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FDI in Retail – when it comes to organized retail, how different is India?

, January 14, 2013, 3 Comments

If  I were to distill the key enablers which retailers in the West have built their businesses upon, the following stand out:

  • Vast open spaces to set up huge, stand-alone hypermarkets with millions of SKUs.
  • Customers willing to drive down to such shopping locations, usually located far from cities, and buy bulk items e.g. 10 kg pack of cereals instead of a 2 or 5 kg pack
  • Homogeneity in customer tastes and preferences that make a national distribution network viable

FDI in Retail – A Bane or A    Boon?

The first article of this four part    series
  • Low procurement costs through negotiations with a few big vendors (farmers or manufacturers) who control a majority of the supplies
  • Cheap, often immigrant, labour
  • Finally, basic infrastructure in terms of roads and warehouses that makes sure products reach the consumer on time, especially perishable items like farm produce

If one considers the above against a creaking bureaucratic democracy like India, then the retailers have to contend with a beast quite different from other emerging economies like China or Mexico. Why so?

The gigantic stores that have been the cornerstone of retail in the West needs the kind of unutilized land that is simply not available in India. As the Tatas in Bengal and real-estate developers in Delhi/NCR found out, land acquisition is an emotive issue often leading to disruptive consequences. Foreign retailers need to navigate the minefield of the Indian real-estate market while scouting for locations to set up stores.

Assuming that such stores were set-up, they would inevitably be located far from population centres. Given the state of public transport in India, bringing in customers would then be difficult. Also, with barely 1% of the population owning a car, driving down to the stores and going back with a month’s worth of household supplies will be impractical for many a customer.

The other aspect of their operating models that the foreign retailers need to look into is their approach to economies of scale. India is a fragmented market both in terms of supply, as well as, demand. On the supply side, farmers with large agricultural holdings are rare outside the Punjab.

This implies that retailers need to negotiate with a greater number of individual farmers and co-operative societies to source their products. The same is true for manufacturers of locally-produced goods. Thus, vendor acquisition will be a costly and painstaking process.

On the demand side, the tastes and preferences of the Indian consumer is very diverse. Each region in the country has unique food habits and consumption patterns. A grocery store in Delhi needs to stock a different assortment of brands and products from that of a store in Chennai. And yet, both the stores in Delhi and Chennai need to have a substantial stock of products that caters to the South Indian and North Indian Diasporas in their respective catchment areas. This ‘regionalization’ of demand and supply is nightmarish for the merchandiser trying to come up with a uniform buying and selling policy in the retailer’s organization.

Assuming that trained, cheap labour will be easier to find, we finally come to the contentious issue of infrastructure. India’s shortage of motorable roads, railways, electricity and warehouse facilities are considerable impediments that foreign retailers need to confront while building their supply and distribution network. Supporters of FDI in retail argued that retailers would heavily invest in their back-end distribution networks which would have a spill-over effect on the country’s infrastructure. However, as a carefully considered report of the NY Times shows, there is little empirical evidence of retailers like Wal-Mart building infrastructure for a country. And, given India’s size and the scale of her infrastructural woes, it is just a fanciful expectation.

So, if the Wal-Marts of the world are not going to do what is essentially the government’s job, then it is realistic to expect that this gap will impact their ability to establish a national footprint. For instance, they will find it harder to transport products, especially perishable farm produce, over long distances. They will also find the usual fleet of cargo carriers plying Indian roads unsuitable for their specialized transport needs. Unreliability of the electricity grid means that they will need to have alternative sources of power supply for their stores. To sum up, though they are not expected to do transformational investment in the country’s infrastructure, they still need to invest considerably to circumvent the infrastructural problem.

Essentially, India as a market offers unique challenges for the retailer wanting to establish a meaningful presence here. What, then, should they do to make their India experience a successful one?

About author
Saptarshi Basu is a B.Tech(Hons.) in Mechannical Engg from IIT Kharagpur and a PGDM in Marketing from IIM Lucknow. Saptarshi has over 8 years of experience in analytics and consulting. In his professional career he has provided BI consulting in a wide variety of domains from financial services firms like Ameriprise Financials to giant retailers like Tesco...more ...more