AMIDST the clamour of protests over the Government's decision to open up the retail sector in India to foreign investment, there is one group of players which has been notable by its silence – existing Indian organised retail players.

 One would have thought they would have been the first to react, as they are the ones likely to be impacted the most by the entry of foreign ‘big box' retail. In fact, the day the government's decision was announced, Kishore Biyani, Future Group CEO, and the undisputed leader of organised retail in India, said on television: “We are well placed. Competition should be worried about us rather than us worrying about competition.”

The India challenge

Biyani, more than anyone else, knows the real challenges of developing a modern retail business in India. On paper, India remains one of the hottest retail destinations on the planet, occupying the fourth spot in consulting major A.T. Kearney's Global Retail Development Index (after topping it a couple of years ago).

It's not difficult to see why. Organised retail accounts for 9 per cent of India's roughly $435-billion retail market and is expected to reach 20 per cent by 2020. But organised modern retail has less than 6 per cent share of the retail business. Though big box retail, like hypermarkets, is staging a bit of a comeback, the explosive growth of smaller supermarkets and small-format stores of a few years ago has given way to more sedate consolidation and measured expansion.

Despite its relative youth, the sector has already seen some spectacular rises and falls. And global chains mulling an entry into India would no doubt be looking at the lessons to be learnt from the likes of Subhiksha, which became the fastest growing retail chain in India, only to spectacularly crash a couple of years ago.

 Starting with a single store in Chennai in 1997, R. Subramanian, an IIT Chennai and IIM Ahmedabad alumnus, was growing strongly as a mainly local player in Tamil Nadu till 2006, riding on its small-format, low-margin strategy. In 2005, it started moving out to other States, and increased its store sizes. By 2007-08, it had exploded to over 1,600 stores, and boasted equity partnership from ICICI Ventures and Wipro chief Azim Premji, who pumped in Rs 230 crore of his personal wealth for a 10 per cent stake, which he acquired from ICICI Ventures.

But unplanned and unrealistic growth, poor cash flow and inventory management and growing competition was squeezing Subhiksha. By 2009, it had become modern Indian retail's first burn-out.

“It will take a couple of years for foreign retailers to tide over the initial problems in the sector. While it may be true that because the global markets are under strain, they could be looking at India, which offers a huge potential for growth, it is also a fact that retail is not like the export business where if one market falls, you can start exporting to another region,” points out Arvind Singhal, chairman, Technopak Advisors.

Biyani knows this all too well. When he opened his Big Bazaar store in central Mumbai's revamped mill district, Biyani found that Mumbai's commuting hassles and traffic meant that he had to depend on regular business largely from shoppers in the nearby catchment area, dominated by canny, middle-class Maharashtrian shoppers.

On probing falling volumes after a rousing initial response, Biyani found that shoppers felt the Rs 50 they shelled out as cab fare to reach his store from nearby Dadar was wiping out most of the savings they were getting from his discount groceries. Biyani promptly offered to reimburse cab fares to anybody with an address within 5 km of his store – which sent sales soaring once again.

 “Indian shoppers are unique, and they need unique solutions,” he remarked in an interview several years later. Foreign retailers need to learn these lessons as well, and come up with their own solutions. Singhal agrees. “Retailing needs commitment and infusion of capital in new regions,” he says.

A maze of laws

One of the biggest hurdles any retailer faces is the multiplicity of laws covering the sourcing, movement and sale of goods, especially agricultural produce, in India.  “FDI is definitely not the only step needed towards creation of strong retail in India. There is a need to relook at some of the acts that govern retail, including the Shop and Establishments Act, which is State-wise and not a common Act across the country,” points out Kumar Rajagopalan, CEO of the Retailers Association of India.

 From the Weights and Measurements Act, which has provisions which were relevant 50 years ago, to the APMC Act, which has a stranglehold on agro-products, to the absence of a single Goods and Services Act, organised retailers have had to overcome an incredible array of problems in India – and come up with home-grown solutions.

“From developing special self-service packaging for vegetable and fruit counters to differential calibration of cash registers across the country, Big Bazaar had to find its own solutions to virtually every problem. Nothing came off the shelf,” points out an IT specialist who had helped develop some proprietary software for the retailer.

Harsh realties

Another huge challenge for new retailers in the country would be in real estate. “Mall infrastructure would take another 3-4 years to grow to the level required by the new retailers,” estimates Singhal.

 “A more comprehensive city development plan by States will help here. If we realise that shopping is an integral part of living standards in the cities and the potential of locked real estate with government entities is planned and used, this can also be tackled,” says Rajagopalan.

Though he supports FDI in modern retail, V. Rajesh, a retail industry veteran, says it's not going to be a cakewalk for the foreign investor even to set up retail outlets, leave alone redefining the supply chain network here.   The Commerce Ministry has gone on record stating that the final ground-level implementation will be the respective State Government's prerogative because trade licences, especially the Shops & Establishment Act comes under their purview. Legislation framework in India is not an easy animal to tame.  For instance, “to set up one retail outlet, one has to procure anywhere between 25 and 30 licences from different authorities.”   Moreover, according to Rajesh, the framework as of now looks convoluted. Most of the riders that the Government has announced seem very specific to the ‘food and grocery' segment. For example, take the clause of sourcing a third of products from micro and small industries. If an international operator enters the country to set up a toy store where there has not been much of a modern trade presence, 30 per cent of its range has to be procured from local small-scale industries. Sure, you can include the wooden toys of Chennapatna and a few such regional specialties, says Rajesh, but, will all of them make up for 30 per cent of the store's content?  It will be even more difficult in the case of consumer electronics and durables, he says. “We are standing on the threshold of an era in Indian retail real estate that will be based on careful market research and forward planning by the biggest stakeholders,” says Pankaj Renjhen, head of retail services at real estate consultancy Jones Lang Lasalle India, in a recent research report.

Big box retail, which depends on large volumes and low margins, might find the exponential increase in the cost of real estate a major hurdle, admit industry sources.

 The challenges are more daunting, as food, with the shortest shelf life, highest logistics problems and most regulatory challenges, continues to account for 70 per cent of Indian retail.

According to A.T. Kearney's retail survey, organised retail has a 31 per cent share in clothing and apparel, while the home segment is growing 20 to 30 per cent per year.

But domestic players have already moved to a strategy of selective growth, the survey points out — postponing aggressive expansion plans, adding stores judiciously and shifting gears to tier 2 and 3 cities.

The Aditya Birla Group plans to open about 100 supermarkets and 10 hypermarkets by mid-2011. Spencer's is expected to add up to 25 hypermarkets through 2012. Reliance Retail, India's organised retail leader, plans to open 150 Reliance Trends apparel and accessories stores in the next year.

Kothandarama Setty, Chairman of Vivek's Ltd, a major consumer electronics and durables retailer in the South, says FDI will certainly benefit every stakeholder in the trade, and of course, consumers. “We are open to FDI in our company,” he says, adding that foreign retailers bring in not only investment but the best trade practices, global sourcing mechanisms, efficient supply chain management and more. “It will only take the Indian retail industry to a higher level. What happened in the case of the automobile industry and the consumer durables industry? Don't we have a greater choice if we want to buy a car or a refrigerator? Are we, as consumers, not benefited?” he asks. Vivek's itself, without any other investors, has expanded to over 50 large-format showrooms in southern India, which any other large player entering will find hard to rival.

With so much local competition already on the ground, foreign retail is not going to find India a cakewalk.

(With reports from Anjali Prayag & R. Ravikumar)

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