German retailers in India?
Land of contrasts: Modern self-service retailing is still the exception in India
After much vacillation, the cabinet of the ruling Congress government has agreed to open up its retail sector to permit full foreign ownership of so-called “single-brand” stores.
This means that Adidas, Ikea and Marks & Spencer etc. will be allowed to do business in the $450bn India without a local partner, provided they source at least 30 per cent of their products from local SMEs.
The initiative towards liberalisation could speed Ikea’s plans to enter Asia’s third-largest economy. It will also strengthen the hand of Marks & Spencer, even though the UK fashion and food specialist wishes to continue with its local partner.
The news won’t come as much comfort to “multi-brand” retailers such as Walmart, Carrefour or Tesco, though, with whom the government has been playing fast and loose for years.
Ten years of debate
Their hopes were raised and dashed within only two weeks at the end of last year. On November 24, food minister K.V. Thomas and Minister of Commerce & Industry Anand Sharma made an announcement that could have lead to a revolution in Indian retailing.
After 15 years of planning, ten years of debate, and two years of vehement discussion in cabinet, it briefly looked as though India's weak and tenuous governing coalition had finally seen its way clear to act. The proposed legislation would have permitted up to 51 per cent of foreign direct investment (FDI) in multi-brand retail, thus giving major international retailers majority control of their retail joint-ventures on the subcontinent.
This was a breath of fresh air for foreign multi-brand retailers who are obliged to accept a minority stake in a local retail partner or to expand via cash & carry (C&C) if they wish to do business in the world's fourth-largest retail market after the USA, China and Japan.
Caveats and riders
However, the new initiative was loaded with caveats from the start. Future investments would have had to have exceeded $100m (€133m) with at least half of this channelled into back-office systems and local infrastructure; the sale of fresh produce would have been limited; and at least 30 per cent of goods were to be purchased from local small and medium-sized enterprises (SMEs).
Expansion was also restricted to only 53 cities, albeit with populations of more than one million (!). India's 28 regional states were, of course, to have had their say, eleven of whom made it clear from the start that they intended to resist cabinet proposals.
To complicate matters further, India's vast lobby of Mom & Pop store operators has always been vehemently opposed to the above liberalisation. Their cause has also been taken up by the opposition party.
Twelve million kiranas
Within days of the government’s announcement to liberalise the market, some of the twelve million family "kirana" owners, who make up more than 90 per cent of the sector, held demonstrations in a number of Indian cities. They have even forced parliament to adjourn. There were also protests outside the stores of Walmart's Indian partner, and Carrefour's latest C&C outlet in Jaipur sustained fire damage to exteriors.
This was enough for the government to put the brakes on its own legislative proposition and announce an embarrassing U-turn. On December 3, Mamata Banerjee, leader of the second-largest party in the ruling coalition, announced that the government would continue to look for “consensus”.
Whatever this may mean in practice, one thing is now clear: international retailers wishing to invest or increase their FDI in India are in for a lot more fun and games before the day is out.
If one adds to this orgy of prevarication, government corruption, an outdated infrastructure, and Maoist insurgents, called Naxalites, marauding through central & eastern districts, then there is considerable country risk for western investors.
Despite all this, legal experts still regard the Indian government’s original statement of intent on November 24 as at least a promising development for international retailers.
"The changes that were originally decided could potentially represent a genuine liberalisation of the Indian market," says Tim Luthra, head of the Indian desk at legal chancellery Raupach & Wollert-Elmendorff. "To date, the hurdles for German retailers have been very high. The prospect of making money has been burdened by the legal situation. We believe that there will be increased investment as soon as majority stakes are permissible."
So, if liberalisation, however late in arriving, is inevitable, why are no German food retailers at least joint-venturing in India? After all, the country’s vibrant market represents 1.2bn people and an aspiring middle class estimated to grow to 580m consumers by 2025.
Metro takes the plunge
Only Metro Group has dared to take the plunge by going it alone via C&C so far. The Düsseldorf-based company has opened eight outlets since 2003, but has not been able to make a profit on current annual revenues of around €200m ($267m). Metro has struggled to cater to an extremely heterogeneous customer base in terms of culture, ethnicity and religion.
