The Hindu Business Line : Big cos seek a chunk of the retail pie

The rules of the retailing game in India are likely to change dramatically over the next couple of years, as corporate bigwigs and international retailers fight for a larger share of the consumer's wallet. Reliance Industries has grand plans of becoming the No 1 retailer by 2010-11 with a revenue target of Rs 1 lakh crore and an expansion blueprint that renders other retailers' plans insignificant.

It made quite a splash when, two weeks ago, it launched 11 of its Reliance Fresh outlets on a single day in Hyderabad. Reliance's bold bet on retailing has also led other conglomerates, such as the Aditya Birla group and the Bharti group, to seriously consider a foray into the industry and unconfirmed reports of their proposed plans and tie-ups have begun to make headlines regularly.

Meanwhile, international retailers are also exploring options in the country, though there are restrictions on foreign investment in the sector. Here is a look at what could happen in the industry in the new competitive landscape.

Flood of Investments

The entry of conglomerates promises big-ticket investments that are expected to fast-track the growth of organised retailing. Rapid scaling up of Pantaloon Retail and Shoppers' Stop over the past couple of years has had investors according them high multiples as they expand their market share. However, even Pantaloon's proposed investments of a few thousand crore rupees pale in comparison to the war chest that conglomerates are willing to create for their retailing ventures.

While Reliance's Rs 22,000-crore investment plan leads the pack, the Aditya Birla Group's estimated Rs 15,000-crore investment indicates that it too means business when it comes to the retailing.

PricewaterhouseCoopers estimates that $412 billion worth of investments is likely to be made in the retailing sector over the next five years. At this pace, the share of organised retailing is slated to rise to 15 per cent by 2010, from a mere 3 per cent now. And where is most of the money going? It seems the big players are mostly interested in taking a bite of the food retailing pie.

The Big Opportunity

The food and groceries business has been dominated by unorganised retailers — the street markets and hawkers and the neighbourhood kirana stores. It is the least penetrated category, with organised stores accounting for less than 1 per cent of the market. Yet, it remains the largest spending category of the much-celebrated Indian middle-class.

Players such as Spencers Daily, Nilgiris, Subhiksha and Trinethra have had some success in building a presence in the South. Pantaloon Retail has also scaled up its presence in the business, with about 60 Food Bazaars opened across Northern and Central India.

Their investments in the supply chain have not, however, been substantial. Retailers have till now managed their logistics by locating their warehouses close to aggregators (who pool produce from farmers). Their strategy may not have been entirely out of place. None of them operates at the kind of scale that would justify the substantial investment required for cold chains.

A larger space in current supermarket formats has, instead, been devoted to staples, which have a less complex supply chain system than wet groceries or perishable food items. As a result, customers continue to buy their daily stock of fruits and vegetables from the vendor down the street.

For Reliance and the Aditya Birla group, which are likely to attain scale rapidly, investment in the supply chain makes sense. New entrants hope to attract customers to more modern formats by promising more fresh offerings, such as vegetables and dairy, than staples and FMCG products.

Supply-chain issues

Experiments with corporate or contract farming appear to be a good testing ground for a foray into food retailing. Direct contact with farmers enables them to cut out the middlemen in the supply chain, saving costs and cutting wastage. Initial reports following the store openings of Reliance Fresh suggest that it is able to offer fruits and vegetables at a 10-15 per cent discount by bypassing intermediaries. The Bharti group is likely to fancy the segment as well. Its joint venture with the EL Rothschild group, FieldFresh, exports agri-products from Punjab to Tesco and other European retailers.

The larger scale of the new entrants also promises to reduce the burden on the consumer's wallet, irrespective of the product category.

While existing supermarkets offer a superior shopping experience, the argument that they offer significantly lower prices than the traditional vendors has been less convincing.

Players such as Pantaloon have had some success in their large hypermarket store format, where the promise of bulk purchases has yielded some discount in prices.

Again, lack of scale has prevented existing retailers from exerting pressure on their suppliers. If the new entrants manage to attain the kind of scale they have charted out, the balance of power could tilt in their favour in a couple of years.

Reliance Retail's current strategy is to saturate each market, one at a time, but it will do so at a pace that will make it a national player soon.

The venture is targeting 100-million square feet of retail space across 800 cities by 2010-11.

Going by the Birla group's reported investment corpus, it is likely to dot the Indian map quickly as well.

Real estate battle

The gargantuan plans of the new entrants and fears of a further spiral in retail real estate rentals have had existing players scurrying to tie up retail space. Pantaloon hopes to expand its retail space nine-fold to 30-million square feet by 2010 and claims to have already signed up 24 million square feet, at an average rental of Rs 40 a square foot.

Shoppers' Stop, which has about one-million square feet under its fold, has signed up about 3.5 million square feet to come up by 2010. For smaller players, steep rentals could be a big barrier to expansion.

Foreign competition

To add another element to the changing dynamics of the Indian retail industry, foreign competition is on the horizon. Large international chains have not yet been invited to the retail party, as only single brand-retailers can open stores in India. But they appear set to crash in through loopholes and back-door entries.

It is important for chains such as Wal-Mart, Tesco and Carrefour, all of which are rumoured to be in negotiations with Indian players for a joint venture, to enter the market when penetration is still low.

Forays into mature markets such as Korea have not proved successful for Wal-Mart and Carrefour, partly because they underestimated their domestic competitor, Shinsegae, a leading national chain. They may not want to repeat that mistake with Reliance Retail.

It is probably why these retailers are not ready to wait for a further relaxation in foreign investment regulations. While Australian retailer Woolworths appears content in providing technical and sourcing support to the Tata's new electronic retailing, Wal-Mart appears open to the idea of a franchisee, although it prefers to enter international markets through acquisitions. A possible Bharti-Wal-Mart tie-up is the latest buzz in the media and the market.

With the big players now in the game, the Indian retail industry is set for a revolution.

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