| India has topped management consultancy A. T. Kearney's Global Retail Development Index 2006, ranked above Russia and Vietnam, the 'Little India' which has moved up five places to the third spot.
It means India has emerged as the world's most attractive destination for mass merchant and food retailing, outperforming "saturated" China for the second year in a row.
The Index, closely watched since it was first introduced in 2001, ranks 30 emerging economies on the basis of 25 variables, including economic and political risk, retail market attractiveness and retail saturation levels, on a 100-point scale. The higher the market, the greater the urgency there is to enter the market.
The report, available on www.atkearney.com , describes India as a "peaking market". It says: "A peaking market is developing quickly and is ready for modern retail. At this stage, retailers should enter the market through sourcing offices, local representation and new stores."
Citing the success of Wal-Mart and Carrefour, which moved into China in the late 1990s and early 2000s, the report says: "Retailers that enter during (the peaking) stage have the best chance for long-term success. ... Today, Wal-Mart and Tesco are adopting the same strategy in India -- testing the market before diving in. Looking ahead to 2011, don't be surprised if Wal-Mart and Tesco are among the top three international retailers in India ."
A window of opportunity, the report continues, "lasts about five to ten years before a market enters the closing phase and reaches saturation levels close to developed market" (a situation that China now finds itself in).
" India , for example, was in the opening stage in 1995, entering the peaking stage in 2003 and reached the Number 1 rank in 2005. We expect India to remain in the peaking stage for two to three years and then begin to move into the declining stage. While Wave 2 formats like discount stores could succeed in the later stages, the ability to earn significant market share and profits is limited and competition is fierce," the report states.
"In markets that are emerging or peaking, supermarkets and cash and carry formats are the most successful. Forcing an unfamiliar format onto a new market generally doesn't work," the report says. "In India , for example, where space is limited in large cities, Tesco is introducing a smaller store under the Magnet banner."
Making a strong case for opening up the Indian economy to international retail formats, the report, citing the experiences of Brazil and China , says that apart from driving productivity levels up, it leads to a surge in export volumes. The report then goes on to say: " China 's policy of being open to foreign investment directly led to a surge of exports of more than US$60 billion per year. Wal-Mart alone exports approximately US$20 billion in products from China -- a significant rise in exports occurred after the company developed operations in China .
"By comparison, India 's policy of being more closed to foreign investments means (Wal-Mart's) exports are hovering under US$1 billion per year. These figures are less about the success of individual companies and more about the market's openness to modern retail."
Admitting that though modern retail formats create additional employment, they take away traditional-sector jobs, the report says that "the disruption may not be as bad as people fear".
Pointing to India 's unique situation, it says: "In India , traditional retail is often located in residential areas, and the family owned store is an extension of the family home. Labour costs are low because employees are mostly family members, which means fixed costs and the associated break-even points are low. The businesses would have to suffer significant volume losses to put them in the red."
The report concludes by commending the way Poland , the Czech Republic and other East European countries "have all done a good job of striking the right balance". That's certainly something for Indian policy-makers to chew on.
But, as Ajoy Khanna, CEO, Indian Brand Equity Foundation and Deputy Director General, Confederation of Indian Industry, said in his response to the AT Kearney Index, the charm India holds for investors is based on the "fabulous returns its market provides."
The average return on capital employed for multinationals in India is 19%, Khanna pointed out, quoting Finance Minister P. Chidambaram's speech at the 'Advantage India ' business seminar organised by the Foundation and the Ministry of Finance. Chidambaram had pointed out: "One-half of the MNCs earn higher returns in India than their global average. This fact showcases India 's financial solvency -- a fact among many others that has made 'the elephant dance'."
Now, if foreign investment in India 's retail sector is a win-win situation for both parties, what's stopping the marriage?
Relevant extracts from the A. T. Kearney report:
India is more attractive than ever to global retailers. Its economic growth, forecast at 8% GDP in 2006, continues to support the retail industry. The estimated US$350 billion retail market is expected to grow 13% and the top five retailers account for less than 2% of the modern retail market.
There are also fundamental changes underway in India . In early 2006, the Government of India announced that it would allow foreign companies to own up to 51% of a single-brand retail company, such as Nike or FCUK. This is a significant growth for global retailers and will spark a flurry of investment. Already, companies including Gap, Zara, Timex and United Colors of Benetton have announced plans to enter the market.
However, the relaxed regulations do not extend to companies that sell a variety of brands, such as Wal-Mart and Tesco.
Despite the ongoing obstacles, Wal-Mart is eager to open its doors in India and is investigating its options. One possibility would be to open a Sam's Club wholesale business through a joint venture and sell strictly to other retailers. The strategy skirts the issue of not being able to sell directly to consumers and still establishes a presence in the local market.
Tesco is planning to enter the market through a partnership with Home Care Retail Mart Pvt. Ltd. and expects to open 50 stores by 2010.
Still, controversy about how globalisation will affect local retailers continues, and local conglomerates are moving quickly to ensure they don't lose out to international players. Reliance, a leading Indian conglomerate, announced that it will invest US$3.4 billion to become the country's largest modern retailer by establishing a chain of 1,575 stores by March 2007. Hypercity Retail, a subsidiary of the Raheja Group, plans to open 55 hypermarkets by 2015.
India 's government seems to be on a gradual, but definite, path towards allowing foreign retailers into the country. And when it takes the final steps, the peak time to enter will quickly pass -- giving retailers that enter now a distinct edge.
Indian Food & Grocery Retail Market to Touch US$482Bn in 2020
The UK-based research agency, IGD, predicts that Wal-Mart will be the first global retailer to enter the Indian food and grocery retail market. The Indian retail sector, worth US$203bn, is currently closed to Foreign Direct Investment (FDI), but the government may open the doors to international players over the coming year, according to a report on www.kamcity.com , quoting the IGD findings.
If this happens, IGD believes that Wal-Mart will be the first to make a move with its hypermarket format. If the government drags its heels, Wal-Mart is likely to get a head start by establishing a cash and carry operation in the unrestricted wholesale sector.
"Global retailers cannot afford to ignore India if they are looking for growth,” reports Fiona McTavish, Senior International Business Analyst, IGD. “By 2010 it will have overtaken France , Germany and the UK in the league of global grocery markets, and will double to a value of US$482bn by 2020."
For the complete article, follow this link: http://www.kamcity.com/namnews
For recent news stories on developments in the Indian Retail Sector, click here
|
