapan, have answered my queries and helped with access.

One of the most valuable and productive visits I made to India was in September 2007, to attend and report on the India Retail Forum in Mumbai, and to visit new retail outlets in Chennai and Hyderabad. At the Mumbai forum, I had the opportunity to speak to and hear some of the leaders of modern Indian retail industry as they discussed the challenges they were facing. I want to thank the following people for their help in giving me a better understanding of the industry: Adi Godrej, chairman, Godrej Group; R. Subramanian, managing director, Subhiksha; V. Vaidyanathan, executive director, ICICI Bank and chairman, Retail Forum; Kishore Biyani, founder of Pantaloon Retail/Future Group; Rajan Malhotra, CEO, Big Bazaar (Pantaloon Retail); Mayur Toshniwal, vice president, Pantaloon Retail; Andrew Levermore, CEO, HyperCity; John Wilcox, chief of operations, HyperCity; Vinod Sawhney, President & COO, Bharti Retail; Arun Nanda, executive director, Mahindra & Mahindra; K. Venkataraman, CEO new business, Mahindra & Mahindra; Hemchandra Javeri, president, Madura Garments (now with Future Capital); K. Radhakrishnan, CEO Hypermarkets, Reliance; Hans Udeshi, CEO general merchandise, Future Group; Roopa Purushothaman, chief economist, Future Capital; Ireena Vittal, partner, McKinsey; B.S. Nagesh, managing director, Shoppers Stop; Sumantra Banerjee, president & CEO Retail Group, RPG Group; Sanjay Jog, head of human resources, Future Group; Bijou Kurien, president & chief executive—lifestyle, Reliance Retail; Tim Eynon, director, Provogue; Sanjiv Gupta, CEO, GKB Opticals; Manoj Kumar, managing director, Ghari Industries; C.K. Vaidya, managing director, Godrej Agrovet; Rajesh Gupta, business head, Hariyali Kisaan Bazaar; Abdul Rab, vice president retail & business development, Parsvnath Developers; Peter Baker, CEO H&B Stores, Dabur India; Vikram Bakshi, managing director, McDonald’s India. Before and after the forum, I was fortunate to interview Subhiksha founder R. Subramanian in Chennai, and Venugopal Komanduri, chief executive customer operations for Reliance Retail in Hyderabad.

In October–November 2007, I was in New Delhi to attend the Fortune Global Forum, where I was able to talk, once again, to Arvind Singhal and to hear other business leaders discuss India’s economic outlook and its brand image. In February 2008, just before completing the manuscript for this book, I made a final visit to Chennai to talk to regional retailers and industry observers there, and to look at shopping precincts, stand-alone stores, malls and development sites. My thanks go to Lavanya R. Nalli, president, Nalli; B.A. Kodandaraman, managing director, and B.A. Srinivasa, director, Vivek Ltd; R. Venkatesh, regional director, Ernst & Young; Ramesh Nair, managing director Chennai, Jones Lang LaSalle Meghraj; Ampa Palaniappan, managing director, and Bijoy John, retail coordinator, Ampa Housing Development.

Others who have provided input for this book include Adit Jain, managing director of IMA India, and his colleague Richard Martin, managing director of IMA Asia; Ranjan Biswas, partner, Ernst & Young; Anurag Mathur, joint managing director, Cushman & Wakefield India; Shubranshu Patel, managing director, retail, and Vivek Menon, head of marketing & communications, Jones Lang LaSalle Meghraj; Unmesh Sharma, Macquarie Securities India; Santrupt Misra, director of human resources, Aditya V. Birla Group; and Rajendra K. Aneja, SwitzIndia.

A full list of secondary sources appears in the bibliography and endnotes, but I want to acknowledge again my debt to Technopak’s material, particularly its retail and consumer outlooks. Among other reports, some of the most useful included McKinsey’s Bird of Gold, Lehman Brothers’ India: Everything to Play For, CLSA’s 20 20 20: Bigger, Richer, Faster Boomers, the various BRICs reports by Goldman Sachs between 2003 and 2007; KPMG’s Indian Retail: On The Fast Track and Ernst & Young’s The Great Indian Retail Story. Kishore Biyani’s autobiography It Happened in India is a fascinating and informative account by a retail insider. Among Indian newspapers, magazines, and television programs, the ones I turn to most often are The Economic Times, The Financial Express, Mint, The Times of India, The Hindu Business Line, Hindustan Times, The Deccan Chronicle, Telegraph, Business India, Business Today, Business Standard, Businessworld, Outlook Business, The Smart Manager, Retailer, Images Retail, and the websites moneycontrol.com, domain-b.com, rediff.com, timesnow.tv, ndtvprofit.com, www.ibnlive.com and zeenews.com. The websites of the Securities and Exchange Board of India and the Bombay Stock Exchange, along with company websites, are good sources of corporate and regulatory information. Internationally, I rely mainly on the coverage of India by The Asian Wall Street Journal, The Financial Times, The Australian and Fortune, Forbes and Businessweek magazines and their websites.

