The growth of a nation


With a retail market worth an estimated $350 billion, it’s not hard to see why the OP big boxes are looking to set up shop in the Indian market.
So what is it about the market that it is proving so lucrative to foreign OP firms? Well not only does the country’s vast population of roughly 1.3 billion provide an extensive customer base to be tapped, but the retail market is expected to grow by an average of 13 percent annually over the next few years.
And, according to AT Kearney’s FDI [foreign direct investment] Confidence Index, India has displaced the US as the second-most favoured destination for FDI in the world after China. Couple these factors with GDP growth of 8.6 percent in 2006, rising disposable income levels and good relations between the Indian government and most governments of the West, and the opportunities for international OP retailers are easy for all to see.
Purchasing consultant Ian Milligan, the former European purchasing manager of private label at Spicers, has his own take on India’s charms. He says: "If you look at India’s potential purely in terms of population, it’s huge. It’s pretty close to the size of the Chinese market and so, obviously, India is a lucrative market that is growing and developing, although at a much slower rate than the Chinese. So from both a purchasing and retailing perspective, there’s a need to get a foot in first.
"India is not that far behind China in terms of growth. It has got a lot of potential. It has the largest student population in the world. The government also wants to achieve literacy levels of 100 percent and this will create a lot of wealth and lead to a stronger economy over all."
And some Indian manufacturers are already cashing in on the huge student market. For instance BILT, India’s biggest writing and printing paper company, has recently launched the latest notebook range to hit the student market. BILT says its Matrix Youth Series is aimed at the "young, urban and trendy" market and that the notebooks are selling "extremely well".
But setting up in this land of promise is not always plain sailing. There are two setbacks. The first is the country’s fiercely protectionist foreign retail policy and the second is its less than robust infrastructure.
Foreign retailers have only recently begun to develop Indian operations. Last year, the notoriously protective Indian government announced that it would open up the organised retail market to allow foreign companies to own up to 51 percent of single-branded domestic retailers, while foreign multiple-brand retailers remain limited to cash-and-carry, franchise or licence operations. But as yet the government has been unable to implement the policy for single-brand retailing due to heavy domestic pressure. And so foreign retailers continue to pursue JVs to establish themselves within the country’s market.
Taking the initiative
Not wasting any time in getting a foothold in the market, earlier this year Staples took the initiative to establish its presence by setting up a JV with Indian partner of choice, Pantaloon Retail. The partners now run Staples Future Office, which serves businesses of all sizes through delivery as well as cash and carry locations, offering a wide range of office products from core office supplies to printers and computers.
When OPI first broke the news of the deal in January, the tie-up with Kishore Biyani’s Pantaloon Retail arm was said to establish a platform for Staples to enter the $10 billion OP market in India and allow Pantaloon to benefit from the industry expertise and sourcing network of the world’s biggest office products company.
At the time Staples CEO Ron Sargent said: "As Staples expands globally, India represents a great opportunity for the company. This partnership combines Pantaloon’s local business knowledge and leading brand with Staples’ best practices and global procurement strength."
The JV has moved quickly and in January made its first acquisition, taking over the operations and management of Officedge, an online B2B OP firm that provides contract delivery services to corporate customers throughout India.
Pantaloon’s director, Rakesh Biyani, says: "The acquisition fits in with our strategy of being present with different business formats to capture increased spend levels by customers. We have, over the years, pioneered many concepts where we interact with end customers. Officedge is a unique organisation and gives us the necessary traction in a growing market."
And not to be outdone by its rival, now Office Depot is thought to be planning its own Indian debut. The retailer is understood to be looking to move into the market by setting up a franchise. A team of senior management members recently visited the country to hold talks with potential partners. But the clearest signal yet of Depot’s intent to enter India came when Chuck Rubin, Depot’s president of North American retail, commented on the growing speculation at Reuters’ recent consumer and retail summit.
He told the conference: "We haven’t done anything in India yet. I think India is too large, too attractive, for us to think that we won’t be. We’re trying to globalise how we go to market."
This high level of interest in India from multinational retailers is coming as no great surprise to many in the OP industry. Milligan says: "I’m not really surprised with what the big retailers are doing. What they’re doing in India now they were doing in Eastern Europe in the early 1990s. When Tesco and Carrefour first moved into that market it was pretty underdeveloped but now, just over 15 years on, it’s developing pretty well. So given the lessons of entering the Eastern European market, it’s understandable that big companies will be keen to establish themselves now, so that when India is rocking and rolling, economically speaking, they will be able to cream off the benefits."
