Retail Revolution

Countdown to India's retail revolution

By Toby Poston BBC News business reporter:

The economy is growing by 8% a year, its stock market rose by nearly 40% in 2005 and foreign investors are flooding in. There are about nine million small grocery shops in India
Whichever way you measure it, business in India is booming. And as the economy grows, so does India's middle class.

It is estimated that 70 million Indians in a population of about 1 billion now earn a salary of $18,000 a year, a figure that is set to rise to 140 million by 2011. Many of these people are looking for more choice in where to spend their new-found wealth.

Protectionist:

The Indian retail sector is now worth about $250bn (£140bn) a year, but it is heavily underdeveloped. Well over 95% of the market is made up of small, uncomputerised family-run stores. Now there are finally signs that the Indian government is dropping its traditionally protectionist stance and opening up its retail market to greater overseas investment. Last month it eased restrictions on foreign investment, allowing overseas retailers to own 51% of outlets as long as they sell only single-brand goods.

For the first time, chains like McDonalds, Marks & Spencer, Body Shop and Ikea can, if they want to, open and control their own operations in India. Previously, many of them had gone down the path of working with franchise partners, a policy followed by M&S which supplies clothes to eight "Planet Sports" stores. They look like M&S stores on the inside, but they are owned by local retailers, and the UK retailer has no plans for that to change.

"This is now our policy for overseas expansion," said a spokeswoman.

"We rely on franchisees who know their local market, it's working very well in India."

Stiff opposition:

But allowing in the big multi-brand, international retail groups like Wal-Mart, Tesco and Carrefour was considered a step too far, says Kamal Nath, India's Minister of Commerce and Industry.

"We have announced a partial opening of our retail market, to single-brand retailers," Kamal Nath told BBC News.

"But beyond that, we need to find a model that doesn't displace our existing retailers."

The Indian government has been conducting an impact analysis of how the introduction of supermarket chains like Tesco and Carrefour would hit its retail sector.
Further retail reforms are likely to be opposed by the Communist Party, a key ally of the Congress Party-led government.

Many politicians still feel they have a duty to protect the livelihoods of the small shopkeepers they represent. But the government does realise that foreign investment is badly needed to provide the infrastructure - the warehousing, distribution and processing operations - that are needed to upgrade India's chaotic retail industry. An estimated 50% of the country's fruit and vegetables rot by the roadside before they reach market.

New jobs:

It's a challenge that some of India's own industrial conglomerates are taking up. Last January, Reliance Industries said it was investing $5bn in creating a chain of hypermarkets and back-end retail services. Its plans called for the creation of a whole new supply chain, with new stores, cold storage facilities, food processing units and contract farming. It will initially launch pilot projects in three Indian states before potentially rolling the strategy out to 500 Indian towns and cities.

The investment could create up to 400,000 jobs, it believes. Elsewhere, consumer goods group ITC has set up its "e-Choupal" scheme to try and improve the productivity of farmers that supply its food processing operations. It has built internet kiosks in rural villages to help give farmers access to the latest information on things like the weather, current market prices and what foods are in demand.

"India's greatest need is to take the benefit of retailing to the doorstep of the farmer," ITC chairman YC Deveshwar says.

"There is such potential if we can invest in greater food processing. India has the most irrigated farm land in the world."

Tentative steps:

So while Indian businesses forge ahead with their own plans to take a big share of Indian consumers' spending, and the Indian government slowly refines its retail roadmap, where does that leave supermarket giants such as America's Wal-Mart, Germany's Metro and Britain's Tesco? For years, their plans for domination of the Indian retail scene have been sitting gathering dust.

German store group Metro has made tentative steps, via its chain of wholesale cash & carry centres in cities like Bangalore. About 90% of the goods it offers come from local producers and suppliers, which could give it a head-start if the rules on selling to individual shoppers are relaxed in the future.

