Retailization in India ... an opportunity not to be missed?
Now that I have my mind tuned in on India, at least for a while I might as well tell you about an article I want to share with you. It is from the Economist's print edition 15th of april and deals with the retail sector in India and how it is presents an unequal opportunity for major global retailers. The article is walled for non-subsribers but below I will walk you through the major points and also why, today, it is important to study the retail link in the supply chain.
To make a long story short we are seing a development in global business where major retail outlets such as Carrefour, Wal-Mart and Tesco are seing their barganing power increased significantly, a development which is summarized in a recent book (Retailization) by Keith Lincoln, Anthony Aconis, Lars Thomassen.
"Retailization illustrates how brand power is slowly and inexorably being replaced by retail power - whether we like it or not, retail is now central to all our business decisions. Unfortunately many brands lack the tools needed to prevent themselves becoming trapped between massive, global retailers and well-informed, demanding shoppers."
This is interesting in an Indian context exactly because this trend is yet to break through in India but also because global as well as domestic interests in India are beginning to see the opportunity of retailizazing India sort to speak. Currently India has the highest density of retail outlets in the world and the retail sector is the largest provider of jobs. For Wal-Mart and co. this means that there is a lot to retailialize but so far the sector is protected by legislation which bans inward FDI in the sector. So, the pivotal question is whether India would benefit from retailiazation and essentially whether Indian policy makers can stop it which obviously also is a question of whether to let domestic retail outlets develop on the expense of the global players.
No matter what company who decides to take up the challenge the Economist reports on notable challenges pertaining to organised big retail cooperations' entry in India.
Potholes - Basically we are talking infrastructure here and the lack of it presents a major challenge to any organised business considering to expand to India, especially retail business. However here, a retail giant such as Wal-Mart might actually be a good thing since the government could need some help financing the build-up of the infrastructure and a quid-pro-quo relationship might be a possibility here, I mean big retailers know the concept of CSR I should think.
Land grabs - This issue highlights the problem of getting land to build businesses in India which obviously is very important for retail outlets since the physical location is of high strategic importance. The specifics on this however are unclear as so far as The Economist's article goes, but it does seem as if that land in the big cities is hard to come by where as land in "second-tier" cities are more accessible. In the end this still presents a problem I think since Wal-Mart and the likes would want to estaiblish themselves in the big cities.
Red tape - This in my opinion would potentially be the largest impeeding factor for organised retail to set up in India and deals with the myriad of local government rules and locations. This issue is of course very complex but because retail businesses would want to be spread strategically it is a business which is particularly vulnerable towards this mindfield of local government regulation in the sense that it consumes ressources to cope with it.
People problems - This seems odd in an Indian context since one of the things we usually hail about India is the abundance of skilled labour with good English skills. However, apparently in a retail context big organised retailers might very well struggle to find qualified labour in India.
On a whole, however, it seems clear that the profit waiting in India through the creation of an organised retail sector outweighs the difficulties and challenges by some distance.
"If the difficulties facing organised retailers in India are huge, then the possible rewards must be even huger to have attracted such intense domestic and foreign interest. This is part of India's broader surge of economic self-confidence at home, boosted by a spell in the international spotlight. The country is engaged in a prolonged coming-out party, where the world is at last noticing its size, achievements and potential.
The economy is one of the world's fastest growing, with GDP expanding at an average annual rate of about 7.5% for the past three years. A young population, declining dependency ratio and higher savings rate lead even the most sober economic forecasters to expect the growth rate to average 6% or so for the next few decades. The more sanguine think 8% can be sustained and even bettered."
Even more lucrative from a retail point of view is that a whopping 64% of the Indian economy is driven by private consumption which is more than in Europe, Japan, and China. Furthermore the retail sector is estimated to grow at a staggering annual rate of 25-30%.
This is obviously all well and good but from an Indian point of view we also need to look at all those small private shops which would undobtedly be forced to shut down as well as the total employment in the retail sector which would perhaps decline. the worst news for Wal-Mart and other big foreign retail companies is that domestic Indian cooperations are already positioning themselves.
"Another monster, however, is stirring. Reliance Industries, an oil, petrochemicals and textiles giant, and India's largest private-sector firm, has startlingly huge retail plans. So big, in fact, that Mr Biyani believes they are not physically possible. Insiders say they involve 100 billion rupees ($2.2 billion) of investment in 1,500-1,800 supermarkets and hypermarkets, employing 400,000-500,000 people, with 60 supply centres, some with their own airstrips, strategically located round the country, all in the next two years."
Ohh my ...
This has certainly turned into a long rant about retailing in India and whether the globals trends would soon penetrate this fast growing emerging market. In the end the story of retailization is interesting not only in its own sense but even more so in an Indian context because we are yet to see any organised retail business taking the plunge ... it will be interesting to see what happens.