Metro has therefore been obliged to reduce its assortment and to scale down new store sizes from 7,500m² (81,000ft²) to 5,000m² (54,000ft²). Also, absurd retail estate prices have led the company to rent rather than buy sites in order to retain flexibility.
Metro, one of the retail pioneers in India, remains committed to the country: "We intend to expand and to invest further in India. Provided that all conditions are met, e.g., suitable sites and licences to trade, we see the possibility of opening at least five new stores per year over the medium-term.”
Germany’s largest retail/wholesale group refuses to be disconcerted by recent governmental toing and froing: “Any future decision by the Indian government to liberalise the local market and to ease FDI would have no direct influence on our C&C business as we are wholesalers and were not affected by past restrictions on retailers."
"But, in general terms, we welcome any liberalisation of the market because we believe that this is an important precondition for further economic growth in India."
Tesco still cautious
UK market leader Tesco is understandably cautious: "Allowing FDI in retail would be good news for Indian consumers and businesses, and we await further details on any conditions. We already have a franchise arrangement with Tata's Star Bazaar stores (hypermarkets). Learning about India and serving more customers every month is a win-win for customers, suppliers, Tesco and Tata (Trent)."
Tesco, however, has a number of trump cards in India. The Brits have a cultural affinity with India and can often communicate in their own tongue. Also it would be difficult, if not impossible, for Metro to recruit, say, 350 Hindi-speaking managers in Germany. By contrast, Tesco could find them in London alone and perhaps within its own organisation.
While US behemoth Walmart refuses to comment, French retailer Carrefour, which has announced the opening of a second C&C outlet in India, was content to stay bland: "We welcome any future decision from the Indian government...Any such legal evolution should contribute to modernise the Indian food supply chain and to fight against food inflation for the benefit of Indian customers."
"It would also provide farmers and local SMEs with new outcomes and would more generally contribute to India's economic development. Carrefour will remain attentive to the finalisation of any such regulation and continues the development of its C&C operations."
Carrefour, however, has little and Tesco no experience in C&C. As international rivals struggle with new formats, could German retailers take a passage to India soon? After all, the prize is great: IGD Retail Analysis estimates that the world's largest democracy will achieve $600bn (€450bn) in annual retail sales by 2012, $430bn (€323bn) of which will be in food retailing.
Metro Group has consistently refused to comment on whether it could diversify from its C&C base into Indian retailing. Given recent management and shareholder turmoil at the company, as well as the long-frustrated wish to sell its "Kaufhof" department stores and "real,-" hypermarkets, this is highly unlikely.
Rewe visits India
Fascinatingly, "The Economic Times" published a piece as long ago as April 2007 that a delegation of top executives from Rewe Group was scheduled to visit India and to meet local policymakers. This has never been confirmed by Germany's second-largest food retailer, and nothing has been heard here since to indicate that Rewe might be contemplating such an ambitious move.
Unlike Metro Group, Rewe is not a public limited company and could not raise the necessary capital so easily. Busy trying to revitalise its "Penny" discount stores in Germany, Rewe is unlikely to radically increase foreign commitments at such a huge distance from its home market.
Meanwhile, Edeka Group's withdrawal from an alleged bid for Dutch supermarket operator C1000 at the end of November is revealing. Certainly, it illuminates the problems that German independents experience even when trying to cross into a neighbouring country.
Prepare for a long wait
Based on past form, German hard discounters Aldi and Lidl will want to wait until Indian retailing has matured before entering the market. Above all, they will wish for a modern supermarket segment to develop first whose prices they can be seen to undercut.
So in India, as in South America and Africa, it would seem that German retailers are happy to leave a complex, but dynamic market to their French and American rivals. Or could it be that they are rueful bystanders in a potentially very rewarding game that is being played without them? If nothing else, the current high jinks of the Indian government will certainly provide them with an alibi for inaction…
Related article in German: By Mike Dawson in Lebensmittel Zeitung, no. 48, 02.12.2011
Our thanks for some excellent information and commentary provided by Lebensmittel Zeitung's Indian sister company, Delhi-based IMAGES Group. We recommend a joint report compiled by ASIPAC and IMAGES Group ("The Impact of Opening up the Retail Sector to Foreign Direct Investment") and published in the December 2011 edition of "IMAGES Retail" magazine. Digital copies can be purchased from the IMAGES Online Book Store and downloaded via Pay Pal.