The Australian newspaper’s online managing editor Grant Holloway has been a great supporter, as has Kevin Drew, supervising editor at CNN.com Asia Pacific.

My relationship with the team at John Wiley & Sons in Singapore began with India’s Global Wealth Club in 2007. I am delighted with the enthusiasm they’ve shown for this follow-up project, led by publisher Nick Wallwork, editorial executive Fiona Wong and managing editor Janis Soo. Jo Tayler in Melbourne has been a thoughtful and meticulous copy editor who brought order to my many inconsistencies.

Geoff HiscockAugust 2008

Introduction

For India to overtake the United States and become the numbertwo economy (behind China) by 2040, it only needs to grow at 6% a year. —Jim O’Neill, head of global economic research at Goldman Sachs, February 2008.

With a population fast approaching 1.2 billion and an economy that will likely double in size by 2015, India is destined to become one of the largest consumer markets in the world over the next decade. As many as 500 million people, newly released from living on or just above the poverty line, will start to buy goods and services in significant quantities for the first time in their lives. How and where those people spend their money will determine the fortunes of countless businesses, large and small. This book explores the opportunities and challenges that confront India as its “organized” or “modern” retail sector seeks a much greater share of consumers’ disposable incomes.

Up till now, the ubiquitous kirana (family-owned corner stores), along with street vendors, bazaars, fresh food markets, weekly rural fairs and a smattering of department stores, have provided for the shopping needs of much of the Indian population. More than 90% of India’s total food market, for example, is unbranded. But tastes and spending habits are changing as India’s demographic profile becomes ever younger. By 2015, more than half of India’s population will have been born after 1986, and will only ever have experienced an economically “liberalized” country. Brand advertising is becoming a factor in consumer choice, spurred along by a proliferation of mass media and pervasive technology in the form of mobile phones and the Internet.

As incomes grow, so too does the size of India’s middle class—from about 50 million people now to an estimated 200 million by 2015 and almost 600 million by 2025. This is why modern retail is well on its way to being the key driver of the Indian economy. As these hundreds of millions of new consumers gradually work their way up from the bottom of the pyramid, they will venture into supermarkets, department stores and air-conditioned shop­p­ing malls for the first time. And instead of just looking around, most of them will be primed to spend.

To cater for their needs, established players in the modern retail sector, such as the Biyani, Raheja and Goenka families, are being joined by some of the biggest names of Indian business—Reliance, Birla, Tata and Bharti (Sunil B. Mittal and family)—who plan to spend billions of dollars over the next few years rolling out supermarkets, big-box hypermarket outlets and specialty stores. At the same time, property developers are getting on with “the great malling” of India, erecting shopping malls of varying sizes and standards, always with an eye for anchor tenants to lure customers.

On the sidelines are overseas players, such as U.S.-based Wal-Mart (the world’s biggest retailer), which has tied up with Bharti in a joint venture to provide backend support and a wholesale operation. For now, there are restrictions on what foreign direct investors can do in retail. That means the handful of big international names with a presence in India—such as Metro and Shoprite—restrict themselves to wholesale cash-and-carry, single luxury brands (PPR’s Gucci), joint ventures (Argos, Dairy Farm, Marks & Spencer) or franchise operations. Ideally, what Wal-Mart wants is the right to set up its own stores in India—something that may be possible after 2010. The same goes for Tesco, Carrefour, Costco and other international players.

