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Ross MBA: International Retail Expansion Study

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MBA Independent Study Project on International Retail Expansion with focus on India market

MBA Independent Study Project on International Retail Expansion with focus on India market

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  • 1. Strategic Analysis of International Expansion of Retailers By Nanda Kishore Rajanala Stephen M. Ross School of Business University of Michigan A research paper submitted in fulfillment of the requirements for 2credits, GRADUATE INDEPENDENT RESEARCH PROJECT, WINTER 2006 Professor Jie Zhang, Faculty Supervisor i
  • 2. ii
  • 3. TABLE OF CONTENTSTABLE OF CONTENTS ............................................................................................................. iiiTABLE OF FIGURES ................................................................................................................. ivABSTRACT.................................................................................................................................... vHISTORY OF INTERNATIONAL RETAILING...................................................................... 1 Retail Innovations in the USA .......................................................................................... 3GLOBALIZATION OF RETAILING ......................................................................................... 5 Carrefour .................................................................................................................................. 5 Key differentiators for Carrefour’s success............................................................. 6 International Strategy..................................................................................................... 7 AMERICAS............................................................................................................................ 8 ASIA ....................................................................................................................................... 9 EUROPE................................................................................................................................. 9SUPPLIER – BUYER RELATIONSHIP................................................................................. 11 Buyer Power.......................................................................................................................... 11 What Retailers demand .................................................................................................... 12WAL-MART ................................................................................................................................. 14 Quick Facts ............................................................................................................................ 14 International Expansion ................................................................................................... 15 Mexico & Canada............................................................................................................. 15 Latin America ................................................................................................................... 15 United Kingdom ............................................................................................................... 16 Germany............................................................................................................................. 17 China.................................................................................................................................... 18 The Japanese challenge ............................................................................................... 19 The Road Ahead… ............................................................................................................... 20INDIA........................................................................................................................................... 22 Un-caging the Tiger ........................................................................................................... 22 The Five Forces of Indian Retailing.............................................................................. 23 Consumers......................................................................................................................... 23 Economy & Political System ....................................................................................... 27 Competition....................................................................................................................... 28 Logistics, Operations & Services............................................................................... 29 Infrastructure ................................................................................................................... 31 India Retail Model .............................................................................................................. 32 Description of the model.............................................................................................. 33 Functioning of the model ............................................................................................. 34 Summary of the model................................................................................................. 45APPENDIX A ................................................................................................................................. IAPPENDIX B .............................................................................................................................. IIIAPPENDIX C ...............................................................................................................................V iii
  • 4. TABLE OF FIGURESFigure 1: 2005 Global Retail Development Index (Emerging markets) .............. 2Figure 2: Top 250 Retailers, By Sales .............................................................................. 3Figure 3: Carrefour - Breakdown of consolidated net sales by geographic area......................................................................................................................................................... 5Figure 4: Carrefour Store Layouts ..................................................................................... 8Figure 5: Wal-Mart Financial Highlights......................................................................... 14Figure 6: Wal-Mart International Operations............................................................... 15Figure 7: “Wal-Mart Germany: A problem of size”.................................................... 17Figure 8: Wal-Mart in 2005 ................................................................................................ 20Figure 9: Five forces of Indian Retailing........................................................................ 23Figure 10: Indian Consumer Market ............................................................................... 24Figure 11: Market Share across Retail Categories in India.................................... 24Figure 12: Indian push-cart vegetable vendor ........................................................... 25Figure 13: Growth of Retail Categories in India ......................................................... 26Figure 14: India Retail Model............................................................................................. 33Figure 15: Category shares among CCA outlets ........................................................ 42Figure 16: Map of Asia............................................................................................................VFigure 17: Map of India........................................................................................................ VI iv
  • 5. “A Strategic Analysis of International Expansion of Retailers” ABSTRACTThis study project aims to explore the history of retail expansions by the world’s twomajor retailers. It analyzes the expansion of global retailer Carrefour and takes thespecial case of Wal-Mart Stores.The study delves into the details of how Wal-Mart worked towards its overseasexpansions in Europe, Latin America and Asia. This section will include a study oftheir current domestic and international plans.Of particular emphasis would be an analysis of the retail market in India, and thepromises they hold for a giant mass merchandise retailer like Wal-Mart. The studywill also explore specific strategies for this emerging market that a retailer could lookinto.The proposed strategic initiatives will be based on the analysis of forces such assupplier relationships, merchandise operations, market environment, consumercharacteristics and competition. In understanding the huge technological advances inretail operations in the U.S, the feasibility and ease of implementation of thesetechniques in the world markets will be studied very briefly. A few examples aredemand forecasting and pricing software, RFID, data collection methods forcustomized shopping experience and challenges of applying these technologies in anemerging market like India.Retailing trends in India- A section of this study as mentioned earlier, will focusprimarily on what prevents or supports the plans of foreign retailers in making theirpresence felt in the country with the biggest promise for growth. As retailers in theU.S. strive hard to distinguish themselves from their competitors by working onbrand image, partnering with local retailers and establishing a brand name overseaswould be some of the challenges that will be analyzed. As India slowly movestowards the organized retail sector, a lot of political and operational challengesundermine the utilization of the same basic strategies that U.S. retailers have sosuccessfully mastered over the past 50 years.Finally, a simple model for business growth of U.S. retailers in India will be devised.The research project will rely on materials from past projects, retail news articles,retailing websites and research papers.The conclusion of the research study will be an attempt to integrate the variousanalyses made and provide a study material that can help people interested ininternational retailing, identify the methods and inherent reasons behind retailer’sinternational expansion programs. v
  • 6. HISTORY OF INTERNATIONAL RETAILINGThe history of international retailing can date back to several hundred years, whenretail merchants traded with different countries in selling their products and bringingnecessary goods for their local consumers. Fast forwarding it to the 19th century, wesee the rise of organized retailing in the developed world and their expansion intointernational markets in the middle of the 20th century.The internationalization of retailing is ‘the transfer of retail management technologyor the establishment of international trading relationships, which bring to a retailorganization a level of international integration which establishes the retailer withinthe international environment’.1 Alexander (1997) proposed six distinct stages thatidentify the history of retail internationalization:Genesis (1880-1945): characterized by the limited expansion of US and Europeanspecialty, department and luxury stores across major cities in order to tap expatriateand cosmopolitan markets.Emergence 1 (1945-1960): characterized by the transfer of US retail formats andtechniques (e.g. the supermarket) into the markets of Western Europe and Japan.Emergence 2 (1960-1974): characterized by the overseas investment of majorWestern European retailers, both in other Western European markets, and in theUSA. This was a sustained period of internationalization, driven by cash-richEuropean retailers reaching the limits of their national markets at a time whenregulatory barriers to international activity were starting to fall.Crises (1974-1983): a period of truncated international activity due to theeconomic shocks of the mid-to-late 1970s.Renaissance (1983-1989): characterized by a resurgence of investment activity inEurope and the US by leading Western European retailers, and also significantinvestments by Japanese retailers in Western Europe and the US.Regionalization (1989-2000): after a period of recession in the early 1990s, aperiod characterized by ‘regionalized’ expansion by US and European retailers,shaped in part by the European Single Market and NAFTA, and the opening up ofnew markets in Eastern Europe and East Asia.According to AT Kearney’s 2005 Global Retail Development Index, India and Chinaare among the top 5 emerging markets in the world. This analysis is based onextensive studies that looked into factors such as political risk, economic risk, accessto capital markets and financial institutions, market attractiveness, market saturationand time pressure.2Moreover, Eastern European countries like Russia and Ukraine are also growing aspotential markets for entry of retailers. Nearly 55% of countries in this region are1 Alexander, N. International retailing (Oxford: Blackwell, 1997), 372 A.T. Kearney Inc., “The 2005 Global Retail Development Index – Emerging Market Priorities for Globalretailers” 1
