The Hindu Business Line : "Big-box retail a huge plus"

The entry of big names into Indian retail is likely to help consumers as well as manufacturers, says Vijay Govindarajan of the Tuck School of Business.

The large volumes will provide the scale for Indian manufacturers to produce high-quality products at low cost. A thriving manufacturing sector will create a large number of jobs. More jobs imply more purchasing power which drives demand for more products.

VIJAY GOVINDARAJAN, Director, Tuck's Center for Global Leadership.

What are the implications of Wal-Mart tying up with Bharti, Reliance starting Fresh, and Carrefour planning to enter India? This is the question BrandLine posed to Vijay Govindarajan of Tuck School of Business at Dartmouth College, US. His answer was immediate: "This is a huge plus that will propel the Indian economy forward."

For starters, `big-box store' is a term of art in the retail trade that refers to a style of retail store, says Wikipedia. The phrase `big box' is descriptive of the physical characteristics of the building, one learns.

"A big-box store is a large, free-standing, rectangular, generally single-floor store built on a concrete slab. The flat roof and ceiling trusses are generally made of steel, the walls are concrete block-clad in metal or masonry siding. The interior can be either relatively luxurious, or starkly utilitarian, depending on the market niche of the firm and how it wishes to communicate that market position to its customers," it describes. Floor space is `several times greater than traditional retailers in the sector,' and can typically go beyond 50,000 sq ft and edge towards two lakh sq ft.

The Ivy League professor, rated by BusinessWeek, Forbes, and The Times, London, as a `Top 5' thought leader in strategy, shares his views on a few questions.

Big-box retail is coming to India. A development at the right time, would you say?

Opening up the distribution sector to multinationals is long overdue. Because, historically, the Indian distribution sector has been highly fragmented, creating many bottlenecks and inefficiencies for consumers as well as manufacturers.

Why is distribution so important?

At the most fundamental level, there is a strong connection between the prosperity of the manufacturing sector and the efficiency of the distribution system.

Will there be any impact on employment?

Let us be clear about one thing. India cannot fully employ its mega population in the IT (information technology)-services sector. The manufacturing sector has to flourish to absorb the huge numbers of Indians who will come into the workforce in the next 25 years. The biggest problem facing the Indian manufacturing sector is lack of scale. Herein lies the importance of big-box retailers.

How?

A Wal-Mart or a Carrefour moves large volumes - millions of cases of toothpastes, millions of refrigerators, dishwashers, and so on. Somebody has to make them. The large volumes will provide the scale for Indian manufacturers to produce high-quality products at low cost. They can use that base to globalise their companies. A thriving manufacturing sector will create a large number of jobs. More jobs imply more purchasing power which, in turn, drives demand for more products. There will be a virtuous cycle.

What are the pre-conditions?

Big-box retailers also will demand world-class physical infrastructure - roads, ports, airports - to support their supply chain needs. This will put pressure on politicians and the private sector to step up the pace of improving India's physical infrastructure.

Will the consumer benefit?

Ultimately, the consumers will pay less for products. For instance, in the US, big-box retailers such as Target and Wal-Mart are able to sell products at 20-40 per cent less than the mom-and-pop stores. This is because they get scale economies in sourcing large volumes from manufacturers. Big box retailers employ a lot of people in their stores - another job creation engine.

Is the picture only rosy?

Of course not! When big retailers come into India, inefficient small corner stores will be driven out of business. There is always a cost to economic progress. This should not imply that we stop big-box retailers. The solution lies in anticipating the side-effects and in finding ways to retrain the employees in small corner shops for other opportunities, including working in big retail stores!