Dean Best

Best bits: Caution over India's retail ruling

By Dean Best | 28 November 2011

Major retailers like Wal-Mart, Tesco and Carrefour will now be able to invest in Indian retail - albeit with a number of conditions

Major retailers like Wal-Mart, Tesco and Carrefour will now be able to invest in Indian retail - albeit with a number of conditions

Multinational retailers beware. For all the headlines last week, the passage into India's fledgling and potentially lucrative retail sector is likely to be anything but smooth.

News that the Indian government plans to relax restrictions on foreign investment in the country's retail industry would have initially been greeted warmly in boardrooms at the likes of Wal-Mart, Carrefour and Tesco.

New Delhi's decision to, for example, allow overseas retailers to take a majority stake in a supermarket chain in India does, on the face of it, present a very appealing opportunity for Western retailers keen to tap into the country's growing and ever-more wealthy middle class.

However, the devil is in the detail. A retailer that wants to set up a supermarket chain in India will have to meet certain conditions, including a stipulation that it must invest US$100m - and half of that must be spent on infrastructure. Companies will also be forced to buy 30% of produce from small and medium enterprises and will only be able to establish stores in cities with a population of one million people or more.

That said, the most critical consideration for would-be investors is the fact that the Indian government's reforms have been met with fierce opposition in some parts of the country. Individual states in India's federal political system will be allowed to ignore the new regulations if they wish - and there has already been defiant statements from some local politicians that overseas retailers will not be allowed entry to their markets. Opposition leader Uma Bharti has reportedly even threatened to torch any Walmart store that may open in the country.

It, therefore, seems there is a long way to go before we see a network of Tesco supermarkets in India. And, from the public reaction so far - a spokesperson from Carrefour last week pointed out that "it's still an ongoing process" - Western retailers are fully aware of the potential obstacles that lie ahead.

India's planned retail reform was the big news story in a week dominated by developments at a number of global retailers. One retailer that already has a presence in India through its wholesale network - Metro Group - was also in the spotlight with the appointment of its new CEO. Finance director Olaf Koch will take the top job by next October and, after the uncertainty at the top of the retailer in recent months, investors will be pleased that a sense of normality is set to to return to the German retail giant. However, there are a number of challenges that lie ahead for Koch, including a need to revitalise sales at the company and successfully sell department store chain Kaufhof.

Ahold was another European retail giant under scrutiny last week. The Dutch retailer unveiled a series of measures that it hopes will keep it at the "forefront" of the sector, including plans to treble its online sales, open more stores in Europe and expand private-label sales in the US. Analysts welcomed Ahold's plans, although, interestingly, the retailer's share price fell in the wake of its announcement. Were investors concerned that Ahold, despite its new initiatives, stuck to its target for sales and margin growth? Are they anxious about Ahold's exposure to mature markets like the US, where the retailer is operating in a fiercely competitive and economically challenging environment? There could be some truth in both but Ahold, with its new strategy, plans to demonstrate how it can navigate such tough trading conditions.

However, competition looks set to get tougher in Ahold's home market of the Netherlands, after local rival Jumbo acquired another Dutch retailer C1000 last week. Ahold could benefit in the short term as Jumbo integrates C1000 into its business. However, looking further ahead, the acquisition is likely to put pressure on Ahold's margins, as a strong number two player is created to challenge the company's position as market leader.

Sectors: Emerging markets, Financials, Mergers & acquisitions, Multichannel, Retail

Companies: Tesco, Carrefour, Ahold, Metro Group

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