  • 7. worth considering, up from 45% in 2004. In Asia, 30% of the emerging marketsshow a promise for foreign retailers. The study also predicts that timing is a keydifferentiation factor for most retailers. This could explain the reason behind severalretailers leaving a market due to poor performance. In 2003, China and Russia werehighly attractive markets for retailers, but in 2005, they have been overtaken byIndia and Ukraine.3 According to the study, this transition of market attractivenesskeeps shifting (based on a country’s GRDI ranking) as and when emerging marketsgrow and previously hot markets reach saturation.Figure 1: 2005 Global Retail Development Index (Emerging markets) 2005 Country Region Country Market Market Time Score rank risk attractiveness saturation pressure Weight 25% 25% 30% 20% 1 India Asia 62 34 91 80 100 2 Russia Eastern 52 58 71 92 99 Europe 3 Ukraine Eastern 46 34 82 90 87 Europe 4 China Asia 68 40 53 90 83 0=high 0=low 0=saturated 0=no time risk attractiveness 100=not pressure 100=low 100=high saturated 100= risk attractiveness urgency to enterSource: AT Kearney Inc.There are about 270 countries with 6.5 billion people and a $55 trillion GWP (GrossWorld Product) 4in the world. In 2004, The GDP of the United States was $11.75trillion, about 20% of the world economy. The population of the United States is 295million, only about 5% of the world population. 5In 2003, the global retail salesreached $8trillion and are still growing. This includes the sales of both US and foreignretailers operating in different parts of the world. These figures show the potentialmarkets that US retailers can explore and why it’s beneficial for them to expand bygoing international.Currently, the top 250 retailers in the world serve 135 countries. With emergingmarkets in Latin America, China and India showing a steady growth rate and a risingconsumer demand, retailers are required to quickly realize the potential for immensegrowth.3 AT Kearney Inc., “The 2005 Global Retail Development Index” – derived from Figure B and Figure 34 GWP – Gross World Product or Purchasing Power Parity: A method of measuring the relative purchasingpower of different countries currencies over the same types of goods and services. Because goods andservices may cost more in one country than in another, PPP allows us to make more accurate comparisonsof standards of living across countries (Source: http://youthink.worldbank.org/glossary.php)5 “The World Fact Book,” Central Intelligence Agency,http://www.cia.gov/cia/publications/factbook/ 2
  • 8. Figure 2: Top 250 Retailers, By SalesSource: www.stores.orgAccording to Professor Emeritus James Brian Quinn at Dartmouth College, “The worldwe live in was not in the economics books when I was in the university. They talkedabout land, labor, and capital in those days. Now, intellect is the driver of all growthin the world. In fact, intellect, service, and growth create value,”6Retail Innovations in the USARetail innovations have pioneered the growth of the retail industry by bringingrevolutionary changes to retailing formats and consumer behaviors, each steptransforming a nation of people and shaping the growth of the economy.In 1879, F. W. Woolworth pioneered the five-and-dime store, that specialized inselling everyday items at bargain prices by using high-volume, low markup strategy.Woolworth also led to the demise of behind the counter stores and started directpurchasing from manufacturers. The last Woolworth store was closed in 1998 after itwas unable to compete with the mass-merchandise discount stores on either price orchoice of items.J.C. Penney led the retail revolution in 1902 by offering consumers high-qualitymerchandise coupled with practices like standardized pricing and money-backguarantees. Penney changed the way American consumers perceived retailers byembracing the golden rule, “Do unto others as you would have others do unto you”In 1948, the first E.J. Korvette’s discount store was opened as a “membership store“to avoid the radar of the Robinson-Patman act. 7 The concept of membership storessoon developed into the building of giant membership stores like Costco and Wal-Mart’s Sams Club.6 Margaret Hart, “Value-Creating Growth: Goals, Strategies, Foundations,” The Conference BoardInc.7 The Robinson-Patman Act of 1936, or Anti-Price Discrimination Act, outlawed the anticompetitivepractice of producers allowing chain stores to purchase goods at lower prices than other retailers. The Actprovided for criminal penalties, but contained a specific exemption for "cooperative associations (Source:http://en.wikipedia.org/wiki/Robinson-Patman_Act) 3
  • 9. The concept of convenience stores was started by 7-Eleven in 1927 at the SouthlandIce Company in Dallas, Texas. By selling basic grocery items when regular storeswere closed after-hours or on Sundays, the retailer was able to offer consumers, thecomfort of purchasing necessary items. 7-Eleven, or in other words, 7am to 11pmseven days a week was a revolutionary idea at the time.Inspired by the concept of hypermarkets in Europe, Wal-Mart opened its firstsupercenter following a growing demand by consumers for a one-stop shoppingexperience. The first supercenter was opened in 1988 in Washington, Mo. Since then,the retailer has expanded into the grocery business and relatively every retail spaceimaginable. Other retailers like Target and K-mart have also followed up with theirown supercenters.These innovations have led to the massive expansion of the retailing industry in theUnited States. Most of these retailers are now equipped with innovative and efficientprocesses, paving way for their expansion into foreign markets. 88 “Retail Innovation: Ten Opportunities for 2010,” Retail Forward,http://www.retailforward.com/special/innovation2010.pdf 4
  • 10. GLOBALIZATION OF RETAILING9Academic studies over the years have come up with various theories on what drivesthe global expansion of retailers. Some theories propose that global retailers aresuccessful internationally if they are the first-movers in the market on a potentiallylarge operating scale, using no local partners or acquired assets and offering a storeformat that is new to the country but is familiar to the retail firm. The study byGielens and Dekimpe (2001) provides answers to two questions: (a) on what basisshould retailers choose the market of entry for their international operations? (b)How can retailers succeed in an international market?A study by Harvard Business School professors David Bell, Rajiv Lal and WalterSalmon, delves into these very questions by focusing on three top global retailers,Carrefour, Wal-Mart and Ahold. This study used data collected from multiple sourcesincluding field interviews conducted by the professors in Latin America. My analysisfocuses on their research about Carrefour, the global French retailer.Carrefour10Carrefour is the leading European retailer and second largest in the world after Wal-Mart. It operates hypermarkets, supermarkets, convenience and other businessesand hard discount stores in 32 countries across Europe, Latin America and Asia. Witha compounded annual growth rate of 24% since 1996, its sales including taxes were90.681 billion euros in 2004 despite the fact that Carrefour has no stores in the US,and UK.Figure 3: Carrefour - Breakdown of consolidated net sales by geographic areaSource: Carrefour SA Annual Report 2004Carrefour opened its first store (7000 sq ft) in the basement of the Fournierdepartment store in Annecy, France, in 1957. Soon thereafter, in 1963, Carrefouropened its first hypermarket outside Paris in Sainte-Geneviève-des-Bois. The storewas unique in its size (27000 sq ft and provided parking for 450 cars) whereconsumers could meet all their shopping needs under one roof. The store format was9 David E. Bell, Rajiv Lal and Walter J. Salmon (John Quelch and Rohit Deshpande, eds.),Globalization of Retailing in the Global Market: Developing a Strategy to Manage Across Borders, HarvardBusiness School, 200410 Source: “Carrefour SA Annual Report,” Thomson Research, 2004 5
  • 11. largely self service and covered a range of products from grocery to auto, clothing,sporting goods, jewelry, home products and home furnishings. The Frenchconsumers, who were largely fed until then by several mom & pop stores, welcomedCarrefour’s novel idea. Between 1965 and 1971, sales growth exceeded 50% peryear with non-food items accounting for more than 40% of sales.Key differentiators for Carrefour’s successHypermarket Stores: The hypermarket stores averaging 108,000 sq ft, are usuallylocated outside towns in commercial areas where land is cheap, and are easilyaccessible by highways. The company also had a simple construction for its facilities.This allowed it to invest about one-third less on a square meter of selling space thana traditional supermarket.Price: The success of the hypermarket concept could also be attributed toconvenience and price. Any product that a consumer can think of is convenientlyavailable at a single store. Carrefour always maintained a sharp focus on its pricing.The pricing was based on surveys of competitive prices on the most important itemsacross all stores within a five minute drive of a Carrefour store. They were then setto match or be less than the competitor prices. Carrefour’s prices averaged 5-10%under those of retailers in the traditional outlets.Local Suppliers & Private label brands: As competition grew, Carrefourdifferentiated itself by purchasing from local suppliers and selling private labels.Carrefour does not disclose sales figures for its private label products but it has atotal of 2500 private label products. Carrefour is creating a new organization,Direction de la Marque, to manage its retail brands. The organization will work toimprove its private label brands and differentiate it from other manufacturer’sbrands. With the autonomous functioning of its hypermarkets, supermarkets,neighborhood Cash and Carry and discount store operations, this move is part of alarger plan to reinforce the central role of the private label. Carrefour is alsoincreasing its investments in private label. In France, the retailer is introducing about700 new package products by the end of 2006. 11Purchasing locally was a key strategy as it pleased the local authorities and met theneeds of the local consumers. Some of these very strategies were carried over to itsinternational markets to reap rich benefits. By purchasing in local markets, Carrefourwas also able to position itself as a leader in fresh food produce. Carrefour alsooffered private labels at a price that was often 15 to 30 percent lower than thenational brands.Decentralized Organization Structure: Carrefour had a decentralized organizationstructure that allowed its various divisions to focus on local needs in a market. Thehome office in Paris dealt with long term strategy and policy, financial and technicalmatters and any advice as and when was needed. The home office was alsoresponsible for planning capital expenditures of the company and determining newstore locations. The individual store managers were responsible for store profits andhad the freedom to conduct sales and margin forecasts. They also determined the11 “Latest news from supermarkets,” Private Label Istanbul 2006,http://www.privatelabelistanbul.com/pleng/privatelabelhakkinda_haberler_haber6.html 6
  • 12. overall store strategy before it was sent to the headquarters. Comparisons were alsomade with other stores and departments in the region to benefit from best practices.Almost all promotions were from within the organization with a strong emphasis onon-the-job training. With this level of decentralization, support services like IT andlogistics were treated as vendors. For example, In 2005 Carrefour chose a leadingretail software vendor, Aldata, for deploying Aldata Gold software internationally.This structure was a direct opposite to Wal-Mart’s centralized structure that bankedheavily on its in-house IT systems and state of the art logistics.International StrategyWhile Carrefour made big in-roads in France, it also stomped out a large number ofmom & pop stores out of business. Between 1961 and 1971, 80000 out of 203000stores disappeared. These store owners used their political clout to seek governmentintervention to slow the growth of Carrefour’s hypermarkets. Eventually, The FrenchNational Assembly intervened and taxed retailers to pay for the pension of smallmom and pop stores. Added to this were zoning laws that restricted the space forbuilding hypermarkets.With limitations for rapid growth in the French market, Carrefour started its firstinternational expansion by moving into Belgium in 1969. Carrefour soon expandedinto Spain and also introduced the hypermarket concept in Latin America in 1975.However, Carrefour took a cautious approach towards building new stores. From1975-1985, Carrefour opened only 10 stores using capital available from operatingstores. Once successful in a market, it started to build stores rapidly since 1985.During the late 1980s, the Brazilian economy experienced severe inflationarypressures and the local Carrefour management responded to this challengeproducing great financial results for the company. In Latin America, Carrefouradopted the concept of “self-funding” and provided starting capital for only one storeand a half. It then opened its second store only after it was able to generate enoughfunds from the operations of the first store. Carrefour has multiple store formats ineach region (hypermarket, supermarket, hard discount) and the size of the storeformat is tailored to the needs of each country it entered. Carrefour was able tonegotiate discounts with its vendors which were then transferred as price cuts to itscustomers.The store manager as always had P&L responsibility, taking advantage of thedecentralized organization structure. Department heads purchased centrally onlywhen the benefit of central purchasing outweighed the benefit of local purchasing.Hence product mix and assortment could vary by store and suppliers had to sellproducts at the local level to ensure distribution in a country. Carrefour’sheadquarters in Paris negotiated with only 15-20 vendors worldwide and it served asa central supplier of services such as accounting, legal, IT etc.In 1989, Carrefour was also the first international retailer to make its entry into Asia.Currently, it’s present in 7 Asian countries. In 1999, it merged with local French rivalPromode to expand it business further in France. However, the merger with Promodeposed a challenge to Carrefour. It was an alliance between highly decentralizedoperations in the hypermarket division with centralized operations in thesupermarket division at Promode. But, it also provided economies of scale inoperations by preventing Carrefour from looking for new space in the French market. 7