Tesco and Wal-Mart also have a limited presence in India. German retailer Metro has opened cash & carry stores in IndiaBut they are not selling anything to anyone: Wal-Mart's 80 staff in India are there to look after the retail behemoth's purchasing in the region.
Even so, it has been lobbying the Indian government to allow it to open an office in Bangalore where it could research the Indian retail market and the possibilities for developing its operations there in the future.

Bangalore is also home to Tesco's Indian outpost, an office which looks after some of its back-office finance operations. It says it has no firm plans for the region - it will not open up a wholesale operation like Metro - but admits it is watching for any further relaxation of retail regulations.

Inevitable:

Most Indian business experts think it will not have to wait long.
"The recent move was just the first step," says Dr Mohan Kaul, chairman of the Commonwealth Business Council.

"Maybe this time next year there will be a further announcement.

"It's inevitable, there is no way that an open market for retailing will be stopped."

Retail Updates

India's boom time for the few

By Mark Tully Former BBC India correspondent:

Sixty years after Partition and the violence and upheaval which followed, India has begun to prosper as the world's largest democracy. Mark Tully was the BBC's India correspondent for 22 yearsWhen I came to India in 1965, I was surprised to find that diplomats, at the end of their postings, would sell all the possessions they had imported including partly used lipsticks and second-hand underwear.

The shops only stocked Indian goods and they were distinctly second class.
I still remember the pain of shaving with an Indian razor blade and being taught how to remove the glycerine from Indian beer. The trick was to turn the bottle upside down in a glass and an oily liquid would ooze out clouding the water.

Now I shave in great comfort with Indian blades and pour beer straight into my mug.
Raising the siege. When I went back to Calcutta, my early childhood home, to indulge in a bit of nostalgia, I found what had once been the commercial capital of India dying on its feet. One British town planner had forecast it would be the first city ever to collapse.

India's Tata Steel owns the Anglo-Dutch steel manufacturer Corus:

Trees were growing out of the offices of some of the once-great names in British commerce. At least Gillanders House, where my father had worked, was still reasonably well preserved but his firm was a pale shadow of what it had been in his day.
Now Calcutta is enjoying something of a boom and a whole new city is springing up on the way to the airport.

I once complained to an Indian ticket inspector that I had paid a surcharge to travel on a super-fast train, which was not very fast. He corrected me saying, "It is a super-fast train, it's only going slowly."

For years the Indian economy used to chug along at what was known as the Hindu rate of growth of 3%, with perhaps a little plus. Now it clips along at 8-plus%, which is by any standards fast, if not super-fast.
All this has been brought about by the unscrambling of what was known as the licence-permit Raj.

That was a siege economy, which kept out all foreign competition to India's nascent industry.
But in the name of allocating scarce resources, one of which was power, bureaucrats - known as the "abominable Indian no-men" - were also empowered to prevent competition within India.

No-one could start manufacturing without a licence given by the bureaucrats, and existing manufacturers would bribe them to refuse licences for potential competitors.
India abroad. India started to dismantle the wall it built around its economy when in 1991 it faced bankruptcy, and the International Monetary Fund demanded the reform of the licence-permit Raj as the price for bailing the country out.

Some shopkeepers are against big foreign stores moving to India:

The demolition has released India's remarkable entrepreneurial talent. America has coined a new word - "Bangalored" - to describe the fate of the large number of IT employees who lose their jobs to India's IT capital, Bangalore. The big international names in the motor industry now have plants here and they are all being given a good run for their money by cars designed as well as made in India.

Indian companies are now taking over foreign companies like the Anglo-Dutch steel manufacturer Corus. But international businesses complain that the demolition job has not been completed. Foreign bankers, insurers, retailers, and manufacturers compare the restrictions India still imposes unfavourably with the freedom they enjoy in China.
India argues its specific political and economic problems mean that it must retain freedom to direct its economy, and to control the market.

Retail is a good example:

The government rightly fears the political impact of destroying the livelihood of the millions of small shopkeepers who dominate the trade if Tesco and Wal-Mart, who are knocking on the door, are allowed in and given free rein. India is also a land of small farmers and they cannot be left to fend for themselves against farmers in other parts of the world with their giant acreage farmed by one man and a tractor.

