by: Izzy Woods
India’s government has just approved legislation allowing foreign retailers to own up to a majority 51% of multi-brand retail operations, with the remaining 49% owned by a local partner. What this means is that the world’s largest untapped retail market is basically opening its doors to global mega chains like Walmart.
Up to now, Walmart and similar companies such as France’s Carrefour and UK-based Tesco have only been able to invest in franchise partners or in wholesale companies that do not sell directly to the public. Walmart has already established nine cash and carry stores in India, in partnership with billionaire Sunil Bharti Mittal’s Bharti Enterprises. It also supplies fruit and vegetables to more than 100 Bharti supermarkets.
The government has also ruled that foreign companies that sell only one brand, such as Apple and Ikea, can now own 100% of their enterprises in India, up from the previous 51% limit.
The attractions of India for global chains like Walmart are obvious. With 1.2 billion people, India is the second most populous country (after China and followed by the USA), the tenth largest economy, and rated the fifth most valuable emerging market worldwide.
The multi-brand retail (supermarket) sector is estimated to be worth $390-$470 billion in annual sales, and the potential for growth is high, as the country moves towards a Western-style consumer economy. Business Monitor International predicts it will reach $785 billion by 2015.
To date, India’s retail sector has been dominated by small, family-run businesses – local grocery outlets known as kirana stores. Organised retail makes up just 5-7% of the overall market.
These traditional ‘mon-n-pop’ store owners know their days may soon be over. Unlike international giants, they simply can’t afford to lure customers into the store with promotions and freebies, nor can they match the variety of a big supermarket. As one owner says, “When foreign retailers come here, we will have a tough time. How can we compete with their size, options and prices?”
Since entering the Chinese marketplace in 1996, Walmart has established almost 200 outlets in China. It will certainly hope to do the same in India.
What’s in it for India?
After debating the issue for more than seven years, why is the Indian government suddenly about to allow all these foreign companies to take over its retail sector?
The specific conditions linked to the legislation yet to be confirmed, but there is speculation that foreign companies will have to invest a minimum of $100 million, at least half of this in back-end infrastructure. They will also have to source almost a third of products from small and medium-sized local suppliers, and will only be allowed to operate in around 50 cities with populations of more than one million.
Raj Jain, president of Walmart India, has claimed that the company would improve infrastructure and supply chains, and reduce food waste. According to government estimates, some 40% of the country’s fruit and vegetable rot before they are sold, due to poor transport infrastructure and a lack of cold-storage facilities.
Walmart’s joint venture with Bharti Enterprises buys fresh produce direct from around 1,200 farmers, and claims to be helping farmers improve yield ratios by promoting better methods. Walmart has also set itself a target of increasing farmers’ incomes by 20% over the next five years, and to build itself a network of 35,000 farm suppliers by 2015. These arguments are likely to carry significant weight, since the majority of India’s population are employed in agriculture.
Commerce and industry minister Anand Sharma also says fresh foreign investment will generate 10 million new jobs in three years, including 5-6 million in logistics.
The agreement has certainly not been backed by all politicians. The Trinamol Congress and DMK parties – both part of the coalition government – have both spoken against the decision, as has main opposition party BJP.
Leftist parties have called for a nationwide strike on December 1, in support of the Confederation of All-India Traders. Meanwhile Uma Bharti, leader of the BJP, has made the strength of her feelings clear by publicly threatening to set fire to any Walmart that opens. “Economic liberalisation has snatched employment opportunities of about 90 per cent of the poor people and benefited only 10 per cent,” she said.
Others disagree, pointing out that small stores often pay extremely low wages, offer no employer benefits, and breach child employment laws. And some dispute claims that the legislation will mean the inevitable demise of smaller businesses. Only time will tell – but one thing’s certain: once the likes of Walmart get a grip, there’s no turning back.
Since Izzy Woods posted this article, there have been significant developments in India that appear to be derailing Wal-Mart’s attempts to enter the Indian Marketplace:
India backtracks on plan to let in foreign retail
By RAVI NESSMAN and ERIKA KINETZ, Associated Press
Wednesday, December 7, 2011
(12-07) 08:39 PST NEW DELHI, India (AP) –
India on Wednesday suspended its plan to open its huge retail sector to foreign companies such as Wal-Mart in a reversal seen as a major capitulation to political opponents that further weakens the administration.
The business community had hailed the initial decision to let foreign firms own a majority stake in retailers here just two weeks ago, and the government and some economists said foreign retailers would bring better prices for farmers and lower prices for consumers.
But opposition parties and even some members of the governing coalition protested, saying the local mom-and-pop stores that are the heart of Indian retailing would be crushed. Opposition lawmakers disrupted Parliament for days in protest.
On Wednesday, the government met with all the parties in Parliament to hammer out a deal: It would suspend the decision if they would let the legislature function.
Afterward, Finance Minister Pranab Mukherjee told Parliament that the foreign retail plan was “suspended until a consensus is developed through consultations with various stakeholders.” MUCH MORE