Wal-Mart assault: India may forced to open its protected retail sector, but Wal-Mart for the first time will face real communists in India
Balaji Reddy
Jul. 12, 2005

China was a different ball game. Wal-Mart was handled by the Chinese to milk the US economy and rack up staggering trade surplus with America. India does care about that. Wal-Mart and other retailers are just something that has to be allowed in the country with India little to gain from these American companies trying to sell cheap stuffs. Among Indian public, political leaders and especially the communists who are gaining popularity – Wal-Mart, Gap and other Western retailers are pain in the neck and as a matter of fact part of negative growth for forward looking India. But When Indian’s Prime Minister comes to US, he will asked to open up the retail sector or else… by the US Administration. Manmohan Singh will agree to disagree and partially open the sector of retail industry. Wal-Mart and others will enter India but will face the real ideological Marxists – the Indian Communists and trade Unions for the first time. It will interesting how long these American companies will be able to survive in India in a neutral turf without American laws behind them. International think tanks believe the Business models of Wal-Marts and the rest will crumble in India.

But for now the assault on India is on from Wal-Mart,, Retail industry and US Administration. Wal-Mart and others will force an entry into Indian market. India in return will demand more outsourcing and IT contracts making more Americans in IT and call center sectors lose their jobs.

Acceding to media sources, when Manmohan Singh, India's Prime Minister, pays a visit to George W. Bush, the U.S. President, in Washington next Monday, he would do well to stop off at a nearby Wal-Mart Stores Inc. outlet.

That is what could soon start to supplant the riotous urban Indian street market if his reformist government goes ahead with a plan to open the country's retail sector to foreign direct investment. The world's biggest retail chain is all set to lead international groups into the last great emerging market that is still closed to outsiders.

Since the start of a big round of economic reforms in 1991, every Indian leader has felt obliged to announce some opening of the economy before a visit to Washington. As Mr. Singh is expected to be no exception, he has this week to overcome domestic resistance. John Menzer, chief executive of Wal-Mart's international arm, who met the Prime Minister on a high-profile lobbying trip to New Delhi earlier this year, will be just one of the top retailers watching the outcome of the talks.

For Wal-Mart, which has operated in China since 1996 and needs to add as much as US$30-billion of sales a year to maintain its earnings growth, India is a missing piece in the puzzle. But its impatience to enter a highly fragmented market has helped galvanize a protectionist lobby, ostensibly on behalf of the 12 million shopkeepers who account for 97% of India's US$205-billion retail sales. Wal-Mart's US$285-billion global turnover, it is noted, is larger.

Consultants at McKinsey expect the sector to be worth US$300-billion a year in revenue within five years and Arvind Singhal, chairman of KSA Technopak, a retail consultancy, says India's big business houses, either active in the sector or planning to enter it, have captured the policymaking process and exaggerated the threat to jobs from foreign direct investment (FDI).

"There is a whole litany of untruths. Most small shopkeepers exist only in rural areas and small towns where no foreign retailer is going to go. We discovered that there is a body of Indian business houses that have formed a very effective lobby against modern retail."

Their lobbying has made the opening of Indian main streets and malls to foreign players one of the toughest decisions facing the Congress party government, which relies on the parliamentary support of Communist parties vocal in their opposition to FDI.

Mr. Singh sees the liberalization of a sector accounting for 35% of gross domestic product as a test case of his ability to govern to good effect in the absence of a substantial majority. He has this week to demonstrate that ability or prepare a convincing message for Mr. Bush that change will come soon.

Speaking recently to the Financial Times, Mr. Singh said he hoped the sector could be opened by year-end. But much will depend on the detail, with such retailers as Wal-Mart pushing for the right to own their retail operations outright. A debate is still under way in New Delhi over what percentage of foreign ownership should be allowed and whether to limit liberalization to urban areas.

Pressure from consumers for an overhaul of an industry dominated by "mom and pop" stores is greater than ever. With six million Indians travelling abroad each year, exposure to international shopping formats is increasing. New Delhi, which has a population of up to 15 million but lacks a single-branded supermarket chain of any real reach, is decades behind other Asian capitals. Almost all food is still sold through corner shops, street markets and door-to-door hawkers on bicycles.

All the ingredients for a retail revolution are present: extraordinary demographics, surging disposable incomes and an increased propensity to spend rather than save. The number of people aged 20 to 49 is on course to increase by 30% to 510 million in 2010, the largest number in that age cohort anywhere in the world. With 65% of people under 35, a young consumer base is growing up free from the self-denial of earlier generations.

"There is a new India," Jeff Immelt, chief executive of General Electric, GE India's parent, said during a recent visit to New Delhi. "We believe that India is a rising star at the beginning of a growth cycle, with consumer spending increasing at a strong rate, and people seeking and demanding a better quality of life. India is going to be one of the fastest-growing regions of the future. All conditions are right to invest in India."

At present, foreign retailers interested in entering the Indian market are obliged to do so through licences and franchises.

Food retailers will be among the first to jump into the market: groceries account for 44% of consumer spending compared with 5% to 8% in the West. "There are fewer than 20 transcontinental retailers in the world and not all of them are interested in India," says Mr. Singhal of KSA Technopak. "But a number are prepared to put down a bet for the next 20 years. Wal-Mart will be looking at any market where they can put on US$30-billion of sales."

Wal-Mart is trying to win over the Indian government by emphasizing its contribution to exports. The Arkansas-based company sourced textiles and accessories worth US$1.2-billion from India last year at its procurement centre in Bangalore, and plans to increase that to US$1.5-billion. "We want to expand our operations in India," Mr. Menzer said during his visit to New Delhi. "We are ready for it. But it can only be done after the Indian government comes out with its FDI policy in the retail sector."

Obstacles also include finding space on India's crowded main streets for their superstores. Most foreign investment is likely to end up in some of the 93 malls that are due to open in 14 cities over the next two years. A recent announcement by the government that it will allow FDI in property is likely to lift comfort levels of foreign retailers entering the market, as many have relationships with mall developers.

Kishore Biyani, chief executive of Pantaloon Retail, the largest retailer in India, is ambivalent about the comparison with Wal-Mart. He has three successful formats -- Big Bazaar hypermarkets; Food Bazaar, which straddles the food and grocery business; and his original Pantaloons apparel stores -- and is proud of his low-price, high-volume strategy that has struck a chord with the new urban middle class.

But his smile weakens as he contemplates the U.S. retailer's possible launch in India. "An Indian retailer can succeed if the establishment wants it," Mr. Biyani says, arguing that the sector is in its first stage of evolution and should not be "given away to foreign players" while it is too young to compete on a level playing field. "We should be allowed to grow and then compete," he says, drawing a parallel with the high degree of protection that the Reserve Bank of India has extended to local banks, which cannot be taken over by foreign groups until 2009.

A head-start, he adds, would give Indian retailers time to consolidate their one big advantage. "We understand Indian consumers; there are 6,400 castes and sub-castes in India whose eating habits are incredibly different. Our strategy is built around those differences, and that's a huge asset." As evidence, he cites the entry of South Africa's Shoprite, which opened a "standard model supermarket" in Mumbai last year "smelling of meat" in an area of Hindu vegetarians.

Even though Mr. Biyani has in less than five years built up two million square feet of retailing space and achieved sales of US$151-million in the year to June, 2004, he is clearly worried. He lacks the capital to build even average-sized Wal-Mart stores of 200,000 sq. ft. -- four times larger than his flagship Big Bazaar. He agrees the only way this will change is if he throws in his lot with a big Indian partner with deeper pockets and an interest in retailing.

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