The Sydney Morning Herald
India's retail industry gets a shake-up
Daniel Pepper in New Delhi November 4, 2006
On Friday morning Reliance Retail, a part of Reliance Industries Ltd, India's most profitable company and one of its largest, opened eleven western-style supermarkets simultaneously in the southern city of Hyderabad - India's sixth largest and fastest growing city, which happens to be a hub for its growing tech industry.
The stores bring different foods together under one roof, a novel idea in this country of 1.2 billion. Despite the country's surging economy and massive size - it has three times the number of people than the United States, in less than a third the space - Indian companies have never plunged into the retail market the way Reliance is about to. It plans to sink $5.6 billion into opening 4,000 stores in 1,500 towns and cities over the next four years. "The object is to transform the retail industry in the country in a way that creates a win-win situation for every stake holder," said Gunender Kapur, president and CEO of Reliance's food business.
Currently India has only a few dozen such large supermarkets, none with the kind of unified supply chain or on the same scale as what Reliance is rolling out. It is the first major shift from the traditional marketplace ubiquitous through India: one small shop offers canned goods, lentils and biscuits, while another has clothing and bed sheets, a third has sporting goods and a fourth video games.
Reliance is betting that their stores will provide a welcome relief to India's young, upwardly mobile middle class seeking refuge from the loud, crowded, dust-clogged marketplaces (in many cows still plod along disrupting traffic). They also threaten to displace a significant portion of the 54 million Indians who work in the country's retail sector, in some 12 million small shops.
In New Delhi the small, informal retail shops are doubly endangered. Earlier this year India's Supreme Court ordered the city of New Delhi to shut down roughly 40,000 shops that operate illegally along some 2,000 residential roads. The shopkeepers went on strike in October, and four people were killed in clashes with police. On Monday, at the start of another three-day strike, five thousand angry shopkeepers smashed through a series of police barricades during a demonstration outside the city's assembly building. One sign aptly summed up the mood: "Hitler vs the Delhi Gov: Who is the bigger criminal?"
The strike was not in opposition to Reliance, Wal-Mart or similar stores, but against the government's attempt, once and for all, to enforce long-ignored zoning laws that will in turn make the city more conducive to malls and big retail.
Reliance is not the only company getting into India's mushrooming retail sector. According to Arvind Singhal, chairman of Technopak, a New Delhi-based retail consultancy, there are at least eight companies in India that will invest a minimum of US $1 billion in the retail sector over the next five years. Mr Singhal expects India's total retail market to more than double from about US $300 million currently to US $637 billion by 2015.
Most of that money will be generated from within India - the country heavily regulates its retail sector, which means for the time being, the big box stores of Wal-Mart and Tesco are being kept at bay.
"You can't stop the Chinese forever and you can't stop Wal-Mart forever, but you can take it in phases," says Mohan Guruswamy, head of the Centre for Policy Alternatives, a New Delhi think tank. Mr Guruswamy has advised the Prime Minister and members of his cabinet on the go-slow approach to direct foreign investment in the retail sector. With Wal-Mart procuring US $28 billion worth of goods a year from China, "that pipeline is directly set up to come into India, and could be set to wipe out small industry".
Yet Mr Guruswamy is quick to point out that India's retail sector is due for an adjustment. The reason 54 million people work in retail here, he argues, is that the government has failed to provide jobs in industry or elsewhere - the vast majority of workers in India are in the agriculture and unskilled labor set. For those who have any sort of education, but can't find gainful employment, they go into retail.
And it shows. Currently less than 5 per cent of the country's retail outlets are more than 500 square feet. Reliance's first new stores range in size from 2,000 to 5,000 square feet - a fraction the size of the average western supermarket (the average Wal-Mart is 85,000 square feet), but huge compared to the vast majority of shops here. In three to six month Reliance Retail will open a few flagship stores, around 100,000 square feet, but for the time being it is focusing on fresh produce, fruit and packaged goods, bought locally from farmers in the same state as the stores.
Not that large retail will have an easy ride setting up shop in India. The country's infrastructure remains in a state of pitiful neglect, at least relative to neighbouring China, and while there may be droves of young people applying for a spot behind the register, without any tradition of large retail stores in India there is a paucity of experienced talent available for mid-management positions. Also, Mr Singhal points out, manufacturers within India are not accustomed to providing merchandise on the scale of what Wal-Mart buys from Chinese manufacturers.
They will surely adapt, as will many of the shopkeepers whose stores may be shut. But with big box stores like Wal-Mart around the corner the mom and pop stores might be in the twilight of their days.