Is it time for India’s supermarket sweep?

Two years since the Indian government changed the country’s strict retail laws, the presence of Western supermarkets in the sector remains small. Helen Roxburgh looks at why that might be set to change

Two years ago, a groundbreaking law in India opened the country’s retail sector up to worldwide investment. For international supermarkets, which had been waiting in the wings for years, the new rules over foreign direct investment (FDI) represented a huge opportunity to move into a massive and untapped market.

Under these rules, announced in September 2012, the Indian government formally approved up to 51% FDI in multi-brand retail, meaning major retailers such as Tesco can partner with a local operator and sell directly to Indian consumers for the first time.

According to the Expanding Horizons of Global Retailers in India report by property consultant CBRE, this move was “regarded by many analysts as being crucial to re-launching the country’s flagging economy”.

India has an increasing, and increasingly wealthy, urban population, with disposable income to spend on shopping. At the end of 2012, India had close to 160 million people in the middle income category, more than the entire population of Russia. The National Council of Applied Economic Research says Indian households earning more than INR 250,000 ($5,579) annually are expected to have grown by 70% between 2010 and 2015, and households earning more than INR 1,250,000 ($27,896) is expected to have doubled.

Bringing international supermarket retailers into India has also been widely seen by supporters as a way of helping bring down soaring food prices, modernise the country’s distribution and infrastructure systems, and boost food safety standards in the country.

And yet it’s two years since the rules changed, and the penetration of Western supermarkets into the Indian retail sector remains tiny. Although a number of big global supermarket chains have been quietly testing the Indian market in recent years by operating in the wholesale sector, no branded global supermarkets have yet opened.

The election, which took place in May 2014, was one factor that had made supermarkets reluctant to act too quickly.

“Unfortunately in India, FDI in retail is a very big sensitive issue, because of politics,” says Rajat Rialch FCSI, of HPG Consulting. “The biggest challenge was the government’s hesitance to allow foreign direct investment in multi-brand retail chains. The present government is open to the idea, but lets see how things shape up. And the second challenge has been the almost non-existent back-end cold chain – logistics is one of the key problems.”

Restrictions surrounding the policy have also caused concern, including the requirements that specify foreign chains should source 30% of their products from local small and medium-sized enterprises.

The mix of uncertainties proved enough to scare off several supermarket chains. In July, French company Carrefour announced it would close its five cash-and-carry stores in India by the end of September. This followed Walmart’s decision last October to dissolve its joint venture in India with Bharti Enterprises and suspend plans to open supermarkets in the country.

Democracy at play

“The challenges were bureaucratic hurdles, red-tape, complicated processes, outdated regulations and most of all corruption – all of which are highly discouraging,” says Purvez Gazder FCSI, director at HCTS International. “Up to now the plans of international supermarkets have been a total failure in India – Tesco, Walmart and Carrefour and the like had huge plans and had committed millions in funding their India operations but none took off.”

“What players on the fence were waiting for was for the government to be elected,” says Vivek Kaul, head of retail services in India, CBRE. “Now this has happened, it is very easy for them to take an informed decision. Since it’s a majority government, there will at last be more clarity on where they are heading. And the new government might even relax certain caveats about taking investment in the country in the future.”

Rialch agrees: “The present government has a clear majority and because of that they will end up taking strong decisions. They are also a development-focused party, so I am sure good days are ahead.”

And presuming that the political landscape keeps on looking favourable, there are still players in the market. British retailer Tesco has signed a 50/50 joint venture with Trent Hypermarket, part of the Tata Group, for its expansion into the country. Further than this it has not outlined its plan, although it is expected they will start opening branded supermarkets in north India next year.

It’s not all smooth sailing from here though. In the world’s biggest democracy, implementing sweeping changes rarely runs without issue. Many experts are predicting that a number of states could block foreign multi-brand retailers from operating under their jurisdiction.

“India is a federal country with individual provinces having power to create their own rules and regulations even though the central government gives a go-ahead,” explains Rialch.

Supermarket brands will have to counter strong grass-root opposition from the owners of small domestic stores. Protests broke out in 2012 when the policy was announced, amid concerns that the introduction of supermarkets will put smaller shop owners out of business.

“It is assumed these supermarkets will almost eliminate the business of small traders and make them homeless, and traders are a good chunk of political party fundraisers,” Rialch adds.

Internet opportunities

Another problem global retailers face in India is a limited availability of quality real estate. Despite a steady growth in supply of organised retail space over the past 10 years, large retailers often find it challenging to secure space in a prime mall or retail centre. Among India’s 300-plus malls, only a few can be described as “successful” retail projects, according to CBRE. Space is also very localised, with 70% of the supply of modern retail space standing in New Delhi, Mumbai
or Bangalore.

“It is in this context that the role of global retail chains such as Tesco will be crucial,” CBRE’s report concludes. “These retailers possess extensive experience of running successful retail stores and properties in markets like the US, China, Europe, Middle East and South East Asia, with local partners to create successful shopping formats.”

An added element in this equation is the huge popularity of e-commerce in India – so much so that many supermarket brands are considering breaking into the market via retail websites, rather than with huge bricks-and-mortar stores. Since a few have been testing the water with cash-and-carry style stores for several years, they are understood to be weighing up the benefits of expanding this to an online grocery service.

“E-commerce retailing has become so huge and forceful that conventional retail chains such as Tesco or Walmart have actually become redundant in India even before they have opened their first stores,” speculates Purvez. This factor could further delay the opening of any international supermarkets.

Nonetheless, most experts believe it is a matter of when, not if, global supermarkets successfully manage their expansion in India. When they do, they will bring opportunities for foodservice professionals in terms of consultation, planning, logistics and operations.

“At the moment there is a very limited scope in this area for foodservice consultants, because the development is at a nascent stage,” says Rialch. “But the moment the giants come, I am sure foodservice consultants will get opportunities in terms of cold chain designing, bakery designs and operational consulting.

“I am very firm believer that in isolation you can’t grow,” he concludes. “So for growth you need to open your doors for FDI in this sector. It will not only be beneficial for consumers, but will also make the existing players conscious of quality standards.”

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