But the optimism of foreign firms in setting up in India is being met with staunch opposition from lobby groups within the country. FDI Watch is a national coalition of labour unions, trade associations, environmentalists, NGOs and academics that has formed to block attempts to allow FDI in India’s retail markets. The coalition believes that FDI in retail will amount to job losses in the thousands and the closure of thousands of small businesses. It also believes that the influx of FDI will continue the race to the bottom in wages and working conditions.
Reena Desai, an advisor to the coalition and member of ACORN (the Association of Community Organisations for Reform Now) tells OPI: "India does not need American retailers like Wal-Mart and Staples. Wal-Mart has been responsible for driving out small businesses, driving down wages and harming the environment in the US.
"With 12-15 million family businesses, India has the highest density of small shops in the world and the retail industry is currently the second largest source of employment. But even now, in major cities like Mumbai, stationery and Xerox stores are prominent, and are a large source of employment even within unorganised retail. Given this, what need would there be for such retail giants in India, where the negative impact would be much worse?
"The ban on FDI in retail exists precisely because the Indian government knows that huge corporations like Wal-Mart will wipe out existing stores and small-scale industries, as it has done elsewhere around the world. That is why it has not been able to open yet and why Wal-Mart and others are entering the market through JVs. These JVs are nothing but backdoor entry for foreign retailers. In the case of Wal-Mart setting up with Bharti, Wal-Mart is essentially trying to ease its way into the market to establish a presence, by getting involved in infrastructure and back-end operations. This will increase its leverage with the government to open FDI in retail so it can eventually fully operate at the front end.
"The entry of companies like Wal-Mart and Staples into the Indian retail market, whether legally or subversively through JVs, will have the same effect on small shops, hawkers and others employed in retail – they will be wiped out."
Yet it is not all doom and gloom. Some Indian manufacturers are very welcoming of international players entering the market.
DK Jain, the chairman and president of writing instrument manufacturer Luxor, is much more enthusiastic about opening the market to FDI. He tells OPI: "The entry of international retailers will help modernise the buying experience for the Indian consumers. This will also bring to India an international mix of products. It will help improve the end customers’ experience in more ways than one. The competition will get healthier and will help the Indian OP industry to upgrade its products and meet international standards."
And he is also far more positive about the ability of local firms to survive. He adds: "While international players have their own strengths, the inherent strengths of manufacturers in the Indian marketplace, such as low-cost manpower and high quality production, will help local firms compete on an even footing."
A promising development
Chand Das, CEO of Indian retail giant ITC’s greetings, gifting and stationery business, shares Luxor’s enthusiasm. "FDI coming into the country is a promising development. It will help organise the office supplies market, which is today completely unorganised. A few companies like Office 1 Superstore and some online operators are trying hard to change buyer behaviour. Our product range is available at Office 1 Superstore and we are in discussions with Staples for our branded paper products."
And Das is optimistic about the chances of survival but realises the challenges small firms will have to face.
"They will have to provide outstanding customer service and build customer relationships, while stocking similar quality products to those of international competition," he says.
And Ambrish Jain, executive director of stationery manufacturer Kangaro, says: "For local firms to compete they must keep improving quality and keep costs under control as well as consolidating operations."
But offering a somewhat more sombre outlook, Reena Desai comments on the reality for many small Indian businesses: "What is even more distressing is that unlike in the US and the UK, these huge corporations are entering India in small-store formats, not just hypermarkets. They compete directly with small corner shops and already those shops are losing business and having to close down. They simply don’t have the resources to compete. They don’t have the money to buy supplies in bulk. Wal-Mart and Reliance are able to do this, which is why they sell cheaper and cut out their competition."
Banding together
And it now seems that smaller retailers are beginning to band together so that they are able to buy in bulk as well as having the capacity to boycott suppliers that offer cheaper prices to larger retailers.
Although this development has not yet impacted on the OP market directly, buying groups are starting to enjoy some success. In Mumbai, the Retail and Dispensing Chemists Association (RDCA), which represents more than a thousand chemist shops, has recently been successful in boycotting pharmaceutical companies selling cheaper to the Indian chain retailer Subhiksha than it does to small businesses. The RDCA won its battle and its members are now getting the same prices. Perhaps this will encourage Indian OP dealers to club together, leading to a better organised Indian OP industry.
The other challenge for retailers wanting to establish themselves in the Indian market is the country’s poor infrastructure. Its underdeveloped transportation network hinders its success as international players simply don’t want the hassle of having to deal with hold-ups when it comes to shipping their products. It’s all well and good if products can be sourced cheaply but if they can’t be shipped quickly, they lose their competitive advantage to products made by rival countries.
As Milligan says: "If you look at India from a sourcing point of view, the infrastructure and the level of organisation compared to China injures the market significantly. China is a very slick operation and as a country it operates smoothly and efficiently, but India just isn’t quite there yet. If India can get the infrastructure and the organisation right, then it can be an enormous rival to China."