  • 13. But, along with continued expansion, Carrefour also exited from countries in which itperformed poorly. It made unsuccessful forays into Chile, Czech Republic andSlovakia, Hong Kong, Japan, Mexico, United Kingdom and the USA. In the USA,Carrefour had hypermarkets in Philadelphia and New Jersey for about five years.Both stores closed in 1993. In the UK, Carrefour had three hypermarkets until the1980s. These stores were sold later and Carrefour exited the market due to stiffcompetition.12In terms of international expansion, Carrefour seems to have traded off the benefitsof size, in terms of buying power, distribution and logistics costs and marketingcosts, for getting the format right in each country it entered. In certain Asiancountries, although Carrefour was the first international retailer to enter, it still hadto go through Joint ventures due to government regulations. However, it seeks tohave a majority ownership in these ventures to take control of the day-to-daymanagement of the stores.Figure 4: Carrefour Store LayoutsSource: IGD Retail Analysis (igd.com)Thus Carrefour’s mode of entry remains to be green-field except when constrainedby local market regulations. Carrefour caters to local market needs with a strongemphasis on prices. For example, in Taiwan, 70% of the products in stores areTaiwanese, 20% Asian and the remaining 10% come from America or Europe.Overall, Carrefour has had a strategy that makes it the first international retailer toenter a market and it seems to prefer and succeed in developing markets overdeveloped markets.The following is a snapshot of some of the highlights of Carrefour’s expansion inseveral markets worldwide. This gives an idea of the variety of country specificstrategic initiatives that Carrefour implements in each market.13AMERICASArgentina: Carrefour is Argentinas largest retailer with more than 400 storesincluding Carrefour hypermarkets, Norte Supermarkets, and Dia hard discounters.It acquired Norte in 2001 and completed the operational integration of the company.Its expansion plans for 2005 hinge on Argentinas ability to "tackle the black marketand wrap up the countrys mammoth debt restructuring."12 Source: “Carrefour,” Wikipedia, http://en.wikipedia.org/wiki/Carrefour13 This Country Analysis snapshot is from multiple news sources: Business Week, One Source GlobalBusiness Browser database and online newspapers worldwide. 8
  • 14. Mexico: Carrefour badly lagged Wal-Mart in Mexico and had only 29 stores. In 2004,Carrefour sold its Mexico operations to Chedraui as part of a program announced bythe group to divest non strategic or underperforming activities.Brazil: Carrefour opened its first hypermarket in Brazil in 1975 and is currentlynumber two in the country. Competition among retailers in Brazil, a nation of 184million with some of the highest interest rates in the world, is heating up as theyoffer customers financing for their purchases. Carrefour had 390 stores at the end of2004 and spent money investing in a lot of new hypermarket stores. Wal-Mart is itsbiggest foreign competitor in this nation.ASIAChina: Carrefour has been active in China since 1995, but its store opening planshave had to be put on hold while it restructured its business to include a localpartner – a rule imposed on all foreign businesses moving into China. Carrefour salesrose by 25% to 17.4bn Yuan ($2.2bn; £1.3bn) in 2005, making it Chinas ninth-biggest retailer by sales. However, Chinese retailers still dominate the local retailmarket. Carrefour increased the number of its stores in China to 78. China is the fifthlargest market for Carrefour.Korea: When Carrefour became the first global supermarket chain to enter Korea in1996, it put local discount stores on high alert. But the chain failed to localize itsbusiness sufficiently to meet Korean customers’ tastes by stacking products up to theceiling warehouse-style and organizing stores the same way it does in France. In2006, Carrefour Korea, the No. 3 discounter in South Korea, decided to sell up to 10of its 32 outlets nationwide. This may be purchased by rival Lotte Mart. However, thecompanys plan include an increase in the number of stores in the Seoul metropolitanarea from the current five to 12 by 2008 and investing 400 billion won this year forexpansion and remodeling plans.Malaysia: Carrefour started its Malaysia operations in 1994. Its operations are 30percent owned by Malaysias Syarikat Pesaka Antah. Carrefour Malaysia, plans toinvest up to RM200 million for two additional stores and hopes to get better salesriding on its promotional activities involving a price cut of up to 5% on some of its“customer-sensitive” products. Carrefour Malaysia is also planning to invest up to200m rat in two new hypermarkets in the Klang Valley, to raise its network to 10stores from eight currently. It currently has six hypermarkets in the Klang Valley,one in Penang and another in Johor. Malaysia has restricted the entry and expansionof hypermarkets in the country in recent years to protect smaller local businesses,forcing foreign retailers to devise new strategies to enable them to expand.EUROPETurkey: Carrefour Turkey is currently the number two food retailer in Turkey with2004 net sales of E702 million. It currently operates 12 hypermarkets, sevensupermarkets and 255 hard discount stores in Turkey. It is on a strong acquisitiondrive of local retailers in the market. 9
  • 15. Spain: Carrefour has had to work hard to make its Spanish operations work, giventhe tough legislative framework there and the mechanics of integrating the Prycabusiness acquired in 1999 with its existing Continente unit. The necessity of creatinga single IT system for the merged Pryca/Continente business allowed Carrefour toupgrade its operations, with a likely reduction in IT costs of 25-30 percent. An addedbenefit from this merger that contributed to Carrefours success in Spain was thesharing of services – such as central purchasing and pricing negotiations. Carrefourhad 30 Spanish distribution centers in 1999 but is on target to reduce this to 11 by2006 – which should allow it to reduce logistics costs as a percentage of sales. In2005, Carrefour divested Puntocash in Spain to Miquel Alimentacio Grup.In 2006, Carrefour Spain acquired 4 hypermarkets and 2 petrol stations fromCaprabo.Poland: Carrefour has been active in Poland since 1997, and operates about 15hypermarkets and 67 supermarkets there, with one store the company claims is thelargest shopping center in central Europe, located in central Warsaw. In 2004, withthe purchase of 13 Hypernova hypermarkets from Ahold, Carrefour became Polandssecond-largest hypermarket retailer. Carrefour is considering opening 1,000 squaremeters stores in smaller towns. This format will be more suited to the Polish marketwhere the population is spread out more in rural towns. Poland has a low populationdensity, with only four per cent of the population living in the capital city. Hence,small towns are a big opportunity. The retailers future development in the countrywill no longer involve takeovers of shopping malls or individual stores, despite thefact that it acquired 12 hypermarkets from Ahold early in 2005. 10
  • 16. SUPPLIER – BUYER RELATIONSHIPIn the context of Global Retailing, no analysis of the retail industry can be completewithout considering its relationship with two main elements of the value chain-consumers and suppliers. In this section, I briefly analyze the latter element and itsrelationship with retailers in the wake of intense global expansion of both retailersand suppliers.Buyer Power14When organized retailing began in the early 1900’s, the consumers became the king.They were offered a wide array of choices and competition ensured that they alwaysgot the better of price and variety. However, a retailer’s relationship with hissuppliers has been evolving over the years. Initially, suppliers had the power todictate terms to the retailer. They decided the products that need to be sold, thedisplays and the products that need to be replaced in a store. Price negotiationsalways helped the supplier reap benefits from selling a product to a retailer.However, things changed with the quick rise in discount stores like Wal-Mart.Retailers were rapidly able to generate consumer demand through their stores andincreased loyalty through price savings, efficient logistics and better marketing. Thiseventually led to a retailer dictate terms to the suppliers in order to sell theirproducts in the stores. Nowadays, major retailers like Wal-Mart get huge pricediscounts from suppliers that enable them to implement EDLP (Every Day LowPrices).With the opening of world markets, manufacturing companies were the first to gointernational by initially sourcing raw materials and then producing them toeventually selling their final products. These manufacturing companies offeredcustomized choices to consumers and negotiated better deals with retailers.Especially in developing economies, suppliers had a better chance of earningprofitability in highly unorganized retail markets. Hence, they were able tounderstand the dynamics of foreign competition much before the major retailers did.But with the global expansion of retailers from the early seventies, the buyer powercame to the forte again and suppliers are faced with some of the similar challengesthat they faced earlier in domestic markets. A typical scenario is where a consumerproducts company is faced with the task of satisfying his customer, the retailer. Aretailer with international operations could complain that he is paying different pricesfor the same products in the markets he operates in. The retailer may even demandthat he receive a consistent price or deal for all his stores failing which he would goto the lower priced competition.This is a circumstance where retailers have understood the strategies of suppliers indifferent global markets and hence want to take the same decision makingadvantages, which made them powerful in the domestic market. However, such adeal with a retailer would require a supplier to go through a region-wise financialanalysis and price data understanding that would only complicate than make thingseasy for him. Moreover, a change in this direction would be a global decision that canbe made only by the CEO.14 Mark Carr, Arlene Hostrop and Daniel OConnor, “The New Era of Global Retailing,” The Journal ofBusiness Strategy (Boston: May/Jun 1998.Vol.19, Issue. 3; pg. 11, 5 pgs), Copyright Faulkner &Gray, Inc. May/Jun 1998 11
  • 17. Faced with increasingly saturated home markets, leading retailers such as Wal-Martand Carrefour are looking abroad for future growth. The growth in business throughthese large global retailers is creating downward pressure on pricing and upwardpressure on costs in areas such as working capital, supply chain enhancements, andsupport resources such as IT. But as retailers began to exert pressure, manysuppliers were finding their regional operations as ill designed to deal with it. Thisinconsistency has largely in part been due to the way in which manufacturingcompanies expanded internationally.Most manufacturers began their international operations in a decentralized manner.The regional offices had considerable leeway in developing channel strategies andtactics. This structure also enabled manufacturers to better deal with localcompetition and consumer choice. But this regionalized structure has now become aliability with the growing clout of global retailers. This independent decision makinghas led to inconsistencies in pricing structures, brand positioning, and logisticscapabilities across markets.However, in order to survive in a world where global retailers are ever expanding,the buyer relationship needs to be strengthened and this required significant butslow changes to the strategic, operational, system and organizational structures ofthese manufacturers.The expansion of global retailers has been a tough challenge for manufacturers.Their growth has made manufacturers see an increasing dependency on the sellingpower of retailers to customers. One consumer packaged goods company withoperations in more than 50 countries found that 10% of its global business was withWal-Mart, with another 25% of its business spread among a handful of other globalretailers. Many manufacturers, especially in Europe where retailing is wellestablished, have found a greater percentage of their business dependent on ahandful of retailers.Carrefour has entered into global supply contracts in certain categories and so areother retailers. Also, several European retailers joined global buying groups such asCarrefour Marchandises International (CMI, created in 1995) to leverage bestpractices and realize economies of scale. Carrefour is also considering creatingsimilar groups in Latin America and Asia.What Retailers demand15Price concession: When dealing with manufacturers, either in the domestic orinternational market, retailers negotiate a lot of favorable terms. Retailers like Wal-Mart have well established systems that help them see through price differences andpromotional activities across markets.Operational cost savings: With increasing costs of global operations comes toughcost saving measures. Global retailers generally force manufacturers to accept toughpayment terms, in turn raising the costs of doing business for a manufacturer in the15 Mark Carr, Arlene Hostrop and Daniel OConnor, “The New Era of Global Retailing,” The Journal ofBusiness Strategy (Boston: May/Jun 1998.Vol.19, Issue. 3; pg. 11, 5 pgs), Copyright Faulkner &Gray, Inc. May/Jun 1998 12
