Global Retailers and India
How does the global retail business work and why is India important to answer this question? This is the subject of this entry and in order to begin we might want to a brief synopsis on the retail sector and the salient business trends. There are two major trends to look out for:
1) The Process of Retailization
What underpins this process is among other things a supply supply/value chain perspective. The point is that major retailers such as Wal-Mart, Tesco, Carrefour etc has almost ultimate bargaining power towards their suppliers. Why? There are two inter-relatated reasons. First of all it is because the density of the retail sector has steadily been strikingly eroded in the developed world. By density I mean the amount of retailers and as such the market is now dominated by few but very big outlets. This essentially means that retailers have become proxies for end consumers and this position is used to pressure suppliers into complying with particular vicous cost demands and restructurings and more accurately, erording the brand power of producers.
The link provided above from a recent book (Retailization) by Keith Lincoln, Anthony Aconis, Lars Thomassen sums up the question from 'branding' angle and takes on the perspective of those troubled suppliers.
We used to live in a world where brand power was everything, but slowly and inexorably it is being replaced by retail power. When the largest retailer in the world is now several hundred times larger than an individual brand, it is clear where the real power lies. When only a few retailers control 75 per cent of an individual market, while the biggest brands control less than 1 per cent, it is clear where the real power lies.
2) Global Retailing (?)
Is the retail sector really suited for globalization? For retail business marketeers this is an important question because the answer is not at all straightforward. However, the push for searching global markets should, at least at a first glance, be clear. Most major retailers have their base in the developed world where populations are ageing and consumer spending is waning relatively to younger emerging markets; India is really a prime mark here with its huge and growing population and 60-70% of the economy driven by private consumption. Furthermore, general competitive pressures and the existence of markets with a very dispersed retail sector (India once again) are in themselves powerful driving forces for looking to new markets (i.e. the opportunity to leverage the 'retailization advantage'). However, as The Economist reports in the latest print edition retailers going abroad have, at best, had mixed results and the lesson is clear; a major retailer's domestic business model is not necessarily exportable, far from it actually. In fact, many major retailers are not even considering going abroad. The Economist lists three rules to remember and the most important is that retailers needs to tailor their business models to their selected markets. This chimes in with a basic business tenet in relation to globalizing your business. If your core business model is not applicable on a global scale your internationalization strategy should reflect this. In fact, the most basic lever on which to determine an industry's globalization potential is whether the business model and practices can be standardized. In a retail perspective the plights of for example Wal-Mart in Germany clearly suggests that this is not necessarily possible.
But why then the fuss about India?
I have reported on this here at Alpha.Sources several times (see links below) and in essence it comes down to the fundamentals of the Indian economy and retail sector. In short; if there is one place where major retailers want to make an entry with succes it is in India. Firstly, the Indian population is currently passing through its demographic dividend and as such domestic consumer spending is on a favorable trajectory from a retailer's point of view. Also the absolute size of the Indian market is huge in a global perspective and as such cannot be neglected. Secondly, we have the nature of the Indian retail sector which has the highest density in the world and moreover is one of the biggest sources of employment in India. This simply means that the opportunity to leverage the 'retailization advantage' is huge in India and as such being the first one to market matters for any potential retailer.
However here we encounter a big but ...
The problem for major retailers outside India is consequently capital controls which forbid direct retail FDI activity in India and as such the retailization opportunity in India is slowly but surely being eroded by domestic first movers who are capitalizing on the difficulty of Wal-Mart, Tesco, Carrefour to enter the Indian market directly.
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
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.
As the article reports, franchising or licensing are viable alternatives for foreign retailers and although this would lie very far from the traditional entry mode of major retailers it might be the only initial way to take up the battle for supremacy on this important market.
Want to know more?
I have reported on particularly the Indian retail sector a few times before as you can see from the links provided above. Below is a list of all my posts. Note also the links which deal with the lack of infrastructure in India. As such a workable and efficient infrastructure is very important for major retailers and as such the lack of this in India is narrated as a notable entry barrier to the industry.
Paving the way in India (on infrastructure)
Opening up India? (on capital controls)