While a consumption boom means that the growth outlook appears bright, the underlying problems for India’s retail industry are astronomical. There is no reliable cold chain; transport and warehousing logistics are appalling; other infrastructure, such as power and water supply, is haphazard at best; there is a huge lack of skilled managerial talent; land and construction costs for good retail space are soaring; and there is no consistency in the quality and quantity of goods supplied. Adding to this complex mix is the reality that a socio-cultural shift of this magnitude raises other issues. There is, for example, significant and sometimes violent political opposition from groups, such as market middlemen who hate the idea of being squeezed out by efficient “farm to fork” operators (exemplified by Reliance). The future of mom-and-pop kirana stores has to be taken into account by the government and modern retailers. Bharti and Reliance, for example, see the kirana operators as a potential source of franchisees.

There is also, always, the role of India’s heartland—the great rural constituency of 800 million people, eking out a living as small farmers, laborers, merchants, artisans, civil servants, street vendors and other service workers spread across 600,000 villages. They have special needs and circumstances that modern retail must seek to address if it is to carve out an acceptable and sustainable role in the heartland—one that does not threaten too many existing rural livelihoods. Initiatives such as ITC’s Choupal Sagar and DCM Shriram’s Hariyali Kisaan Bazaar (discussed in more detail in Chapter 9) are steps along that path.

Still, the consensus among industry observers is that, even taking rural sensitivities into account, there is plenty of room for all in India’s great retail evolution. By 2012, the modern retail segment—mini-marts, supermarkets, hypermarkets, department stores, malls and specialty shops—will grow to US$110 billion, and reach US$220 billion by 2018, according to research by the Delhi-based industry consultancy, Technopak. Even by global standards, that is a market of considerable size. But, at an estimated US$640 billion in 2018, unorganized retail will still account for much, much more of the Indian consumer’s wallet. Indeed, India’s most experienced retailer, Shoppers Stop managing director B.S. Nagesh, believes that even with rapid growth and store rollouts in the thousands, the share of modern organized retail in the total picture will still only be around 20% in 2015. “That leaves around 80% for the unorganized sector. So who’s bigger, and what will happen to it?” is the question Nagesh posed at a recent India Retail Forum in Mumbai. “We have to modernize this [unorganized retail] as well. The point is, everyone needs to modernize,” he says.

Arvind Singhal, Technopak’s chairman, says India is attempting to do in a decade what took 25 to 30 years to accomplish in other major retail markets around the world. He believes the next few years will be “the most remarkable in the evolution of modern retail in India.” Singhal expects that domestic and foreign retailers will invest US$35 billion by 2013, creating an additional 2.5 million jobs in the process. Bharti alone is planning to spend US$2.5 billion. Birla will spend about the same amount, and Reliance Industries boss Mukesh Ambani is talking about a Reliance investment of up to US$6 billion.

There is no doubt the face of Indian retail is changing rapidly and some of the most powerful names in Indian business want to be a part of it. Equally, it is clear there will still be a place for the small independent bazaar, alongside Kishore Biyani’s Big Bazaar, for many years to come. As Singhal observed during a conversation in New Delhi late in 2007, “We really haven’t seen competition (in retail) yet. Twenty years from now, it will be different. But 20 years is plenty of time for anyone to adapt to the new environment.”

Note: Rupee figures have been converted at a rate of 40=US$1, the rate prevailing at March 31, 2008. Market capitalizations are at the same date.

Chapter 1

The Golden Bird

Said the Indian sage Iarchas: “The Phoenix is the bird which visits Egypt every 500 years, but the rest of that time it flies about in India. It is unique in that it gives out rays of sunlight and shines with gold.” —from Philostratus: The Life of Apollonius of Tyana (translation by F.C. Conybeare).

At any time of the day or night in India’s southern consumer capital of Chennai, amiable confusion reigns. Along Ranganathan Street in the city’s Theyagaraya Nagar shopping district, the inescapable crush of thousands of people in search of a bargain adds urgency and excitement to a heady mix of heat, humidity, dust, noise, fetid air, rubbish and open drains. During big celebrations, such as Diwali (the Festival of Lights, held in October/November) or the southern harvest festival of Pongal in January, as many as 200,000 shoppers a day surge into this cramped and chaotic lane, eager to get the best price from one of the 400 shops and stalls, plus scores of itinerant hawkers, who offer food, sweets, clothing, shoes, books, homewares, jewelry, toys, knick-knacks and a thousand other items in a profusion of colors and styles. Welcome to one of several ground zeros in India’s 21st century store wars, where 12 million “mom-and-pop” kirana (or corner) stores and old-style shopkeepers must confront the challenge of the big organized retailers drawn by the lure of India’s next 500 million shoppers.