  • 18. same market as the retailer. This gain in Accounts Payable period helps retailersdivert funds to much needed measures such as NSO (New Store Openings).Supply chain efficiency: Wal-Mart’s IT enabled sophisticated supply chain systemshas led to manufacturers improve theirs in turn. To keep up with the fast pace ofWal-Mart’s operations, several manufacturers have adopted expensive and efficientmeans to achieve lean operations. This has sometimes led to suppliers outsourcingtheir operations to manage rising demands and high costs of labor and material.Overall, the biggest challenge for a retailer or a manufacturer lies in efficientlycoordinating each of these activities to realize true economies of scale and healthyprofit margins. 13
  • 19. WAL-MARTQuick FactsWal-Mart is the world’s largest retailer with sales of $312.4 Billion as of January 31,2006. It employs 1.6 million people worldwide operating from more than 6200facilities spread across the globe. On an average, 138 million customers visit Wal-Mart each week.The first Wal-Mart was opened by Sam Walton in 1962 in Rogers, Arkansas. In 1970,the first distribution center was opened in Bentonville, AK to check the COGS growth.In 1983, Sam Walton introduced Sam’s Club warehouse after observing the conceptof Sol Price’s Price Club. Wal-Mart also has the largest network of suppliers spreadacross the globe. Contrary to popular belief, Wal-Mart buys merchandise andservices from 61000 suppliers in the US.In 1992, Wal-Mart went international in Mexico, which was followed by its entry intoCanada with the acquisition of 122 Woolco stores. Since then, the retailer has neverlooked back. International sales represented $56.3 Billion in 2005, nearly 20% of thetotal revenues. Wal-Mart made a series of joint ventures and acquisitions in Asia andLatin America to fight with rival Carrefour.In 1996, Wal-Mart entered China and in 1998, entered Korea through Joint Ventureagreements. In 1998, Wal-Mart forayed into Germany and faced the toughestcompetition from rival hard-discounters like Aldi. In 1999, Wal-Mart acquired 229stores of the Asda group in the UK. In a span of 10 years, under a consistentlyprogressive leadership, Wal-Mart made huge inroads in many international markets.Wal-Mart’s major plan for the future is to enter the most promising retail market inthe world, India.Figure 5: Wal-Mart Financial HighlightsSource: Wal-Mart Stores, Inc. 2006 Annual Report 14
  • 20. International Expansion16Figure 6: Wal-Mart International Operations Canada UK Germany Japan South Korea China Mexico Central America Brazil Argentina Not to be reproduced without the author’s permissionSource: Prepared by the author (Primary source:http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=369)Mexico & CanadaWal-Mart made its entry into Mexico by joining hands with the most successfulMexican retailer CIFRA, with sales of more than $5 Billion in 1997. This waswelcomed by many analysts as the North Atlantic Free Trade Agreement (NAFTA)looked promising at that time and a lot of consumers with similar demands for USproducts existed there. Wal-Mart also transformed the Canadian Woolco stores itacquired into the Wal-Mart format. Despite initial doubts, the entry into Canada wasa great success story for the retailer.Latin AmericaWal-Mart entered Latin American by establishing its first store in Buenos Aires,Argentina in 1992. Soon, it opened stores in the interior cities of Argentina. In 1995,Wal-Mart entered Brazil through a joint venture and subsequent acquisition of LojasAmericanas. Latin America posed a challenge to Wal-Mart as varied cultural habitsand preferences prevented Wal-Mart from sourcing the same products that it did forits domestic market and markets in Mexico. Moreover, it had a formidable rival inforeign retailer Carrefour to confront.Wal-Mart established both discount stores and Warehouse membership stores inthese markets. Wal-Mart’s poor performance in Argentina led to the overhauling of16 David E. Bell, Rajiv Lal and Walter J. Salmon (John Quelch and Rohit Deshpande, eds.),Globalization of Retailing in the Global Market: Developing a Strategy to Manage Across Borders, HarvardBusiness School, 2004 15
  • 21. its top management four times in four years. Such a performance could have beenpossible due to a strong desire on the part of Wal-Mart in implementing their muchsuccessful domestic model. Don Bland, president and CEO of Wal-Mart Argentina wasquoted as saying “Following our blueprint too closely wasn’t a good idea”.Whereas Carrefour with a decentralized model was able to adapt quickly to localtastes, Wal-Mart initially failed to realize this during its operations in Latin America.There were many unwanted items stacked in the shelves and Wal-Mart didn’t payattention to difference in consumer incomes and spending within the same city. Thestore layouts also reflected the US model and didn’t augur well with the localcustomers. Wal-Mart strongly relied on its purchasing power and EDLP strategy towin over the Latin American population, but soon realized that consumers indeeddictate the strategies of any retailer.Also, Carrefour posed an unmatched competition in Latin America by competinghead-to-head on prices and using its first entrant advantage as a tool against Wal-Mart. Especially in Argentina, it was observed that Wal-Mart was not able to spreadthe message of its EDLP strategy to the consumers. Another interesting idea is tounderstand the mind of the consumer. Latin Americans consider shopping as a socialevent unlike consumers in developed countries, who consider it as mostly a chore.Word-of-mouth campaign is strong with people recommending stores and theirbrands to family and friends. Hence EDLP wasn’t a sellable proposition in thismarket.Wal-Mart as always, learned quickly from this experience and came up with alocalized model for a store it opened in La Plata, 50 miles southeast of Buenos Aires,in 1997. Not only was the floor made of scuff-resistant tile instead of carpet but theaisles were made wider. Wooden wine shelves with overhanging arbors replacedmetal racks, a change that bolstered wine sales by 20 percent in other stores.Doughnuts were glazed with dulce de leche, a caramel confection and clothing rackscarried more apparel in medium sizes and less in large sizes. Moreover it was able tokeep an eye on its close competitor, a Carrefour store just down the street.United Kingdom17Wal-Mart entered the U.K through the acquisition of Asda. The retailer has facedintense competition from rival retailer Tesco, which by and large has been verysuccessful in the country.Asda is the UKs second largest food retailer and forms the UK interest of Wal-MartsInternational division. The company runs 265 Asda stores, 19 Asda Superstores, ageneral merchandise pilot store (Asda Living) and six trial George clothing stores inthe UK. Asda specializes in supermarket retail, selling a range of both food and non-food products. Its non-food offerings cover apparel, entertainment products,electrical goods, home ware and toiletries. The stores operate as a traditionalsupermarket and also offer services such as insurance, photo processing and an on-line shopping service. The company also sells its own range of fashion apparel, underthe George label.17 Source: “Company Spotlight: Asda,” Market Watch: Global Round-up, Sep2005, Vol. 4 Issue 9,p85-90, 6p 16
  • 22. Using Wal-Marts expertise, Asda is rapidly expanding into new specialty areas suchas pharmacies, opticians, jewelries and photo departments. In addition tosupermarket retailing, Asda is also involved in property development through itssubsidiary, Gazeley Properties. The company, through ASDA Financial Services(AFS), also offers customers insurance schemes (car insurance, home insurance,travel insurance, life insurance, mortgage life insurance and pet insurance), creditcards and savings schemes. In addition, the company runs about 150 petrol stationsin the UK.Asda has been trying hard to impress upon the UK government to remove certaincompetition laws that govern planning authorization for large stores (e.g.supermarkets) in a particular region. Asda has been losing market share to Tescoand hopes the relaxation of the law will enable it to compete better with its rival. Theproblem with the first mover advantage is that, in practice, once a largesupermarket has been built in a particular area, no further planning permission isgiven in that area. Because of this, in many locations there is only a single largeTesco outlet and Asda cannot open a rival store.However, apart from building new stores, acquisition has been a path that Asda istaking to compete with Tesco. In 2005, the Office of Fair Trading approved thepurchase by Asda of a dozen Safeway stores in Northern Ireland. Asda aims to openat least 10-12 new stores per year and hopes to create more than 500,000 squarefeet of new retail floor space every year.Germany18Figure 7: “Wal-Mart Germany: A problem of size”Source: Lebensmittel zeitung18 “Wal-Mart lesson: Smiling service wont win Germans,” The Christian Science Monitor,http://www.csmonitor.com/2002/1017/p07s01-woeu.htmlAndreas KNORR and Andreas ARNDT, “Why did Wal-Mart fail in Germany (so far)?,” University ofBremen, Department of Economics and Business Studies (FB 7), Institute of World Economicsand Int’l Management (IWIM) 17
  • 23. Wal-Mart entered Germany in early 1998 by acquiring 21 Wetkauf and 74 Intersparstores. Wal-Mart faced a major hurdle in Germany when it was unable to understandthe mind of the German consumer and came up with initiatives that fell flat. Thefollowing can be identified as challenges that Wal-Mart faced in Germany: • Lowest price - Germany is Europe’s most price sensitive market. Consumers looked for cheapest prices on certain products and were willing to look elsewhere for that. • “Everything under one roof” shopping experience – Wal-Mart had so successfully sold this concept of finding everything a consumer needs in a single store. However, German consumers did not find this as a value-add. They were willing to go to other rival retailers for products they didn’t find. • Customer Service – German shoppers were happy to shop in a store as long as they got the product they wanted at the price they wanted to pay. Smiling store clerks and cashiers didn’t add to the glitter of a great shopping experience. • The Aldi challenge – Aldi is the most successful retailer in Germany and operates small hard discount stores in comparison with Wal-Mart. German consumers love Aldi for its cheapest price offer on groceries and other essential products. Aldi also offers little in service and no bagging for items. However, consumers from the poorest to the richest preferred to shop at its stores. There is a huge challenge to Wal-Mart in luring Germans to their bigger stores. • Real estate laws – Wal-Mart is limited in building gigantic Sam’s Club type warehouse stores in Germany due to planning restrictions. Still Wal-Mart has come up with around 80 supercenters so far. • Strict work hours – Germany has a legal maximum of 80 hours/week of store opening hours. This is among the shortest in Europe. Stores are not allowed to be open during holidays or on a Sunday. This restricted Wal-Mart which found the low working hours affecting its sales. • Fair trade and Anti-trust laws – Germany has some strict pricing policies in place. This prevented certain pricing strategies as they were deemed illegal although the same were perfectly legal in the US and the UK. In 2003, Wal- Mart was slapped with a ruling from the German High Court accusing the retailer of predatory pricing. The selling of goods below the cost is not allowed according to anti-trust laws as it is believed to impact small businesses.China19Wal-Mart entered China in 1996 and opened its first store in Hsang-Chuin city. Thislocation was preferred as the local government provided tax incentives to the retailerand the city was closer to Hong Kong. Wal-Mart entered the Southern part of Chinaand slowly gained a foothold before moving to the larger cities.Wal-Mart is focused on gaining a greater market share of China’s $240 billion retailmarket. It currently operates more than 43 stores through joint ventures in China.The company is teaming up with the Hong Kong based CITIC Pacific to open manystores over the next five years. CITIC Pacific and Wal-Mart are likely to invest heavilyon opening stores in central China as well as the eastern cities of Shanghai and19 Source: “Company Spotlight: Wal-Mart,” MarketWatch: Food, Feb2006, Vol. 5 Issue 2, p19-25,7p 18