Left out:

The biggest problem for India is that the rapid economic growth has only led to stunning changes in the lifestyle of the rich and the middle classes. There is still widespread poverty in the cities as well as the countryside.

Many economists argue that the present top-down economic growth will never trickle down to the poor and so the economy needs to be directed more towards them. The trouble is that the direction has to be done by the government and that means the same "abominable no-men" who created the nightmare of the licence-permit Raj.

No matter how many arguments there are for the Indian train going at its own speed there can be no argument for allowing them to be on the footplate, driving the engine.

India's retail revolution

India's retail revolution

Will India's mom-and-pop stores perish with the arrival of modern supermarkets? Fortune's John Elliott reports.

(Fortune Magazine) -- Suresh Prasad sells groceries from a 12-by eight-foot store opposite a new Reliance Fresh supermarket in the southern Indian city of Hyderabad. His specialties are 10-cent pastry puffs and cakes. With the supermarket drawing new customers to the area, his sales have doubled.

Venu Gopal owns a slightly larger store opposite another supermarket a few kilometers away. Sitting on a stool behind a glass counter topped with plastic bottles of sweets and surrounded by closely packed shelves of rice, lentils, fruit juices and other groceries, he sells two or three sweets to children, a single cigarette to another customer, and tiny tobacco sachets every few minutes. "Our customers," he says, "come for small quantities."

Small shops, like this one in Hyderabad, worry that Reliance Fresh supermarkets will take away their business.

Though customers appreciate the value at Reliance Fresh supermarkets (above), the quality of the produce is not as competitive.

Venu Gopal, in his Hyderabad shop near a supermarket.

Those are hardly the dire scenarios of doom forecast by opponents of India's retailing revolution, who have taken to the streets to defend the livelihoods of more than 12 million mom-and-pop shop owners. In May and June hundreds of demonstrators armed with stones and bamboo sticks sacked Reliance stores in three cities, including Delhi. In Kolkata merchants marched to protest a Reliance contract to redevelop their market.

More on India
But in Hyderabad, the epicenter of the revolution, where Reliance Fresh has opened 50 brightly lit, Western-style stores in the past seven months as the front edge of a nationwide rollout, the reaction has been more muted. And the evidence seems to suggest there's room for everyone - street sellers and mom-and-pop shops, known as kiranas, as well as large chains.

"Definitely there is room for both," says Doma Trivedi, a franchisee of one of Reliance's most successful supermarkets in Hyderabad, whose wife and brothers continue to run the family's kirana a few kilometers away. "Everyone will have his own business. Smaller shops give credit and cater to people shopping on their way home from work, while Reliance Fresh gives correct measured weights and guaranteed prices."

Reliance Industries, the parent of Reliance Fresh, along with other retailers, including Wal-Mart (Charts, Fortune 500), which has teamed up with Bharti Enterprises, wants to change the way Indians have shopped for generations. So far 220 Reliance supermarkets have opened in 20 Indian cities since the rollout began last November. Plans call for 2,500 outlets in the next four years, including 500 hypermarkets.

The retailers' plans are generating opposition from wholesalers, other middlemen, and leftist political parties, which estimate that small-scale retailing provides livelihoods to about 20 million urban workers and 12 million rural vendors. To stem such opposition, Reliance has been opening bulk-buy stores called Ranger Farms in the early-morning hours that allow street vendors to buy at wholesale prices from the Reliance supply chain, thereby increasing their margins.

That hasn't stopped the Communist Party of India (Marxist), which initially focused on blocking foreign investment in the retail sector, from calling for restrictions on the number and size of large stores that can be opened in a single locality. They also want protection for farmers who sell to large retail chains and will, they fear, be bullied into accepting low prices. Reliance and Bharti argue that their supply chains will replace corrupt officials and middlemen who run the current purchasing and distribution system, and reduce waste of up to 40 percent of produce sent to urban areas.

