India’s retail revolution is at last getting started. At the moment 97% of retail sales are made in more than 15m tiny mom-and-pop stores, mostly of less than 500 square feet (46 square metres). But now Reliance Industries, the country’s largest business group, is to spend 250 billion rupees ($5.5 billion) on big new shops over five years, starting on November 3rd when it will open 11 convenience stores in the southern city of Hyderabad. And big foreign companies are moving in too. The government bans them from selling direct to individuals, but they have found a side door: starting wholesale and sourcing companies which supply a local retail partner. The first to do this, last month, was Australia’s Woolworths, in league with Tata, India’s second-largest firm. Tesco, from Britain, is expected to follow soon, and Wal-Mart and France’s Carrefour are also thought to be searching for a way in.
Reliance rarely develops its new ventures quietly, so rumours and leaks about its plans have sparked a chain reaction. Foreign firms have realised that they need to get a toe-hold in India quickly, without waiting for the government to open up retailing to foreign direct investment (FDI) properly. If they wait too long, they risk leaving the field clear for big Indian groups, such as Pantaloon Retail and Spencer’s, which have been accelerating their expansion plans and securing scarce development sites.
For overseas companies looking for growth outside sluggish domestic markets, India’s retail business is one of the most attractive. Consumer demand is booming as the government’s steps to liberalise the economy have produced GDP growth of around 8-9% a year. Technopak, a Delhi-based retail consultancy, expects retail sales of $250-300 billion now to rise to nearly $430 billion by 2010. Modern retailers’ share will rise from just 3% now to 16-18%, it says.
Retailing is one of the last big sectors of the Indian economy to open up to FDI. Previous attempts by foreign retailers to start businesses were blocked by successive governments. In the 1990s opposition from traders and local shopkeepers was enough to convince politicians. Later on the government was persuaded by the political left, and also by the Indian business lobby. The current government now has no hope of allowing FDI into general retailing by the end of this year. But side-door entries are permissible. “We need a model that doesn’t replace existing retailers,” says Kamal Nath, India’s minister of commerce and industry.
Under the current policy, Western brands from Reebok and Cartier to Marks & Spencer have set up franchise stores with locals. The locals own and run the shops, and the foreigners run the sourcing and wholesale part. Starbucks, a coffee-shop chain, is expected to open soon as a similar franchise. Earlier this year the franchise policy was relaxed, so that foreign firms can now take 51% equity stakes in shops that sell just their own brand. But this has yet to catch on in practice. Broader wholesale businesses selling to registered retailers have also been allowed, though Metro of Germany is the only company to have used this route so far.
The newest model for foreigners getting into India is the Infiniti-Woolworths partnership. Infiniti Retail, a Tata group company, last month began opening “Croma” stores that sell electronics and household electrical goods sourced from a wholesale company in India fully owned by Woolworths. “I pay a cheque every Wednesday for the previous week’s supplies,” says Ajit Joshi, managing director of Infiniti, explaining the relationship. Bharti Enterprises has been discussing a similar deal with Tesco and most recently with Wal-Mart. “Government policy allows foreign equity in back-end wholesale and logistics and in real estate, so we’ll do a joint venture with a foreign partner in those areas, and we will own the retail business 100% till the government allows FDI there, and then we’ll do a joint venture there with our partner,” says Sunil Mittal, Bharti’s chairman. He will not confirm whether the retail partner will be Tesco or Wal-Mart, but says he hopes to sign a deal by the end of November.
Reliance intends to have 5,000 shops across India within five years. There will be 2,000-5,000-square-foot convenience-food stores of the sort now being opened in Hyderabad, and also bigger, 25,000-50,000-square-foot hypermarkets, starting with one in Ahmedabad at the end of the year. Pantaloon Retail, India’s biggest and fastest-growing retailer, has 144 shops in 32 cities, and Kishore Biyani, its founder, plans to double the square footage of his empire by next June. Local businessmen have started smaller chains in the south.
India’s millions of small stores, of course, are terrified of the onslaught from domestic and foreign retailers. Many Indians may stick to the small, personal shops they are used to. But the modern emporia will offer lower prices and, presumably, higher quality. “Shopkeepers are asking, ‘is Reliance going to kill us?’” says Arvind Singhal, chairman of Technopak.
A few small shop-owning families in richer areas of the country are taking the easy way out. They are leasing their premises to big consumer brands such as Nike and Reebok, who will pay rents of more than 300,000 rupees a month, far more than the profits that most successful families can make with a traditional small vegetable, grocery or chemist’s shop. A few are being more daring and are expanding their stores. Technopak is advising groups of small shopkeepers in various places on how to get together and gain at least some advantage of scale in purchasing and marketing.
“It will affect our whole market if one of the new stores comes here with lower prices, so we have to compete,” says Harsh Narang, whose family has run the Shri Sant Lal grocery and general store in Hauz Khas, a prosperous middle-class market in Delhi, for 50 years. He recently doubled the size of his shop and is considering an offer from Hindustan Lever, Unilever’s Indian subsidiary, to help modernise. But fruit and vegetable sellers who work from pavements will have far less chance of survival. Jageshwar Prasad, whose family owns a tiny 90-square foot vegetable shop and pavement stall in nearby Malviya Nagar, says, “It will affect us very much because they will take both the rich and the poor customers with lower prices.”