  • 24. Nanjing to tap into the liberalizing market. Wal-Mart will hold a 65% stake in thepartnership.China is an attractive market thanks to its huge population and consumers growinglevels of disposable income. In addition, certain parts of China are especiallyappealing as the government has established zones that encourage inwardinvestment. The Chinese market has looked all the more attractive following theopening of the market to foreign retailers. A regulation requiring foreign companiesto have local partners was lifted recently. Wal-Mart hasn’t taken advantage of thisyet but could probably make changes in this direction. A possible reason why Wal-Mart has chosen to stick with local partners may be the vast information about localconsumers and the market that the partners have. This will serve as a bigcompetitive advantage for the retailer that has realized the importance of this factorduring its experience in Latin America.20This will also enable Wal-Mart to bridge cultural gaps and meet the needs of Chinesecustomers, which will be vital to its success in this market. In China and most Asiancountries for that matter, food is bought more frequently and in smaller quantities.Hence stores need to be aware of this trend when they stock their grocery items.Wal-Mart’s low price image also helps in this case as Chinese consumers are highlyprice-conscious despite the emergence of a fast growing but limited in number andaffluent middle class.The Japanese challengeCarrefour entered the Asian market when it opened its first hypermarket in Taiwan,in 1989. In 2000, Carrefour entered Japan, and set up around 8 hypermarkets.However, unable to sell its mass merchandise, low price strategy to the Japaneseconsumers, Carrefour eventually pulled out of Japan in 2005, after four straightyears of losses.Likewise, Wal-Mart has been facing a downward spiral since its entry into Japan.Appeasing a demanding consumer base that believes “low prices mean low quality”,Wal-Mart has struggled all along in selling its EDLP concept to the Japanese, since itstarted the Japan operation through Seiyu. Seiyu, Japan’s fourth largest supermarketchain store was founded in 1963. In May 2002, Wal-Mart acquired a 6.1% stake inthe company to kick-start its international operations in Japan. Wal-Mart chose Seiyualso because the stores were mostly located close to train stations; one of the mostcommonly used means of transportation. In May 2005, Wal-Mart became the largestshareholder in this Japanese supermarket, when it acquired 42.4% after a series ofcapital infusions.21What went wrong?22 • Japanese consumers believe that low costs goods are associated with lower quality of the products. Foreign retailers like Wal-Mart and Carrefour have been unsuccessful in transforming this attitude of the consumers.20 Source: “Wal-Mart: China in its hands,” Market Watch: Food (Sep2005, Vol. 4 Issue 9, p19-20,2p)21 “International operations webpage,” Wal-Mart stores website, www.walmartstores.com22 “Japan isn’t buying the Wal-Mart idea” and “Wal-Mart’s waiting game inJapan,”Businessweek.com 19
  • 25. • As a matter of fact, Wal-Mart has not been able to successfully implement its EDLP strategy. It is yet to penetrate the close-knit supplier network in Japan and purchase in bulk, a method that squeezes suppliers to provide low priced goods to Wal-Mart, making them more efficient, leaner and faster in return. • Japanese consumers are more used to high-cost departmental stores and mom and pop stores. Purchasing items in bulk and storing them is not feasible as most Japanese homes in the big cities are smaller. Consumers usually prefer to use public transportation and vehicle parking is restricted. Hence they prefer to make frequent purchases in lesser quantities. • Seiyu has not been able to reduce costs in its supply chain. Especially in supermarkets, Japanese buy a lot of fresh produce, which are supplied by small, family-run businesses whose farms and fisheries offer better deals for smaller orders. • A lot of customization also needs to be done to cater to consumers in the different islands of Japan, who have different demands for a particular commodity. This causes logistical inefficiencies and complications. • The Japanese economy is rebounding after a 10 year long slump and consumer shopping attitudes need time to change.This brief analysis of the international retailing scene in Japan speaks volumes aboutwhat retailers need to look into when they enter relatively unknown and much morechallenging grounds like India. The promise of growth is no concession for making anentry that could turn faulty!The Road Ahead…Figure 8: Wal-Mart in 2005 Structural changes Marketing Initiatives 155-165 new stores 33% stake in Central New fully integrated Aggressive pricing in international American Retail media campaign with campaign for the markets. Net Holding Company – celebrities- “Home for Fall holiday season- increase of 285-325 dominance in Central The holidays” taking on the new stores and clubs America competition in US & abroad Greater control over Major acquisitions in Launch of Project Launch of Metro 7- Seiyu in Japan – 53% Brazil of Sonae and Décor- collection of Distinct line of major interest making Bompreco color coordinated fashion apparel for Seiyu a Wal-Mart Home Decoration women subsidiary products Active Public Experimental super Introduction of office Wal-Mart’s “Save Relations (PR) centers opened in products catalog in More Smile More” Ad campaign to fight Texas and Colorado Sam’s Club campaign - growing criticism, emphasizing value launch of addition to customer walmartfacts.com Not to be reproduced without the author’s permissionSource: Prepared by the author 20
  • 26. As can be seen in the above figure, Wal-Mart made some major changes to the veryway it conducted its daily business. Riding high on state of the art logistics andsupport systems, Wal-Mart had a grand plan to integrate its systems worldwide togain unimaginable advantage over its rivals. Wal-Mart still continues to spend about2% of its annual sales on Information Technology. A highlight of their restructuringhowever has been a never before seen emphasis on marketing initiatives.In 2005, Wal-Mart started a major revamp of its organizational policies followingyears of union backed anti Wal-Mart campaigns. Realizing that such continuedmeasures would undermine the image of the retailer in the public eye and facingopposition from certain foreign and local governments in establishing their base,Wal-Mart laid special emphasis on improving its public image.In the domestic market, retailers like Target projected their strength as an upscalediscount retailer and were making healthy profits. Target’s customer base had anaverage household income of $60,000 whereas Wal-Mart’s average was around$45,000. Also, since 2004, Wal-Mart’s same store sale at 2.4% was less compared toTarget’s average growth of 5.1%. Wal-Mart sought to reverse this trend by targetingmore affluent customers with slick merchandise. They also improved store designand display, making their aisles wider and their sales floors tidier.These measures, while helping Wal-Mart regain its strong foothold in the domesticmarket, also sought to improve the retailer’s image in the world. In India, Wal-Martfaces strong opposition from socialist political parties that view the retailer asexploitative and a contributor of job losses for local businesses. Wal-Mart has aimedto mitigate this notion by projecting the economic growth and the jobs it has createdin places where it entered. According to Wal-Mart’s latest mouthpiece,walmartfacts.com, the retailer saves working families about $2300 per year.Currently, Wal-Mart is not only trying to grow in the domestic market but alsomaking a conscious effort to improve its public image. During the Hurricane Katrinadisaster, Wal-Mart was praised for its foresight and swift action in reaching out to theneedy. It spent $20 million in cash donations, gave 1500 truckloads of freemerchandise, food for 100,000 meals and a job promise for every one of itsdisplaced workers. The work that Wal-Mart had done was unprecedented and oftensurpassed the relief measures of the government. 23Such socially progressive initiatives will help a long way in making Wal-Martacceptable to the public eye in a country like India. As India plays the waiting gamein allowing foreign retailers into the country, Wal-Mart is already preparing itself tobegin its retail operations from the very next moment!23 Michael Barbaro and Justin Gillis, “Wal-Mart at Forefront of Hurricane Relief,” Washington Post,September 2005, http://www.washingtonpost.com/wp-dyn/content/article/2005/09/05/AR2005090501598.html 21
  • 27. INDIAUn-caging the Tiger24India was a land of opportunities for global traders since several centuries in thepast. Merchants from Europe traveled several thousand miles of land and sea inorder to trade for Indian goods. But unlike in the US and Europe, the retail scene inIndia has never seen major changes. Retail is India’s largest services sector andaccounts for over 10 percent of the country’s GDP and around 15% of theemployment. Although the country has one of the highest consumer base in theworld, the retail industry as such is still highly fragmented. According to Mike Duke,Wal-Mart’s vice chairman and head of international operations, “India is becoming aconsumer economy”.Compounding this trend was the slow economic progress the country made until the1990’s, when a pro-reform government at the center opened the door formultinationals to easily set foot in the country. This measure was followed in tandemby the US government’s measure to welcome foreign talent into its much neededInformation technology services. This saw a sudden surge in Indian talent moving toforeign shores and Indian IT firms pumping in money into the country by goingglobal. However, the retail industry in India remains elusive to foreign retailers.Having realized the potential of allowing Foreign Direct Investment (FDI) in severalindustrial sectors, India has started the process of opening the Indian retail space.Its much prosperous neighbor, China, has been a true example of how reforms canchange a state and India is learning fast.India is experiencing explosive growth in the economy and projections by a panel ofIndian economists predict that the GDP growth rate of 7% will continue into 2010.“The average Indian consumer today is richer, younger and more aspiring in his/herneeds than ever before,” consultancy KPMG wrote in a report for the Federation ofIndian Chambers of Commerce and Industry (FICCI), which is actively pushing forIndia to relax rules on Foreign Direct Investment. More recently, in a step made inthe right direction, the Indian government allowed single-brand foreign retailers toenter the country by having a 51% stake in its operations.I have organized the various factors that can challenge a foreign retailer in setting itsbusiness in Indian shores, in the below flow circle. I have identified five major driversof retail business in India and shall explain them in detail.24 Source: Multiple news sources including- “One Brand, no waiting in India,” Business Week,http://www.businessweek.com/investor/content/feb2006/pi2006022_1223_pi015.htm 22
  • 28. The Five Forces of Indian RetailingFigure 9: Five forces of Indian Retailing Infrastructure Consumers Logistics, Operations & Services Economy & Political System Competition Not to be reproduced without the author’s permissionSource: Prepared by the authorConsumers25Most retailers will agree that understanding the mind of the consumer is probably thebiggest piece in the retail puzzle. Many retailers spend enormous amount of moneyin trying to understand the behavior and purchasing trends of the consumer andposition their merchandise accordingly. Also, consumers differ across countries andthere is no guarantee that a profitable format in one region will work in the other.Global retailers such as Wal-Mart learnt it the harder way when they entered LatinAmerica and Germany in the 90’s. Indian consumers are no different, and are muchmore demanding and varied in their preferences than their comparable Asiancounterparts. Hence, I’ve considered the Indian consumer as the first part of theretail circle.India has a highly versatile population with a mix of rural and urban inhabitants. Theurban population constitutes 27.78% of the total population. Only 7 out of a total of35 States and Union territories have an urban population over 40%. This indicatesthe level of penetration that a retailer needs to achieve if he plans to enter theIndian market. However, the growth of organized retailing in India depends on theextent of rapid urbanization that takes place. A study by the US census on the25 Sources: “Census India 2001,” Census of India, www.censusindia.net; “Gate Way toGovernment of India,” India Image, http://indiaimage.nic.in/languages.htm; “Ethnologuereport for India,” Ethnologue, Languages of the World, www.ethnologue.com; Sections on languageand culture of India in www.wikipedia.org; “State of Global Retailing – Looking for Growth inEmerging Markets -Focus on India,” National Retail Federation, NRF website resources 23
