Road Ahead for Organized Retail - Commentary by K. Sudhir
“Road Ahead for Organized Retail”
By K. Sudhir
Published March 17, 2010 in the Economic Times
Read the article in its original context on the Economic Times website
Organized retail today accounts for less than 5% of India’s retail business, but is bound to grow, forcing choices on the government, and upon itself. China’s experience and those of other Asian countries that recently modernized their retail sector can provide valuable insight on what choices make sense.
Serving local consumer tastes in China with over 1.3 billion people poses a similar challenge in India, with its 1.15 billion people. Chinese regulations, at both the central and local levels, had created confusion and difficulty for retailers trying to open new businesses or acquire established ones.
India’s regulatory patchwork frequently impedes the efficient flow of products and needs to be coordinated across states and local jurisdictions. Finally, the Chinese transportation infrastructure varies across the country’s vast expanse. They are modern and highly efficient, especially in urban and coastal areas, and organized retail is most successful here.
India needs better transportation and cold-chain supply-chain infrastructure across the country.
Loosening foreign entry into the retail sector should be based on a strategic quid pro quo: the profit potential of India’s large retail market for retail operations knowhow and investment that are critical to modernizing and improving the efficiency of Indian retail.
Taiwan opened up its retail sector to foreigners in the 1980s without creating a regulatory environment for the emergence of a strong retail sector. Predictably, foreign companies dominate Taiwanese retail today. In contrast, Japan’s distribution networks and regulatory environment have been inhospitable to foreign retailers and the Japanese pay today for this absence of competition with some of the highest retail prices in the world.
South Korea and China managed the process of foreign entry more gradually, initially encouraging joint ventures between domestic and foreign retailers before looser regulations on FDI in retail were brought in. Both countries now have the benefit of a vibrant domestic retail sector, and the competition between domestic and foreign retailers has yielded low prices and good service.
India is already following China’s example, initially encouraging joint ventures between domestic and foreign retailers before allowing 100% FDI in organized multi-brand retail. This gradual opening up should preserve a vibrant domestic retail sector in the long term, and provide India with a solid foundation of domestic expertise and human capital. For long-term success, organized retailers should pursue a few key strategies.
First, build capabilities and backend logistics infrastructure. Domestic firms should partner with established foreign firms to capitalize on combining foreign retail knowhow with domestic market knowledge. This is happening already. UK-based Tesco is working with the Tatas; US-based Wal-Mart with Bharti, etc. Over time, these joint ventures will dissolve but both the domestic and foreign firms will have the capabilities to establish successful retail businesses independently.
While the government is rapidly investing in transportation infrastructure, organized retailers should either invest in their own supply-chain infrastructure or promote intermediaries that develop and invest in cutting-edge supply-chain infrastructure.
Second, learn local and regional preferences in developing the merchandising mix. ‘One size fits all’ is not a winning strategy, as Subhiksha, till recently one of India’s retail success stories, learnt the hard way through bankruptcy when it expanded rapidly into the north from its south Indian roots with little local market knowledge. Merchandising correctly in a diverse country such as India takes time, trial and error, and is critical for success.
Third, to deal with the kirana challenge, organized retailers should actively engage customers and local political leaders, to demonstrate the value of their retail enterprise, especially in the context of political challenges from kirana lobbyists.
For example, Bharti has created a retail academy to train thousands of people in Punjab. Creating thousands of jobs over time develops a political constituency of employees.
But the kirana challenge is not just political, it is also competitive. Given the high customer loyalty to these micro-local outlets, helping kiranas become more efficient while allowing them to effectively serve their clients can be both politically expedient and profitable. One way to address this situation is for organised retailers to engage in ‘co-opetition’: to make customers out of their smaller retail rivals.
We already see this taking form in India with cash-and-carry stores that essentially serve as wholesalers to kiranas and other local establishments, as well as to individual shoppers. Tesco-Tata, Bharti-Wal-Mart and Metro have all created cash-and-carry formats.
In fact, the government has recognized the political benefits of co-opetition by allowing 100% FDI in the cash-and-carry format.
A competitive organized retail sector would be a boon for the Indian consumer because the industry will be forced to continuously improve on products, service and price, letting India be in the vanguard of retail innovation.
Such tough competition can produce strong domestic retailers who themselves may expand overseas. Perhaps, more importantly, the presence of foreign retailers would create a huge opportunity for Indian farmers, food processors and other manufacturers.
Foreign retailers that have positive experience with domestic suppliers sourcing for the Indian market are also likely to source from Indian suppliers for their global operations. Consider this: if a $300-billion American behemoth like Wal-Mart sourced even 10% of its products from India, the potential for Indian farmers and manufacturers is huge. The export potential may even dwarf the direct benefits from organized retail.
The author is professor of marketing and director, China India Insights Program, Yale School of Management.