Indian retail market set for growth as Wal-Mart makes move
Wal-Mart's arrival in India underlines the interest being generated by the country's emerging retail sector. But the US giant is not the only foreign company looking to capitalise on India's burgeoning retail market, while local companies also see retail as a prime investment opportunity. Bhavna Rathore reports.
With the recent announcement of the joint venture between Bharti Enterprises and Wal-Mart, a new chapter in Indian retail has begun. While at present the agreement between Bharti and Wal-Mart is just a Memorandum of Understanding (MoU) jointly to explore business opportunities in India, it could well be the birth of the newest organised retail venture in the country.
Wal-Mart has plans to open hundreds of superstores in India over the next five years. Bharti Enterprises will own the stores themselves, but the back end of the operation will be owned and developed by the American giant. The arrangement will allow Wal-Mart to enter India's retail sector, which although closed to Foreign Direct Investment (FDI), allows companies from outside India to operate through franchisees.
The developing retail sector has already been identified as a major investment opportunity by some prominent Indian companies. Companies such as Futures Group with its Big Bazaar and Pantaloon chains, the RPG group with Pyramid Retail, Subhiksha and other regional players are changing the way India shops. Having been used to an undeveloped retail market comprised primarily of local independent shops, Indian consumers are increasingly taking to the chain stores and retail brands that a more organised retail sector offers.
Bharti has been fine-tuning its entry into retail for the last few years. It already has a joint venture with ELRo Holdings India, called FieldFresh Foods, which distributes fresh fruits and vegetables. Bharti's chairman Sunil Mittal sees India as the world's last big frontier for retail, and Wal-Mart's expertise in this area will help the company tap the massive potential the market has to offer.
However, not everyone is happy with the tie-up between Bharti and Wal-Mart. The joint venture's potentially largest competitor Reliance, for one, is already crying foul play. According to local media reports, Reliance boss Mukesh Ambani met Commerce and Industry Minister Kamal Nath, and voiced his apprehension about the way Wal-Mart was planning to enter the market.
While Bharti-Wal-Mart says it is abiding by all the necessary regulations, competitors allege the venture is effectively all Wal-Mart with Bharti as the public face. Competitors have also voiced concern that Wal-Mart will flood the Indian market with cheap, Chinese-sourced goods. More dissent is likely when Bharti-Wal-Mart files its application in front of the Foreign Investment Promotion Board (FIPB) this month (January).
Reliance Industries too has plans to become a leader in Indian retail. The company has said it plans to invest in excess of US$5.0bn in opening more than 5,000 retail stores across the country, including supermarkets, hypermarkets and also smaller stores. It is already testing the waters with the launch of 'Reliance Fresh' stores in the cities of Hyderabad and Jaipur. The Reliance Fresh stores are similar to Bharti's FieldFresh concept, and will sell fresh fruits and vegetables to begin with. This will allow Reliance to fine-tune its logistics before putting its ambitious retail expansion plans into operation.
Reliance is also looking at acquisition as another way of developing its presence in the retail sector. The company recently acquired the 54-outlet strong Adani Retail chain in Gujarat State for more than INR1.1bn (US$24m).
The back-end is going to be the key for all the players. For the food business, Reliance has appointed separate managers responsible for procurement, processing and delivery of every commodity. There are six CEOs for the entire retail operation.
Large stores and superstores have only a 3% share of the retail market in India while local general merchant stores account for the remaining 97%. However, there is vast scope for the retail sector to grow and other international retail giants are showing a lot of interest in India.
While the UK's largest retailer Tesco was unable to forge an alliance with Bharti, it has not given up. Media reports indicate that the group was in talks with the Tata group, and may even decide to enter the Indian market with the cash-and-carry model followed by Metro. Unlike multi-brand retailing, where only limited foreign direct investment (FDI) is allowed, cash-and-carry is an accepted model in the country. Under existing rules, foreign players running cash-and-carry stores can sell to distributors, retailers and hotels among others, but not to consumers.
With Indian retail coming of age, land and commercial space will be the most precious commodity. Every company is busy formulating its own property strategy. While the Futures Group is forming links with a number of real estate developers, Reliance is in the process of buying land banks and large tracts of commercial land across the country. Further growth may be fuelled by the acquisition of land from various Public Sector Undertakings (PSUs) and from the railways, which are among the biggest landowners in India.
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