The malling of Bangalore

A look at the potential impact shows many of the opposition's fears to be exaggerated. "India is at the beginning of a process of change, and customers are looking for something more modern, but there is no risk of serious unrest or job losses because only a limited number of small vendors will be affected," says Arvind Singhal, chairman of Technopak, a retail consultancy in New Delhi. He says that small players will be hit but that the impact will be limited to areas near supermarkets. By his estimate, 6,000 to 8,000 supermarkets will open across India in the next five to seven years, and each might draw customers from 20 to 25 kiranas and fruit and vegetable stands, affecting at most 150,000 vendors.

This, he points out, is a small fraction of the total, and many will switch to selling increasingly popular products such as mobile phones or toiletries, or rent out or sell their premises. Set that alongside Technopak growth forecasts - that $330 billion in sales will reach $900 billion by 2015, of which modern retailing will account for 27 percent, with numbers employed rising from 40 million to 62 million - and it is clear that market expansion should more than compensate for the impact of new stores.

But for vulnerable small traders operating on the margin, these forecasts are of little help today. In New Delhi, where supermarkets are opening fast, pavement and pushcart vendors are bitter. "I've lost half my business," says Rajiv Das, who has been selling fruit and vegetables for 18 years and now has to contend with a new Reliance store a three-minute walk away. "I'm not able to fight, but I would if I could."

Similarly, Selva Kumar, who runs a kirana 100 meters from a Reliance outlet in Chennai, says, "We have lost 40 percent of our business, and that's the future. We're not closing, but there'll be no growth."

There is less opposition in Hyderabad, India's most developed and sophisticated retail market, where the first supermarket opened ten years ago. The city of seven million is booming, with new shopping malls, luxury-car showrooms and construction sites.

At Reliance Fresh stores, wide choices of produce are neatly arranged on shelves and in big display baskets. There are ten varieties of mangoes and 14 kinds of apples, some on sale. Signs hang from the ceiling, and smartly uniformed staff in red T-shirts add to the mood of efficiency.
More residents of Hyderabad have traveled abroad than those from most other Indian cities, and they are "highly value-conscious," says Venugopal Komanduri, who runs Reliance Retail in Andhra Pradesh, where Hyderabad is the capital. That helps explain why modern stores - there are at least nine supermarket chains - already account for more than 20 percent of Hyderabad's retail sales, compared with only 3.6 percent nationally, according to a retail audit last year by Nielsen Co.

But it's not all smooth sailing. Reliance has found its "fresh" tag hard to justify as summer temperatures have risen above 40 degrees Celsius. On a recent tour of several Hyderabad stores, papayas were found to be rotting, and other produce, such as cauliflower and bananas, looked grubby and tired. Staff said it was a "bad day," partly because it was "Sunday produce being sold on a Monday" and the power supply had been a problem. Yet the same poor quality was evident during later spot checks in Delhi and Chennai. "Our weather is playing havoc with the produce," Komanduri says.

India's richest man goes over the top

Not surprisingly, Komanduri calls this a "learning curve." India has few refrigerated warehouses, and no retailer has tried to develop countrywide supply chains for fresh produce, linking collection points in rural areas to processing depots near urban centers. Reliance Fresh has been trying - and failing - to cope with 175 varieties of fruit and vegetables at the height of summer (down from 243 in winter).

Customers have noticed. "It's good value here, better than other supermarkets, but there are difficulties with the quality, especially apples and papayas," says Rama Tibrewal, a middle-aged Reliance shopper in Hyderabad. Other customers agree. "The quality is not so good," says Ratana Shobha.

It would seem that Reliance will be able to eat into small retailers' business in big ways only when quality improves and its stock widens to include household items, which is now happening across all its stores.

The future rapid growth of the retail sector, together with shoppers' preferences in developed markets around the world for both big and small outlets, should mean that the impact on the mom-and-pops will be far less than feared.