1. Why is the Indian retail industry so inviting? 2. Given Wal-Mart’s lack of a strong record overseas, how do you think the company can gain competitive advantage and ensure success in India? 3. As an Indian government official, would you recommend the full-blown opening of the retail sector? 4. Assuming a positive answer in Question 3, what would be your recommended modes of entry if you were the CEO of Carrefour, Metro, Tesco or Woolworths?
India has the world’s highest density of retail outlets of any country. It has more than 15 million retail outlets, compared with 900,000 in the United States, whose market (by revenue) is 13 times bigger. At present, 97% of retail sales in India are made in tiny mom-and-pop shops, mostly of less than 500 feet (46 square meters). In Indian jargon, this is known, quite accurately, as the “unorganized” retail sector. The “organized” (more modern) retail sector commands only 3% of total sales, of which 96% is in the top ten cities. The retail industry is the largest provider of jobs after agriculture, accounting for 6%-7% of jobs and 10% of GDP.
With a booming economy and a fast-growing middle class, it is not surprising that foreign retailers, such as Wal-Mart, Carrefour, Metro and Tesco are knocking at the door trying to expand the “organized” retail sector. However, here is the catch: The door is still closed to foreign direct investment (FDI) in the retail sector which remains one of the last large sectors that has yet to open up to FDI. Millions of shopkeepers, supported by leftist politicians and trade unionists are worried about the onslaught of multinationals. Citing the controversial “Wal-Mart effect” being debated in the United States and elsewhere, one Indian Union leader labelled Wal-Mart “one of the ten worst corporations in the world.”
In response, the reformist government that has brought India to the global spotlight since 1991 delicately tries to balance the interests of various stakeholders. FDI is still officially banned in mass retailing. However, a side door is now open. Foreign firms can take up to 51% equity in single-brand shops that sell their own products, such as Nike, Nokia and Starbucks shops. Further, FDI in the supply chain is now permitted. Foreign firms can set up wholesale and sourcing subsidiaries that supply local mass retail partners. The first to do this was Australia’s Woolworths, which in 2006 started to supply Croma stores owned by Tata Group, India’s second largest conglomerate. To better compete with multinational retailers that may eventually arrive, Reliance Group, India’s largest conglomerate, is now making huge waves by investing $5.5 billion to build 1,000 hypermarkets and 2,000 supermarkets to blanket the country in the next five years.
On average, Indians are still poor. Only one in 50 households has a credit card; only one in six a refrigerator. However, as in China 20 years ago, such statistics do not deter foreign entrants. Instead, these data suggests tremendous potential. Despite objections, Wal-Mart is visibly leading the foreign lobby. One of its arguments is that super-efficient retail operations will enhance efficiency throughout the entire supply chain. For example, at present, 35%-40% of fruits and vegetables in India rot while in transit. Food processing adds just 7% to the value of agricultural output compared with 40% in China and 60% in Thailand, both of which embraced Wal-Mart. As local suppliers become more familiar with Wal-Mart’s requirements, exports may naturally follow – Wal-Mart now accounts for 10% of China’s exports to the United States.
Sources: Based on (1) The Economist, 2006, Coming to market, April 15: 69-71; (2) The Economist, 2006, Setting Up shop, Nov 4: 73-74; (3) A. Mukherjee & N. Patel, 2005, FDI in Retail Sector, New Delhi: Department of Consumer Affairs.
Discussion Questions:
1. Why is the Indian retail industry so inviting?
2. Given Wal-Mart’s lack of a strong record overseas, how do you think the company can gain competitive advantage and ensure success in India?
3. As an Indian government official, would you recommend the full-blown opening of the retail sector?
4. Assuming a positive answer in Question 3, what would be your recommended modes of entry if you were the CEO of Carrefour, Metro, Tesco or Woolworths?
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