  • 29. population division in the world shows the increase in India’s urban populationreaching to become the 2nd highest in the world over the next ten years.Figure 10: Indian Consumer MarketSource: Indian Urban Retail – Opportunities and challenges (FICCI.com)The Indian consumer is also highly challenging in terms of language and culture.There are 22 officially recognized languages in India out of a total of around 415languages. The state boundaries of the country have been divided based on linguisticdifferences. India has 6 major religions and is one of the most secular, diversedemocracies in the World. Indian culture poses a huge challenge for retailers as it ishighly inconsistent and varies in a myriad ways from one place to the other. Thisstrong difference in cultural values is reflected in the purchasing behavior ofconsumers especially when it comes to grocery food items. Grocery food is by far thelargest market in India with a total share of 76% of the total Indian retail market butwith only a 1% penetration rate by organized retailing. Major foreign retailers cannotignore this large pie, but mastering it is highly challenging.Figure 11: Market Share across Retail Categories in IndiaSource: Indian Urban Retail – Opportunities and challenges (www.FICCI.com) 24
  • 30. These challenges were faced when giant CPG companies like P&G entered the Indianmarket. They faced heavy competition from local family owned companies that wereable to make and market products very specific to the local communities. However,slick marketing tactics including heavy spending in advertising has helped them pileup a greater market share in categories such as oral care, hair care and femininecare.Indians are also similar to other Asian consumers in their purchasing behavior.Consumers rarely stock items and purchase frequently for grocery items. Theybelieve in purchasing fresh food produce and usually end up buying vegetables andmeat from local grocers. Hence, it is highly imperative that food items be readilyavailable in terms of convenience and time. This could probably explain why mostvegetables and fruits are purchased from push cart vendors or small food marketsthat are opened very close to residential places.Figure 12: Indian push-cart vegetable vendorSource: A retail study tour of China and India (www.retailforward.com)India is also the largest consumer of vegetables. Indian vegetarians are primarilylacto-vegetarians and make up 70% of the World’s vegetarians. They also constitute20-30% of the Indian population. Most Indian food is produced organically and lackof proper storage and safe transportation, combined with a hot and humid weather,makes it easily perishable. Hence Indian consumers are used to purchasing fooditems on mostly a daily basis.On the other hand, home products offer an easy opportunity for foreign retailers toexplore. India has a growing middle class and fairly young population. India has thehighest proportion of younger population (<25 years) in the world at 53%. With afairly consistent growth in the purchasing power of people, there has been a hugesurge in shopping malls and hypermarkets to cater to their demand. However, thisdemand is still restricted to the urban middle class and does not permeate to therural or urban lower income groups. This fairly large group is appreciating thebenefits of an organized retail growth where shopping centers and supermarkets are 25
  • 31. selling cleaner, fresher, well packed and often cheaper products than a local shopkeeper. Some of the fastest growing categories of retail India are food and groceriesat about 33% and books/music at about 26%.Figure 13: Growth of Retail Categories in IndiaSource: Indian Urban Retail – Opportunities and challenges (FICCI.com)Overall, this can be seen as an increased demand for a better shopping experienceby consumers. An interesting aspect about Indian consumers is that they are bothprice and quality sensitive. Unlike Japanese consumers who believe quality comeswith price, Indian consumers are more open to the idea of receiving quality productsat lower prices. Indian consumers are also used to the luxury of home deliveryservices, a rarity in the west. Heavy traffic crowds and lack of proper commutingfacilities has led to most consumers ordering home items and getting them deliveredto their door step. Starting from the morning milk that is delivered in packs by milkvendors to every household, home product is usually purchased on a monthly basisand delivered by stores on the same day.Customer service also runs high in the highly crowded Indian supermarkets wherefaster turnaround in the cash and delivery sections is highly appreciated. Indianconsumers also are highly fascinated with deep custom discounts and free sops.Moreover, Indian consumers are prone to sales promotions like in many other Asianand Latin American countries. They like the idea of individual service and appreciatespecialized customer loyalty rewards. Indian consumers are also influenced by thePrice cut proxy effect of brand choice decision mechanism. Most promotionalactivities are assumed to be price discounts and are readily grabbed by theconsumers. 26Although this may indicate that a concept like EDLP would not possibly work verywell, a well marketed EDLP campaign can in fact have a lasting effect on change inIndian consumer behavior. A retailer like Wal-Mart would need to first start with aconservative approach to EDLP before making it the retailer’s flagship concept in theIndian market. Indian consumers also run on tight budgets and most householdsusually plan their purchase of goods. Hence, impulse buying is rare although growingaffluence among the middle class has seen an increase in this behavior too. This canturn to be a boon for retailers who are efficient in using pricing techniques based oncustomer demand.26 Prof. Jie Zhang, Assistant Professor of Marketing, “An Integrated Model of Alternative Mechanismsof Display and Feature Advertising on Brand Choice”, Working Paper Series, Department ofMarketing, Stephen M. Ross School of Business 26
  • 32. Added to all this is the fact that Indian consumers are going through one of thebiggest social change in history. The role of the housewife is changing and so are thepurchasing decisions that drive retail shopping. Several studies by various groupsindicate that there has never been such a scenario in the Indian retail industry wherethe consumers want more and more.Economy & Political System27India is currently going through a major economic boom with a GDP growth rate ofover 7%. Coupled with this is the pro-reform attitude of successive governmentsover the past 10 years. According to a report in McKinsey Quarterly, India willbecome the third largest economy in the World by 2050 with a projected GDP of$27.8 trillion. India’s foreign exchange reserves will shortly cross $130 Billion andthe FDI in 2004 reached $9.9 Billion. Thanks to successive governments over thepast 5 years, although India still lags way behind China in attracting FDIinvestments, it is soon poised to replace the US as the hotspot for FDI. India is theworld’s largest retail network with 12 million outlets and a total retail market size of$180 Billion.The current share of organized retail is only 2% but the organized retail sector isgrowing at 28% per annum. This is a welcome sign for foreign retailers who have sofar only entered through franchise agreements. India has proved to be a difficultmarket for most foreign retailers due to reasons that defy economic predictions ofgrowth and prosperity. Most foreign retailers have been able to make very fewinroads in India as compared to Asian giant, China. However, entering a country likeIndia may not be as easy as it looks.The Indian retail industry lacks an industry status because of its highly fragmentedstatus. Also, the country has stringent labor laws governing hours of work andminimum wage payments. Moreover, multiple licenses and clearances are required,sometimes making it a very cumbersome and frustrating process for getting thingsdone.India has a multi-party parliamentarian form of government. This means that thereare multiple political parties both at the national and regional level fighting for powerin each state and at the national level. With more than a hundred political partiesinfluencing state and national level politics, coalition has been the only solutions forpower since many years. However, this structure has created the greatestimpediment to progressive reforms for the country. To gain the approval of everyparty in the coalition has almost prevented any fruitful reforms from happening intime. These delays are further worsened by a weak and often corrupt bureaucracy.This is further complicated by the rampant corruption across all classes of thepopulation and high levels of illiteracy among the voter population. TransparencyInternational has ranked India 88 out of 158 countries in the corruption perceptionindex. Literacy rate is only 60% and there is very poor confidence in the judicialsystem. These factors are of utmost importance for foreign retailers as they help27 Sources: “State of Global Retailing – Looking for Growth in Emerging Markets -Focus onIndia,” National Retail Federation, NRF website resources; “Corruption Perception Index,”Transparency International, www.transparency.org; “The World Fact Book,” Central IntelligenceAgency, http://www.cia.gov/cia/publications/factbook/ 27
  • 33. them look beyond economic prosperity to understand the drivers of daily life in Indiaand get closer to understanding the mind of the Indian consumer.Competition28India has one of the most unimaginable forms of retailing in the world. It has got allretailing formats working in parallel from the street hawkers, push cart vendors tothe supermarkets and giant hypermarkets. There are a total of around 13 milliontraditional mom & pop stores in India. These are mostly family owned and enjoypatronage from the local consumers because of the close community ties theymaintain with them. Most of these small store vendors occupy rectangular one roomstructures and indulge in behind-the-counter sales of items. These stores crop up inevery space possible and add the convenience factor of Indian shoppers who tend topurchase items as and when they need.The food and grocery section is the most complex with bazaars, weekend markets,push cart vendors, basket vendors, morning markets and supermarkets fighting forevery inch of retail space possible. Foreign retailers or any organized retailer for thatmatter will find it a daunting task to cut this chain in the food link to establish hispresence. A strong middle class is aiding this process but it will certainly not beenough, given that Indian consumers are very price sensitive when it comes topurchasing the more frequent food items. Integrating the food chain from the farmto the retail store helps remove the outside link but this is challenging as India’s foodchain is fragmented. India’s farm produce pass through six or seven intermediariesand around 40% of produce is spoilt along the way. Organized retailers hence needto play the convenience and freshness factors to a very great extent coupled withprices that either beat or match its unorganized competitors.For foreign retailers things just don’t stop here. The organized retail is slowlygrowing into the other hotbeds like apparel, books and music and household items.Several players in the Indian market have sprung up in urban areas and currentlythere is a huge mall mania in the country. Retail presence in India is divided intovalue retailing and lifestyle retailing.The value retailing consists of hypermarket and supermarket stores like Big Bazaarand Food Bazaar. The lifestyle category consists primarily of apparel stores likePantaloon and Lifestyle. Foreign retailers may find it easy to break the toughchallenge these retailers will pose but unless it is not wary of their businessstrategies, their own personal strategies may backfire. Retailers like Wal-Mart, whichbelieves in observing and learning from competitors may find this a very fruitfulexercise. As foreign retailers wait for government rules to ease up their entry, thishas been a golden chance for local retailers to expand their formats of organizedretailing. Big industrialists like Reliance are also looking into the possibility ofentering the promising retail market very soon.Several big retailers and small business houses have a significant influence inpolitical circles. Many have been persistent with the fact that they need time to taste28 Sources: Sangita Joshi, “The issue of retail formats,” The Hindu Business Line,http://www.thehindubusinessline.com/catalyst/2004/10/28/stories/2004102800180200.htm; “Wal-Mart takes its China lessons to India,” www.reuters.com ; “QPAC-Indian RetailIndustry-July-Sept 2005,” 2005, Cygnus Business Consulting & Research 28
