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CONTROLLED EXPLOSION

In booming India chain retailers lay the groundwork for a big expansion

By Curt Hazlett

This is a sweet time to be advising retailers in India, where domestic and foreign chains are jostling to be the ones to transform a nation of mom-and-pop stores into one where organized retail holds sway. “Right now everyone wants to know more about what’s going on in retail,” said Deepankar Sanwalka, KPMG International executive director in India and head of the consumer markets operation. “It’s literally a race to see who launches first and who reaches 10 stores first, then 100 stores. It is extremely exciting.”

India is among the hottest places on the planet for retail growth. Like China, its neighbor to the northeast, India is a vast nation whose huge and relatively young population has more money to spend than ever, thanks to the economic boom brought by globalization. Much of that money is chasing consumer goods. KSA Technopak, an Indian research firm, believes India’s total retail market will balloon from $300 billion last year to $637 billion in 2015. India has so much potential that consulting firm A.T. Kearney last year ranked it as the world’s most attractive developing market for retail.

One reason for India’s appeal is the enormous fragmentation of the market, which continues to be dominated by small shops and bazaars despite the overall society’s move to modernization. Various estimates put organized retail’s share of the total at just 2 or 3 percent, which KSA Technopak says it expects will grow to 10 percent by 2010.

“Organized retail coming to India is long overdue,” said Sanwalka.

The most dramatic sign that it has finally arrived came last summer when Reliance Industries, India’s largest petrochemicals company, announced that it would invest $5.6 billion to create a retail empire of groceries, convenience stores and discounters across the country. Its first 11 Reliance Fresh food markets opened in Hyderabad in October, and Reliance says it will open stores of all sorts in 784 cities and some 6,000 towns by 2011.

Faced with a lack of supply-chain infrastructure, Reliance also is developing a network of cold-storage facilities and food-processing plants.

“Reliance has done a great service to the industry because of its big-bang approach to retail,” said Sanwalka. “When it announced what it would spend, everyone stood up and took notice. Reliance is known for doing projects at that scale, and they have demonstrated time and again that they are very successful at implementing large projects.”

So audacious are its plans that the Indian press has begun referring to Reliance as “India’s Wal-Mart.” The real Wal-Mart has been slow to crack the Indian market — not because it hasn’t wanted to, but because the government currently forbids foreign direct investment by companies selling multiple brands. The prohibition has had strong backing from trade unions and the Communist Party. The government decided last year to allow foreign companies to own up to 51 percent of single-brand retail outlets. The minister of commerce and industries said in January of this year that India is looking at loosening the rules for multibrand retailers of electronics, sporting goods and construction equipment.

But Wal-Mart demonstrated that there are ways around the ban when it said in November that it would join with an Indian mobile phone company, Bharti Enterprises, to open several hundred stores using the Wal-Mart name. The government reviewed the deal and found that it conformed with its rules.

Other foreign retailers seem sure to follow Wal-Mart into the burgeoning market. British retailer Tesco and France’s Carrefour had both been in talks with Bharti before the Wal-Mart deal was finalized, and both are reported to be continuing to search for partners.

Another U.S. retailer, Staples, announced in January that it had formed a joint venture with Indian’s largest retailer, Pantaloon Retail, a unit of Future Group, of Mumbai. Staples will operate on a delivery and wholesale basis in India.

“All of these guys recognize that the potential of this market is huge, and you need to be here,” Sanwalka said.

Still another foreign powerhouse, Germany’s Metro, has operated a cash-and-carry wholesale operation in India for about three years, an arrangement allowed under the foreign direct investment law. (In a cash-and-carry format, customers buy goods for cash at a wholesale warehouse and then transport the merchandise themselves.) “I haven’t heard of any plans for them to start in front-end retail in partnership with anyone else,” said Sanwalka.

The imminent arrival of Wal-Mart is spurring Indian retailers to launch pre-emptive growth. Citing the threat of overseas competition, Future Group plans to expand its retailing operation — which includes not just Pantaloon but also the Big Bazaar discount and Food Bazaar supermarket chains — from the current 160 stores to 3,300 by 2010.

Future Group was first off the block, Sanwalka says. “Clearly, they have a head start, though I think Reliance will overtake them because of the sheer amount of money it has decided to pump in,” Sanwalka said.

India’s second-largest company, industrial and real estate giant Tata Group, is also pushing to capture retail territory. In addition to planning expansion for its Trent and Westside stores, Tata has formed a joint venture with Australian chain Woolworths, which operates 3,000 stores, gas stations and hotels in its own country. Infiniti Retail, as the new venture is called, plans to open 30 consumer electronics stores in India this year and eventually to operate about 100 stores by 2010.

Yet another massive industrial conglomerate, Aditya Birla Group, moved into retailing in January with the acquisition of Trinethra Superretail, a leading supermarket and convenience chain of nearly 200 stores. According to local press reports, Aditya Birla hopes to open 6,000 stores by 2010.

Food retailing in particular seems to offer growth opportunities in a nation where refrigerated storage and transportation is just now gaining traction. RPG Retail, whose Spencer’s food stores were among the first modern outlets in India, now operates 80 stores across the country and plans to operate some 2,000 by 2010.

Even regional retailers are getting into the act. Subhiksha, a discount chain with operations mostly in southern India, grew from 140 stores in 2005 to 500 last year, spreading to other areas of the country. Subhiksha plans to open another 500 stores this year.

With so much development taking place, it’s no surprise that new stores are opening in every type of format. “The reason we have multiple formats is that people have realized there are different needs and different segments and localities,” Sanwalka said. “There is space for all sorts of formats, because this is such a vast country and there are so many different types of people. The biggest learning has been that it is not a case of one size fits all.”

Enclosed malls have been among the fastest-growing of these formats, but that growth has presented some problems. Sanwalka estimates that there will be about 350 enclosed malls operating in India by the end of the year, up from just three in 2000. The initial wave of malls generated excitement, he says, but many of them have failed to meet expectations.

“The costs of running a shop in a mall were very high because of India’s high real estate costs and because of inadequate infrastructure,” Sanwalka said. “The footfalls were there, but they were not converting into shopping.”

But operational knowledge and consumer interest eventually caught up with the market. “Now it has really caught on quite well, and builders are once again developing large malls of a million square feet,” Sanwalka said. “People are realizing the convenience of going to a mall and getting everything under one roof. Also, mall managers are becoming more educated in terms of how to select the shops that need to be in the mall. So now the malls are back on track, and evidence of that is that class-B towns and even smaller are now getting malls.” The question now is who is going to dominate those malls among the domestic and foreign retailers. The race is on.