Table 1.1 India’s retail market size

As incomes rise and the golden bird of Indian consumerism takes flight, more and more families are being tempted to switch their loyalties from local markets and stores to the new wave of air-conditioned shopping malls, where clean floors, global brands, private labels, competitive pricing, electronic scales and prepackaging are the norm. At stake is a prize of staggering proportions. India’s total retail spend will grow from US$400 billion in early 2008 to US$615 billion by 2013 and US$860 billion by 2018 (see Table 1.1). “Modern” or “organized” retail currently has only a 4% share of the Indian consumer’s total outlay, compared with 20% in China and 85% in the United States. But it is by far the fastest growing retail segment, powering ahead at 30 to 35% a year. India already has the highest retail outlet density in the world1, but labor productivity is low and it is an industry beset by a lack of capital, technology, management talent and distribution infrastructure. Proponents of modern retail see it as a way of solving these problems and delivering better prices, better products, better farming returns, more jobs and better living standards to consumers—in effect, the opportunity of a lifetime2. But there are entrenched interests, including small traders, middlemen and some farming groups, who are opposed to what they see as the too-rapid growth of modern retail and the possibility of a Wal-Mart invasion.

Birth of a new bazaar

In what is shaping up as the biggest retail evolution the world has seen, Chennai’s Ranganathan Street is something of a halfway house for the Indian shopper’s momentous transition to modernity. This is the home territory of Saravana Stores, champion of discount shopping and purveyor of all manner of goods for the masses under the hard-to-beat slogan, “lowest prices in the nation.” Its stand-alone nature, unrelated to any of the big chains, renders Saravana both a marvel and a mystery of modern retail. Its three-section building on Ranganathan Street is roughly finished, the wellworn stairs chipped and cracked. Storage cartons and product leftovers are piled everywhere—in corners, on the stairs, in the roof space. Despite its unloved appearance and a general air of scruffy desperation, its seven floors hold just about everything a lower-middle-class Indian family aspires to own. There are silk saris piled high on counters, stacks of furniture, whitegoods, the latest electronic gadgets, plastic kitchenware, toys, luggage, sporting goods, cheap shoes, and clothing for every member of the family, plus a top-floor cafe for a little respite from the crushing crowds. Blue-liveried staff keep the enterprise humming and direct floor traffic through a maze of doorways and aisles, while bright blue and chrome chairs in the waiting area on some floors strike an incongruously hightech note. This single Saravana store of 25,000 square feet turns over 2 billion rupees (about US$50 million) a year, courtesy of up to 100,000 shoppers a day, leading it to proclaim itself the “super store of shopping world.” Across the street is its “vessels” outlet—a store devoted entirely to metal bowls, plates and other cooking containers. Bigger department stores with more glamour and less cluttered aisles struggle to do anywhere near the business that Saravana achieves, making it among the busiest and possibly the smartest retail outfit in the country.

Back in 2000, India’s master retailer, Kishore Biyani of Pantaloon Retail, spent weeks studying the secret of Saravana’s success, sending his staff to stand outside the store to observe how consumers approach it, then follow them inside to watch when and why they made their buying decisions.3 With the incessant pushing and shoving that automatically goes with big crowds, the Saravana customer experience is not the most pleasant to be found. The décor is mostly atrocious, the staff are competent rather than courteous, paying for purchases takes an age, and branding and display are missing in action. But Biyani found Saravana’s simple proposition of low margin, high turnover to be both a powerful crowd-puller and a commercial winner. “To many, Saravana may be a shopper’s nightmare, but there are a lot of customers who just love it and approve of it with their frequent footfalls,” Biyani wrote in his 2007 book about his business life, It Happened in India.4 Biyani loved Saravana so much, he made it the template for his own hugely successful (and slightly slicker) Big Bazaar stores that have since proliferated through cities and towns across India. Not long after Biyani’s first investigations, Saravana decided a little more glamor and modernity might not be a bad thing for some of Chennai’s eager shoppers, so a few hundred meters up the road from the first store, it built a new silver-gray and orange edifice where Usman Road meets Panagal Park, in an area known as the “golden furlong” of retail. Opened in 2005, this is New Saravana Stores: nine levels of merchandise in a much roomier (100,000 square feet) environment, but with the same helter-skelter approach to product display and customer care. A phalanx of staff dressed in the New Saravana colors of white, orange and gray greet customers on the ground floor, press floor guides into their hands and attach themselves to those shoppers whom they deem might be ready to spend up big. Outside, a flyover is under construction, adding to the general noise and rendering access to the store a rough-and-ready exercise. Potential customers must negotiate muddy piles of rubbish, stray dogs, water hazards, and building materials. But the crowds love it nonetheless, pouring through the doors at weekends and festival times. All told, the Saravana name appears on five outlets in the space of a couple of blocks along Chennai’s Usman Road and Ranganathan Street: the old and new stores, the vessels store, another specialist outlet dealing in gold, silver, and diamonds, and Saravana Selvarathnam. This last store is operated separately by S. Selvarathnam, who with his two brothers S. Yogarathnam and S. Rajarathnam, first set up the Saravana Stores name in Chennai in the 1970s. The brothers hailed from a village near the port city of Tuticorin in Tamil Nadu state, and made the successful leap from rice milling to retailing. Selvarathnam’s promise at his store is that his price will be “at least 50 rupees” cheaper than the same product at one of the other Saravana stores. Now, that’s brotherly competition!

