Retail revolution



In a Harvard Magazine report on India’s prospects and potential, headlined "India’s promise", the country is described as a "gigantic eBay. Anything that can be sold, is".


With a consuming class of 105 million that is swelling 10 per cent per year, India is a retailer’s paradise. But for outsiders, it remains a forbidden fruit. Foreign retailers are not yet welcome, and as a consequence, the market is dominated by more than 10 million small domestic retail shops, with shopping centres and big stores taking just 3 per cent of the pie – compared to 20 per cent in China and 80 per cent in the US.


But this is set to change – and soon. Within the next year, the Indian government is due to relax laws on foreign companies in the retail sector, one of the last channels in India that remain closed to foreigners. At first, international retailers will be allowed a 49 per cent stake in a joint venture (JV) with an Indian retailer, but the size of the stake is expected to increase in time. As a result, India’s OP sector expects a major boost.


Retail giants with strong OP ranges such as Wal-Mart, Tesco, Carrefour and Aldi are ready in the wings – and have been for some years. Office 1, which first attempted to launch a franchise agreement in India in 1996 that was not approved by government authorities, also plans to re-enter this year. "We are hopefully re-entering this year with a new master franchisee and our application is being considered by the appropriate authorities," CEO Mark Baccash told OPI. Staples and Office Depot, meanwhile, claim they have no plans to enter India at this time.


For those in wait, it should be worth it. India is brimming with young, brand-hungry consumers with a huge spending power (in purchasing power parity terms, India is now bobbing at around fourth place in the world). And the young and increasingly international Indian population is more determined than ever to keep up with foreign brands.




As a result, modern retail chains and large shopping malls are sprouting up nationwide. And the largest retailer, Big Bazaar, is expected to boast sales of $23 billion by 2010, up from $6.4 billion last year. With the predicted foreign investment thrown in, India’s retail industry is estimated to expand by more than 80 per cent in the next five years to value $607 billion by 2010 from $330 billion last year, according to US consultancy firm AT Kearney. For office product retailers, there is more good news: literacy rates are improving and the IT and services sectors are booming. Most estimates say that the OP industry is growing by around 10 per cent per year.


Joe Menzer, president/CEO of Wal-Mart’s international arm, has made various visits to India to discuss the company’s plans with the government and, it is believed, Indian business houses with which it can set up JV partnerships. The giant is also reported to already be hunting for a new CEO to spearhead its Indian operations. "It is amazing that India, which has a huge retail potential, is under-retailed," said Menzer following his most recent visit. "We are looking forward to the government relaxing FDI norms in retail. As and when this happens, we will invest significantly here."


When the multinational retailers do arrive, insiders in the Indian OP industry expect ripples to be felt throughout the supply chain. Indian OP manufacturers will largely do well from the influx, because the retailers will opt for many Indian office product lines, which make up 80 per cent of the domestic market. But the lower prices are expected to hurt manufacturers.


Brian d’Souza, general manager of exports at manufacturer/reseller Kores India, told OPI: "Kores is already well-established as a brand in India so will do well from the foreign retailers coming. But although our volumes will grow, we will have to accept a lower price, which means lower margins. Also, we will be forced to work with the foreign retailers on their terms, such as giving products on credit, which will be more difficult.


"And because margins are squeezed, the likes of Wal-Mart tend to work directly with suppliers, cutting out the distributors," D’Souza adds. "It will upset the traditional supply chain we have here in India."


Vinod Sachdev, managing director and chairman of Indian writing instrument manufacturer Lexipens, also worries about tighter margins. "Selling to small, local retailers gives us a profit margin of between 30-70 per cent at the moment. But with the foreign retailers, although they buy a lot more products, our profit margins will go down to 10-25 per cent."


New international brands brought in by foreign retailers will also put competitive pressure on domestic brands, particularly because India is such a quality-conscious nation – unlike some other Asian countries where price is most important. "People are willing to pay for an international brand in India," says d’Souza. "At Kores we will need to change our marketing style to make ourselves stand out. This is how we will stay in the race. We won’t be able to do it on price alone."


"You cannot sell just adequate quality to the Indian market," adds Sachdev. "The education levels are high here and with the IT boom, people want high quality brands." This view is mirrored by Surendra Karamchandani, co-owner of OP retailer Venus Superstores, a 30-year-old business based in Mumbai’s province of Maharashtra. "Indians are slowly beginning to buy better quality," he says. "They are now prepared to pay more."




Domestic retailers are less enthusiastic than manufacturers about the arrival of foreign players. There is already a protectionist lobby against the likes of Wal-Mart. Small, local retailers worry that the large retailers could put them out of business, and large Indian chains are concerned that they will not have enough time to establish themselves. "We should be given the first chance to develop the market before opening," Kishore Biyani, managing director of Pantaloon Retail, which owns Big Bazaar, told The Wall Street Journal. "Indian consumers are getting what they want, so why rush? Two or three years will be good enough for us to get on our feet."


"It will be tough for domestic retailers when the foreigners arrive," says d’Souza. "International retailers have deeper pockets and more staying power. Many small local retailers will definitely sell out to foreign retailers when they come, because they won’t manage to stay open and expand on their own."


Karamchandani claims that Venus falls into this category. "Because of the small margins, we will be unable to set up new outlets in the near term, so we are planning on setting up franchises. One day though, we hope to expand on our own."


But of course, domestic retailers have the advantage of knowing the local market. This is crucial in India, a country with 17 official languages, six major religions and a large number of ethnic minorities – all with different tastes and preferences.


"It will be difficult for foreign retailers to come in and make big changes because they don’t know the market," says Karamchandani. "Also, we have the benefit of knowing our customers and, as opposed to the likes of Wal-Mart, we can deliver supplies straight to their office."


Industry insiders believe that it is not only the metropolises that will be affected by the influx of foreign retail, but also the small towns, which are currently seeing the strongest OP growth levels. "A lot of growth will come from class B towns in India," says d’Souza. "Kores has shifted its focus to small towns and after a while we may well see the large foreign retailers set up there. There is certainly lots of land available."


But, as has been the case with other Asian countries, foreign players are advised to go into India with caution. In the near term, they will need to feed off their domestic counterparts for knowledge on the market, distribution infrastructure and the legal, tax and regulatory environment. Office 1’s Baccash admits that he expects to find the Indian market "difficult" because it is super-fragmented, price-conscious and suffers from import difficulties. "It may be a little too early," he admits.


With retail growing at such a stifling rate, however, both domestic and foreign retailers have the potential to prosper. Adi Godrej, chairman of Godrej, one of India’s largest business groups to have launched a retailing segment, claims that each party carries its own strengths. "Partnerships are the best format," he said in an interview with The Financial Times. "The market is so huge that competitive pressures are not going to affect the business model for the next decade."


D’Souza at Kores agrees that there is more than enough business to go round: "It is an exciting time for India. Investment is at a height, the brain drain is returning and companies of all sizes are gearing up for international standards. The future is bright and there is a positive energy here – we are transforming but there is still a lot to do."