  • 34. success in the organized retail industry before the big foreign players with massivecapital can jump in. This will weigh heavily when it comes to opening of FDI in theretail space. The key however is for a foreign retailer to assess both the economicand political risks of taking up domestic retailers before making any major advance.Logistics, Operations & Services29India’s biggest challenges don’t stop with just consumers and competition. I considerLogistics, Operations, Services and the next section – Infrastructure, as other majorchallenges that foreign retailers can face. Both are interrelated as a poorinfrastructure limits smooth operations and produces logistical inefficiencies.In India, retail operations is a different ball game altogether. First, building hugedistribution centers, one of the biggest contributors to logistical efficiency, is verydifficult. Apart from difficulties in acquiring land for setting up such huge operations,it is also not possible to take advantage of trucks as lack of proper and wide roadsprevents plying of big trucks and fast movement of goods. Wal-Mart or Carrefourwould require anywhere from 100,000 square feet to 200,000 square feet to settheir stores. Even if they come up with smaller store formats, distribution centers willbe a problem.There is a huge shortage of quality urban space for retailers in all the big cities ofIndia. This forces foreign retailers to look for tier 2 cities and towns. However, this isnot certainly something retailers would like to do when setting shop initially. Most ofthe 30-40 million square feet of retail space that is coming up in cities like New Delhiand Mumbai are in suburban or satellite areas. Although the growth of the middleclass will encourage such an expansion, purchasing consumers are not growinguniformly across regions and face problems such as transportation to reach to farflung places.Retailers themselves face shipping issues in cities where traffic is growing and roadsare shrinking in space. India’s highways are being developed at a much rapid paceover the past few years, but this will hardly allow huge trucks to ply easily. Standardinternational norms mandate road space to be 20-30% of the total area of the city.However, most Indian cities have hardly 10% of road space with certain high-growthcities like Hyderabad having only 6% in 2001. This leads to traffic snarls thatparalyze the operational efficiencies of retailers too.Supply Chain bottlenecks are another apparent impediment to the growth oforganized retail. There are many segments such as apparel and food that arereserved for Small Scale Industries (SSI) distribution. This limits the extent ofgrowth that other players could potentially have. There are restrictions on thepurchase and movement of food grains and there is hardly any cold chaininfrastructure in the country. This leads to long chains where intermediaries play arather unnecessary role in the supply chain.India also had a complex taxation system and sales tax is mostly avoided by smallstore vendors leading to a differential treatment for organized retailers. This hasrecently come to an end with the introduction of VAT. Although, VAT is29 Sources: “State of Global Retailing – Looking for Growth in Emerging Markets -Focus onIndia,” National Retail Federation, NRF website resources; “No road space for traffic in city,” Timesof India, http://www1.timesofindia.indiatimes.com/cms.dll/articleshow?art_id=1373052022 29
  • 35. advantageous, it is difficult to administer and will take time to permeate well into theentire country. It has been observed that mostly traders have been the biggestevaders of sales tax and VAT will certainly reverse this trend. However, multi-pointOctroi levied by different states adds to the burden of taxes that affect the bottomline of retailers.Manpower is a challenge for organized retailers. With the rampant growth ofunorganized retail that is usually run by merchants with limited personal income, theperception of retailing is different in the minds of most Indians. Most of the highlyeducated class in India don’t consider retailing as a career choice and is often lookeddown upon as a low wage chore. Training is also limited and only with the advent ofshopping malls and hypermarkets has the skills of the personnel enhanced. Theseprevent many foreign retailers from tapping a good talent pool for their operations.Manufacturers may not be easy to deal with in India. Barring a few global playerslike P&G and Unilever that have connections with foreign retailers, mostmanufacturers are again local family owned businesses and deal with a lot ofintermediaries. Many of these manufacturers pass on intermediary margins toretailers that eventually reduce profits for the retailers and eventually, the finalconsumer.Store operations also will require major changes and global retailers would requiretheir expertise in understanding local markets and tastes to adapt the floor spaceaccordingly. Indian consumers are getting used to the self-service mode ofoperations but still prefer sales agents to help them out with things. Many organizedretail chains employ a lot of service personnel to cater to the needs of consumers.Security is also a concern in most malls and most retailers spend efforts inemploying outside security services to prevent thefts. In India, certain retailers likePantaloon and Madura Garments have done pilots of RFID systems and plan toimplement it across their supply chains. These technological advances are indeedchanging the face of retailing in the country.Customer service is highly inconsistent in the Indian retail industry. Most of theorganized retailers are trying to imbibe best practices in customer service and tryingto train its personnel towards better maintaining customer relationships. This ishowever not true with the unorganized retail sector and hence can be a promisingdifferentiator for foreign retailers who have tested some of the best customerrelationship practices. Retailers need to be aware of this when hiring store personneland should take care to initiate proper training sessions. Customers themselves canprove to be challenging at times, and there certainly needs to be strict measures forcertain services such as returns and refunds. Retailers gain largely from customerservice measures in India unlike in Germany, where consumers are not worriedabout service as long as they get items for the cheapest price.India has also been the IT hub for the world with the largest growth in the servicesindustry coming from it. It is also a major contributor to the growth in the country’sGDP. However, India’s IT systems and services have not really benefited Indianbusinesses as much as they have impacted businesses in the west. Mostly, this hasbeen due to the reluctance of Indian businesses in recognizing a huge capitalexpenditure in IT as a profit making exercise. However, retailers such as ShoppersStop are realizing the potential of IT based systems and are working towards utilizingthem. Foreign retailer like Wal-Mart can dominate the field with their existing IT 30
  • 36. management systems, if they can percolate it across the supply chain and workaround the logistical challenges, especially by tapping into the IT talent pool in India.Infrastructure30According to a recent statement made by Mr. Robert O. Blake, the Charge d’Affairesof the US Embassy in Chennai, India – “India cannot be a world economic powerwithout world-class infrastructure. Its as simple as that. There are many factors thathave led to the inadequacy of infrastructure in India. One of them is the lack of along-term debt market. In the United States, we have credit markets whereborrowers can find financing for 30 years or longer for development projects. Indiadoes not yet have such a market.”Infrastructure is one factor that is plaguing the entire Indian economy as a wholeand few governments have confronted it successfully. Hence, I consider this to bethe single most important factor in the retail forces that I have designed. Anothersignificant reason for the poor infrastructure has been the real estate.The Indian property market is extremely fragmented due to zoning laws that arebased on pre-world war British notion of how cities should be like. This could getdirty for some businesses when a simple transformation of existing land to a retailstore would require so much of time and bureaucratic hold-ups that they take theeasy path of bribing officials. But, the irony is that the legal system can suddenlyspring up and enforce the zoning laws that throw existing “illegal” establishments outof gear. A recent ruling by the Delhi High court to demolish illegal establishments ledto the bulldozing of two shopping malls as they built stores on a zone marked for“villagers”. This has by and large been one of the biggest enemies confronting theprosperity of the country. The revenue and technical capabilities are highly limitedfor corruption-affected municipalities, that town planners impose strict limits on thefloor space index31. Most Asian cities have a floor space index of 5-15, but in India itis around 1.6. These floor area restrictions push people away from the city center.Another issue paralyzing the real estate market in India is age-old rent control lawsthat are pro-tenant and allow them to pay rates that were set 60 years before. Aninteresting dimension to this is from the political angle. Even though the centralgovernment repealed the law and advised state governments to follow suit, certainstates like Maharashtra still follow the old laws. In a study by McKinsey about 5years ago, the consulting firm warned that India was losing 1.3 percentage points ofeconomic growth because of distortions in the land market. However, little has beendone to mitigate these issues in a “land of opportunity – minus the land”.India suffers from lack of faster urbanization. Also, there is the problem of landgrabbing by anti-social elements, rampant in several big cities. These not only limitthe available of quality space but also force many retailers to enter into unnecessarynexus to obtain prime retail space and fight the competition. Traffic snarls and lackof parking space also impact retail store sales as this discourages consumers from30 Sources: Andy Mukherjee, “Commentary- India is a land of opportunity – minus the land,”International Herald Tribune, March 16, 2006; US Consulate Chennai, India,http://chennai.usconsulate.gov/prind050428a.html; “ Indian government opens retail sectorto foreign corporations,” World Socialist Web Site,http://www.wsws.org/articles/2006/feb2006/indi-f22.shtml31 Floor Space Index: Building’s total floor area divided by the size of the land occupied. This helpsdetermine the building’s height. 31
  • 37. commuting to the stores. Infrastructure pains are also due to the fact that Indianretailing does not have a recognized industry status. This means that retailers wouldrequire going through bureaucratic wrangles to obtain loans or other support.A report by the Center for Policy Alternatives (CPAS) stated that retailing is “probablythe primary form of disguised unemployment/underemployment in the country”.According to the report, most unemployed people face no jobs in the competitive yetstagnant agricultural and manufacturing sectors, hence forcing them to go for theservices sector. But lack of opportunities in this sector, forces them to use whatevercapital they have and start a small store. As a result, a retailer is born out ofcircumstances rather than by choice. This also explains why the emphasis was neverhigh on better infrastructure for the retailers in an unorganized industry. This trendis slowly changing with infrastructure being a hurdle for the more promising serviceindustries like IT and Tourism, and hence a greater pressure on governments toembrace change.India Retail Model 32Foreign retailers have shown a keen interest in entering the largely untapped Indianretail market. While some retailers like Wal-Mart have supposedly done a marketentry study and are keeping their fingers crossed for government approval, someretailers are still in their evaluative stage. In a statement by John Menzer, vicechairman of Wal-Mart, he says “the average urban household income in India isabout $3,000 a year, roughly in line with China, and the consuming class has grownfrom 35 million families in 1996 to an expected 80 million this year. Thats roughly inline with the U.S.” This is a very big opportunity for us."Based on my analysis of the factors affecting the Indian retail industry, I have comeup with a model that can be used as a direction in which a foreign retailer needs tolook into when entering the Indian organized retail industry. This model however is avery basic approach to how a foreign retailer can operate in India and assumes thatthe retailer has done a thorough market entry analysis based on financial returns ofcapital investment.Foreign retailers may soon gain open access to the vast Indian retail space, butconsistent with other forays into international retail markets, they need to be open toa lot of challenges and big surprises. Even with a consistent growth rate of 7% GDPover the past few years, India’s population of around 1 Billion gives it a very low GDPper capita. Several development measures do not reach the intended end consumer.This can be seen in the huge urban rural divide in the country wherein 70% of theIndian population is still rural. For example, global CPG companies found itchallenging to reach mom and pop stores in rural areas, representing 65% of the 12million stores in the country.Also staggering was the strength of the domestic manufacturing companies that builthuge loyalty bases across certain categories during the closed economy until the80’s. This forced foreign manufacturers to do a complete restructuring of theirstrategy. Competition was so intense that it often triggered intense price wars. In2004, P&G and Hindustan Lever waged a battle for gaining market share in the32 Portions of this section are from: “Price war bruises HLL margins,” The Hindu Business Line,http://www.thehindubusinessline.com/2004/04/16/stories/2004041601930600.htm 32