New Saravana Stores pitches itself as a “shopping mall,” but the earthy reality of Ranganathan Street and Usman Road is a long way removed from the vast multi-format shopping centers, replete with cinema multiplexes, food courts and parking bays, that 21st-century developers propose to build throughout India. Five hundred or more malls are in the pipeline, though many will die a funds-starved death or will morph into office blocks. For a look at what some of these developers have in mind, a quick tour of YouTube’s video vault shows a computer-generated depiction of how cool new retail might play out in Chennai.5 The video showcases the ultra-chic 650,000-square foot Ampa development being built in the suburb of Aminjikarai, a few kilometers north of Usman Road’s “golden furlong.” The incomplete seven-level building, with its planned 1,000 parking spaces, sits near a busy intersection backing onto the rubbish-filled Kuvam River. Its planned 2008 opening delayed by what developer Ampa Palaniappan grimly calls “regulatory issues” with the Chennai Metropolitan Development Authority, the mall has lured some of the biggest names in modern Indian retail, keen to be the anchor brands for its hypermarket, department store and seven-screen multiplex. But, when he finally gets a completion go-ahead from the authorities, Palaniappan won’t be calling his center a “mall.” It is a word, he says, that has been devalued by smaller developments and has distorted consumer perceptions of what a mall really is. Plus, he says, some people have a fear of going into a mall. “They look at its size and automatically think it must be expensive. It will take time to educate consumers to realize that there are economies of scale at work that keep prices down.”6

Where Ampa is a one-mall name and Saravana succeeds as a low-price department store for the masses in just one Indian city, the big new names of retail such as Bharti, Birla and Reliance are going for national dominance. Reliance, in particular, is rolling out stores in multiple formats at a tremendous pace—all part of a game plan that Reliance chief (and India’s richest man) Mukesh Ambani calls a “transformational initiative” that will do nothing less than revolutionize Indian shopping, particularly for hundreds of millions of rural dwellers.7

According to industry observer Arvind Singhal, Reliance will be number one in organized retail within a few years. Of that, he has no doubt. Positions one to seven in the sector will be occupied by Reliance (in various guises) and the powerful combination of Sunil B. Mittal’s Bharti Group with the world’s biggest retailer, Wal-Mart of the United States. Singhal, who chairs the retail advisory practice Technopak, believes some existing Indian retailers will stumble. “Just as we’ve seen in the United States, there are those who haven’t even entered the sector yet,” he says. Singhal’s message to aspiring retail leaders is clear: Don’t worry about consumer demand. It’s there all right. Worry about supply. “The retailers who will succeed are those who focus on the supply side,” says Singhal, noting that both real estate and human talent for the retail industry are in scarce supply.8

Momentous challenges

There is no doubt that momentous challenges are faced by both the domestic and foreign combatants in India’s store wars. For three years in a row (2005–07), consulting firm A.T. Kearney has ranked India as the top retail destination globally, ahead of Russia and China (see Table 1.2). But it has also identified 10 key issues that stand in the way of India’s retail industry reaching its full potential. In a landmark study for the Confederation of Indian Industry (CII), completed in late 2006, A.T. Kearney ticked off the roadblocks: An underdeveloped supply chain; inadequate utilities; inadequate human resources; hurdles in IT infrastructure and the product supply base; limited consumer understanding; insufficient government incentives; and hurdles in taxation, real estate and regulatory policies.9 A hypermarket in Mumbai, for example, must apply for 29 unique licenses, which could take up to six months, the study’s authors noted. “And then when it opens a second store, it must apply for the same 29 licenses all over again.”

