• Strategy
  • The Economist

Setting up Shop in India

Foreign retailers mount an onslaught on India, and local companies fight back.

India’s retail revolution is at last getting started. At the moment 97% of retail sales are made in more than 15m tiny mom-and-pop stores, mostly of less than 500 square feet (46 square metres). But now Reliance Industries, the country’s largest business group, is to spend 250 billion rupees ($5.5 billion) on big new shops over five years, starting on November 3rd when it will open 11 convenience stores in the southern city of Hyderabad. And big foreign companies are moving in too. The government bans them from selling direct to individuals, but they have found a side door: starting wholesale and sourcing companies which supply a local retail partner. The first to do this, last month, was Australia’s Woolworths, in league with Tata, India’s second-largest firm. Tesco, from Britain, is expected to follow soon, and Wal-Mart and France’s Carrefour are also thought to be searching for a way in.

Reliance rarely develops its new ventures quietly, so rumours and leaks about its plans have sparked a chain reaction. Foreign firms have realised that they need to get a toe-hold in India quickly, without waiting for the government to open up retailing to foreign direct investment (FDI) properly. If they wait too long, they risk leaving the field clear for big Indian groups, such as Pantaloon Retail and Spencer’s, which have been accelerating their expansion plans and securing scarce development sites.

For overseas companies looking for growth outside sluggish domestic markets, India’s retail business is one of the most attractive. Consumer demand is booming as the government’s steps to liberalise the economy have produced GDP growth of around 8-9% a year. Technopak, a Delhi-based retail consultancy, expects retail sales of $250-300 billion now to rise to nearly $430 billion by 2010. Modern retailers’ share will rise from just 3% now to 16-18%, it says.

Retailing is one of the last big sectors of the Indian economy to open up to FDI. Previous attempts by foreign retailers to start businesses were blocked by successive governments. In the 1990s opposition from traders and local shopkeepers was enough to convince politicians. Later on the government was persuaded by the political left, and also by the Indian business lobby. The current government now has no hope of allowing FDI into general retailing by the end of this year. But side-door entries are permissible. “We need a model that doesn’t replace existing retailers,” says Kamal Nath, India’s minister of commerce and industry.

Under the current policy, Western brands from Reebok and Cartier to Marks & Spencer have set up franchise stores with locals. The locals own and run the shops, and the foreigners run the sourcing and wholesale part. Starbucks, a coffee-shop chain, is expected to open soon as a similar franchise. Earlier this year the franchise policy was relaxed, so that foreign firms can now take 51% equity stakes in shops that sell just their own brand. But this has yet to catch on in practice. Broader wholesale businesses selling to registered retailers have also been allowed, though Metro of Germany is the only company to have used this route so far.

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