India‘s bustling local retailers may soon have some new global neighbours.
In September, the Indian Government announced plans to allow foreign retailers to take a 51 per cent stake in local retail ventures, under changes to foreign direct investment (FDI) rules.
If passed, the changes would let global retailers such as Tesco and Walmart to take direct control of their retail operations in India. They form part of a series of reforms aimed at stimulating India‘s sluggish economy.
The reforms will create new opportunities for foreign retailers to deepen their Indian presence, and on their own terms. The FDI changes would give foreign retailers a controlling stake, allowing them to exert greater control over store design and implement a consistent brand identity. This has been the source of some friction at present where local partners have a majority stake.
As the United States and European economies continue to struggle, India represents a key global market. With a fast growing and aspirational middle class, India offers huge potential for foreign retailers. But the potential rewards are accompanied by huge challenges.
New environment, perennial problems
Part of the Government‘s rationale in introducing the FDI changes is to reduce the cost of food. At present, India experiences wastage rates of 40 per cent between the point of production and the point of sale.
But poor infrastructure – in terms of road, rail and other transport elements – remains a stumbling block to reducing waste and modernising production. Added to this is a lack of warehousing, distribution and cold chain solutions.
There is also political instability to consider. The Indian Government has attempted these retail reforms before, but has been forced to back down. We are taking a watching brief on the passage of the bill, but remain optimistic on its prospects.
Where do you fit in?
Despite these issues, we are fielding enquiries from global retailers about the FDI changes, in terms of them making an initial or deeper move into India on the back of the reforms.
Turner & Townsend has been working in India since 2007, helping retailers including Tesco, Marks & Spencer and Nissan. From these engagements we‘ve seen that the challenges are not insurmountable, but they do require careful planning
Another challenge is finding uncontested space in the Indian market.
One such strategy has been to focus on the premium end of the market. For example, rather than pay the standard price of five rupees for coffee (less than 10 US cents), people are spending around 85 rupees for a coffee at Costa Coffee.
This premium strategy has underpinned strong growth among coffee retailers. In July this year 2012, Costa Coffee opened its 100th outlet in India. Noting its success, Starbucks is planning to open its first Indian outlet in October.
We see more attractive opportunities for global retailers at the upper end of the market, where the margins are higher and the competitors fewer.
The way global retailers establish their local presence is also important.
In the UK, we‘ve seen a shift away from the massive shopping centres built outside cities. Instead, we‘re seeing the creation of integrated retail environments – with stores, apartments and offices all in one complex, located in city centres. This kind of approach may be beneficial in India, where at times local communities have been reluctant to welcome global retailers.
The proposed FDI changes are controversial in India, with several opposition political parties vowing to block them.
If they pass, they will substantially boost India‘s appeal for many retailers worldwide. But foreign retailers should carefully consider their options for entering the market or building their Indian presence.