Table 1.2 Global Retail Development Index 2007*

Source: A.T. Kearney, June 2007.

2007 ranking

Country

2006 ranking

1

India

1

2

Russia

2

3

China

5

4

Vietnam

3

5

Ukraine

4

6

Chile

6

7

Latvia

7

8

Malaysia

14

*The index measures retail investment attractiveness for 30 emerging markets.

The CII/A.T. Kearney study found that, while India’s central and state governments have to step up and play a substantial role in helping the industry, retailers can do more in the areas of training their staff and getting a better understanding of what consumers might want. “While most companies are grappling with the issue of talent shortage, few are investing significantly in a new generation of retail managers,” it says. “This investment must come in the form of initiatives to drive training and retraining programs for staff.” It also urges retailers to sponsor courses on retail, as well as set up retail institutes.10

The other big issue is getting products into the stores at the right time. It can take between five and eight days to ship goods between Delhi and Mumbai and there is a dearth of warehousing and distribution centers nationwide. Fresh food spoilage in India is horrendously high—as much as 40% of fruit, vegetables and other perishables are lost because of interstate bureaucracy, poor transport links and an inadequate (or non-existent) cold chain. Fixing the supply chain could deliver vastly better returns to farmers and lower costs to consumers. A.T. Kearney advocates retailers joining with transport and refrigeration providers to invest in an industry-sponsored consortium. This, it says, could create “a step-change in how perishable items are transported in India today.”11 But cooperation is rare in an industry where the competitive juices run so freely. Companies would rather build and control their own supply chains. K. Radhakrishnan, CEO of hypermarkets for Reliance Retail, says cost cutting is possible through third-party service providers, such as freight consolidators. “But it’s tough to get retailers to cooperate. They don’t want to share information,” he says.12

One of India’s most entrepreneurial retailers is Chennai-based R. Subramanian, creator of the Subhiksha chain of discount supermarkets. In the space of a few years, he has built a chain of 1,500 no-frills convenience stores that are seen as benchmarks for the industry, in terms of their efficiency and income per square foot of shopping space. He offers this view: “Ultimately a retailer draws strength from its cost structure and its supply chain. These are the two variables which make or break you.” Subramanian says Wal-Mart and other overseas players will find it hard to match the cost structures of Indian companies where margins are razor-thin. “For global sourcing of things like T-shirts, Wal-Mart has expertise and can ride on its supply chain to cut prices. But competing with us in selling say, rice and pulses, which involves indigenous procurement—this is not Wal-Mart’s strength,” he says.13

Ocean of opportunity

Still, optimism in the sector is palpable. V. Vaidyanathan, executive director of India’s most aggressive bank, ICICI Bank, also chairs the India Retail Forum. Opening the 2007 event in Mumbai in September that year, he called the transition to modern retail “the next big opportunity” for the Indian economy. “India is a huge blue ocean of opportunity,” he enthused. “There is an opportunity at the bottom of the pyramid. In fact, there is a huge opportunity at every level.”14 McKinsey’s “Bird of Gold” report in May 2007 set the scene for such optimism, asserting that after a long period of stagnation, India was back in the dynamic mode that put it in the forefront of world trade through much of the first millennium. The report says that while much remains unknown about how Indian consumerism will evolve, India is likely to become the world’s fifth-largest consumer market by 2025. It sees the shape of the country’s income pyramid changing dramatically, as 290 million people move up from “desperate poverty” and the Indian middle class swells to almost 600 million people.15 According to McKinsey, rising incomes will lead to a consumption boom and spending habits will change in favor of more discretionary “lifestyle” purchases rather than just the basic necessities of life. All of these trends should benefit modern retail.

Bharti Retail president and CEO Vinod Sawhney makes the point that modern retail should not be viewed as an isolated sector of the economy. “It will stimulate other industries and its 360-degree impact will deliver sustained economic growth to India.” He says there will be more contract farming, with retailers making direct investments in agriculture that bring better returns to farmers and lower prices to consumers. There will be a surge in real estate. “Even now, despite the impression of overbuilding, there is still a paucity of the right real estate,” he says. There will be a further boom in the information technology sector as it delivers much-needed electronic infrastructure to retail. In cold chain logistics, packaging and ancillary services, such as cleaning, security, and advertising, there will be opportunities. “All of this will generate jobs—two million new ones by 2010. So there must be a focus on training,” Sawhney says.16

Rural role

At the same time, traditional retail formats will continue to grow. The habits of a lifetime will not change overnight for India’s older consumers, particularly those living in rural areas, who represent a huge slice of the population. Urban India is made up of more than 5,000 cities and towns that are home to about 350 million people—about 30% of the total population of 1.15 billion. Rural India accounts for the remaining 70%—800 million people living in more than 620,000 villages.

Table 1.3 India’s economy 2002–09 (*fiscal years)

Source: Government of India & Lehman Brothers.

Year

Real GDP growth rate

2002

4.0%

2003

8.5%

2004

7.5%

2005

9.0%

2006

9.4%

2007

8.8%

2008

9.2% (forecast)

2009

9.72% (forecast)

2010

10.0% (forecast)

*2009FY runs to March 31, 2010.

“Rural people are not happy with a self-service (retail) format at first,” observes C.K. Vaidya, head of the Godrej Group’s Agrovet operations. “They have to come to learn it.” Vaidya says there are big challenges in the last mile to reach rural consumers, who often have irregular incomes. Their haphazard income trickle often leads to a rural credit cycle dominated by local money lenders. “Our focus is on farm productivity improvement and job creation. We learn from experience.”17 He says Godrej’s grand vision is to be a change agent in rural India. It’s a theme echoed by other big groups, such as Reliance, Bharti and ITC, who recognize the imperative for economic improvement in the hinterland. Similarly, economic observers agree that rural change is vital. In the view of investment bank Lehman Brothers, India has “enormous growth potential yet to be unlocked,” given that its per capita GDP is about US$1,000, about 60% of its workforce is still in the countryside, and half its population is under 25 years old, meaning they will be consumers for many years to come. In Lehman’s judgment, India could grow at 10% a year over the coming decade, provided it continues to make progress with structural economic reforms (see Table 1.3).18

Lehman says a middle class—defined as those with household incomes between US$4,400 and US$22,000 (or US$23,500 to US$118,000 on the basis of purchasing power parity)—is fast emerging. This is spurring demand as consumption and investment “interact in a benign and dynamic way.”19 But Lehman sounds a familiar note of caution. Given what it says are the powerful trends of demography and urbanization, India needs “a faster and more inclusive” growth strategy to correct imbalances within and between different parts of the country, and to avoid social unrest. “Inclusive growth can be facilitated by further easing the shackles on business, by making education and health available to all of society and by developing the rural sector.” Lehman says a key challenge will be labor market reforms to stimulate job creation over the next decade. Millions of young people finish their education and join the hunt for jobs every year. While many will stay as agricultural farm laborers, experts agree that only India’s manufacturing and service sectors can create enough openings to give them alternative prospects.

Different outlook

There is no doubt that India’s young people have a different outlook on life than their forebears. They have little direct experience of the great socialism experiment of India’s first 40 years after independence, when the idea of buying a car or getting a home phone was almost an alien concept for their parents and grandparents.

In an extensive survey of Asian youth in 2005, investment house CLSA found that Indian 20-year-olds were “incredibly optimistic” about the future of their country and their generation.20 It found that these young people expected that hard work would enable them to earn more than their parents and to sustain India’s rapid economic development. “For this generation, there is more to life than work, and many seek to balance hard work with leisure activities and families,” CLSA said. But it also found that many young people felt India’s upward trajectory would not carry everyone forward: a significant portion of Indian society would be left behind. According to CLSA’s research, Indian students (along with those in China) expect rapid career success, ascending to leadership positions in major multinationals and their own “world-changing entrepreneurial ventures.” Importantly, the students saw this success happening domestically, as the best opportunities were now seen in their home country. Typical of the responses was this from a chemical engineering student at the Indian Institute of Technology, Mumbai. Asked where he saw himself in 20 years, he replied: “As CEO of a major corporation based in India.”21