  • 38. detergents and personal products category by slashing brand prices by almost 20-50%, in turn jeopardizing their margins.The model in the next section takes some of these and other complexities intoconsideration and comes up with factors that a foreign retailer needs to analyze toperform better in the Indian retail market. It starts with an explanation of the model-how it was created, what are the various factors identified, how the factors are tiedin to each other and how should one interpret it. Many of the discussions are basedon current happenings in the economic, political and social spheres of the country.Consistent with some of the vagaries of the Indian system, they need to beunderstood with a latent assumption that not all predictions about the Indianretailing bubble would be successful in the future.Figure 14: India Retail Model Real Estate Logistics Political Economy Technology Channel Competitors Local Suppliers Joint Venture Foreign Foreign Retailer Retailer Acquisition Green field Consumers Organization Marketing Best Practices Services Finance Not to be reproduced without the author’s permissionSource: Prepared by the authorDescription of the modelAs explained earlier, the model was derived from an understanding of the key factorsthat affect Indian retailing. The first assumption is that the central entity in themodel would be a foreign retailer who wishes to set foot in the Indian retail market.The five pointers of the star show the most important entities that affect a foreign 33
  • 39. retailer’s performance in the market. These five entities (in the yellow rectangularbox) are namely: • Political Economy • Competitors • Local Supplier • Consumers • OrganizationThese entities shall be described in detail in the next section.Close to each of these five entities are key factors (orange colored bubbles) thateither influence or be influenced by the entity close to it. For example, the twofactors “technology” and “real estate” either influence or are influenced by the entity“competitors”. Similarly, the two factors “real estate” and “logistics” either influenceor are influenced by the entity “political economy”. There are a total of 8 bubblesnamely, • Technology • Real Estate • Logistics • Channel • Marketing • Services • Finance • Best PracticesIf any of these bubbles burst, there could be a potential threat to the performance ofthe retailer.Also included in the model is a representation of how a foreign retailer can begin hisoperations in the market or gain market share. The options (shown in green coloredpointers) indicate how the retailer can do either a join venture or start a green fieldoperation for entering the market. Following this, the model suggests that acquisitionof competitors should be a target going into the future.Functioning of the model33This model shall be explained from a perspective that would be most relevant indescribing how the entities and the bubbles speak to one another. The model will beconsidered from top to bottom starting with the all important top pointer in the star– the political economy.Political Economy: A foreign retailer needs to be well aware of the politicaleconomy of the country before and while operating in the retail market. India is ledby multi-party coalition governments at the center with state governments run byseveral rival parties. This would be the possible system of governance in the countryfor years to come. This in a way indicates the difficulties involved in making eachstate work together towards development activities identified by the center. Iteventually poses a challenge to certain economic reforms especially ones that dictatethe opening of the country to foreign investors in various fields. Political favoritism,although not uncommon in the world, is very high in India. Mostly, the only cohesive33 Portions of this section are from: “India- Country Forecast March 2006,” The Economist IntelligenceUnit Limited, www.eiu.com; “The World Fact Book,” Central Intelligence Agency,http://www.cia.gov/cia/publications/factbook/ 34
  • 40. force joining political parties is dislike for the opposition party. Apart from frequentbickering among various political parties in power, the concept of “wealth is power”runs high in the Indian society leading to rampant corruption and social injustice.However, the strength of democracy and people’s power to overthrow a governmentputs a certain level of check on this. Anti-incumbency factor is very strong in Indianpolitics and this explains the constant shift of political power between various parties.The low voter confidence can be seen in part because of the false expectations set byparties coming to power. A low literacy rate of 59% among the majority of the votingpopulation adds to the issue of how politicians are judged for their work. A foreignretailer needs to understand these factors to realize how he can deal with thepolitical system by still adhering to the right ethical standards.All economic reforms in India are propelled by political forces yet severelyconstrained on the other end by coalition politics. The role of corporations andprivate firms is highly limited in the microeconomic decisions of the country unlike inthe US. Although the role of business firms is changing and gaining significance, thegovernment still has a huge control over foreign trade and investments. The biggestworry currently is that of the country’s high fiscal deficit at 8% of the GDP.Compensatory measures such as reduction of subsidies, privatization of poorperforming public-sector firms or reduction of government jobs is met with strongopposition from political forces. Not all states are strong on their budget spendingand expect the center to take care of their financial excesses, a privilege set in theIndian constitution. A foreign retailer needs to be aware of this when trying toestablish his presence in a particular state. The economy of the country was alsoprotected from the increased prices of oil with the state-owned firms absorbing thelosses. This will however backlash in the future even if world oil prices are lowered(as predicted for 2007) as domestic oil firms are no longer able to take in the losses.Over the years, politicians have had a huge influence on the price of oil yielding topublic pressure rather than the economic realities of the country. This trend maycontinue into the future and can pose a challenge to the retail industry, whichdepends to some extent on the stability of oil prices and its availability.To summarize, all these economic factors may soon be handled with the rightpolicies in the future. But, the biggest bottleneck will still be the infrastructure of thecountry. The poor infrastructure is compounded largely by political measures thatignored better industrial growth and by rising population, which is headed to outpaceChina soon. Maintaining the correct political relationships, although immenselydifficult in India, is important for a retailer from two retail perspectives – real estateand logistics. Although the effect is indirect, it is vital to realize that politics definesthe economy of the country and economic policies define how the country grows. Abetter infrastructure helps immensely in a retailer maintaining world class logistics inthe country and narrowing his supply chain. Logistical efficiencies can be realizedfrom good political reforms that cater to the needs of the growing industrial servicesin the country.A foreign retailer should also anticipate state governments to respond differently tothe logistical needs of their operations. The southern states of Tamil Nadu,Karnataka, Andhra Pradesh and Kerala along with the states of Maharashtra,Gujarat, West Bengal and Punjab are currently the most investor friendly in thenation. Foreign retailers should also look beyond roads as a means of transportationof goods in India. Railways and shipping are two options that a retailer can lookforward to in the future. Both these services are being targeted by liberal reformsand privatization, in turn leading to better and faster services. Although bureaucracy 35
  • 41. runs high in both these forms of services, a retailer could gain better incentivesthrough political relationships.Likewise, another bubble attached to this entity is real estate. Retailers depend onquality real estate for setting up new stores, warehouses and expanding on existingones. The size and location of the real estate are prime factors that drive thestrategy and sales of a retailer. With the near saturation of residential andcommercial space in top cities, townships in tier II cities34 are being started. A bigstep in the right direction has been the opening up of FDI under automatic route inthe Real estate sector in March 2005. The government decision to welcome FDI willcapture about 20% of the total FDI coming to India. A lot of foreign investors haveshown keen interest in undertaking massive projects in various locations. Both theresidential and office property market is booming. The demand for new office spacehas grown from 3.9 Million Sq. ft in 1988 to over 16 million Sq. ft in 2004-2005. Amajority of state governments are wooing IT related firms to open shop in theirlocations. All these trends signal an opportunity for foreign retailers. But, the majorchallenge will come from domestic retailers who currently have the advantages of aclosed industry and the luxury of time to grab lucrative real estate deals.Government policies can however help competition from foreign retailers also beviable enough in the booming real estate market of India.Competition:35 The next major entity in the Indian retail market is the competitor.Although competitors can be viewed from several dimensions in a retail market, inthis model I would like to deal with the less obvious but most important ones. Thishowever is no indication that a foreign retailer can ignore the competition in otherdimensions such as pricing, logistics, distribution, supplier relationships, storeformats, store product offerings and promotions. In the Indian retail market,technology and real estate play a prime role in how a foreign retailer can handletough domestic competition.In the previous section, I described how domestic retailers are developing over theyears in the organized retail space. In this scenario, the retailer who can manage hisbusiness by making the best use of technology prevails in the long run. Wal-Mart hasbeen a true example of how superior information technology resource helps give theretailer a competitive advantage. The retailer spends less than 1% of its revenues onIT spending, but this comes to a hefty $1.4 billion of IT spend annually. A foreignretailer like Wal-Mart needs to take early advantage of this strength in the Indianretail market. Although it is a challenging task to implement it in a largelyunorganized sector, it is worth the investment to maintain a competitive advantageas technology will be a huge differentiator. In a survey conducted by ForresterResearch in 2005, 36% of 53 worldwide retailers surveyed showed an inclinationtowards increasing their IT spending. These coupled with systems that can maintaincritical consumer and product information across continents will be of immense valuefor a retailer.Retailers in India are also slowly picking up on technology and have startedembracing technologies such as RFID. Already, Indian IT firms have stepped up their34 India’s Tier I cities — Bangalore, Mumbai and Delhi; Tier II cities — Hyderabad, Chennai and Pune.Five leading Tier III cities - Ahmedabad, Chandigarh, Indore, Kolkata and Nagpur (Source:www.Deccanherald.com)35 Sources: “Wal-Mart’s IT Approach: Think like merchants,” Forrester Research; Preeti Pandey,“Keep em moving,” The Hindu Business Online 36
  • 42. offering of RFID solutions to foreign retailers. The market size of RFID is estimated at$3 Billion by 2007-2008. According to the RFID head at India’s leading IT firm Wipro,the adoption of RFID by all major retailers who have sourcing in India will force localsuppliers to soon comply with RFID technologies. This will in turn reflect in domesticretailers adapting to them in a big way. Currently, this is however being done aspilots given the high costs of implementation. The cost of implementation of a typicalcomprehensive RFID deployment ranges between $1 million and $20 million for basicand high-end RFID tagging. The cost of the tags is between 50 cents and more thana dollar. The RFID readers can vary in price from $200 to several thousand dollars.However, with several RFID vendors entering the market, the costs will soon reduce.Soon, enough there could be the emergence of global standards for RFID and othertechnologies. The Indian retail market will benefit from the company which can getthe ball rolling faster. Another dimension in competition that can prove to be a hugechallenge for a foreign retailer is real estate.Real estate in India is highly hampered by poor town planning measures, corruption,bureaucratic wrangles and a general infrastructural failure. But with the growingneed for retail real estate space for the evolving organized sector, competition forprime and quality real estate is growing high. Currently, several domestic retailersare consolidating real estate space even before starting any retail operations. Forexample, Reliance Industries Limited has purchased 50 acres of land in the state ofHaryana to kick-start its agricultural retail business. It plans to spend around $9Billion on land and other resources to provide future sourcing to its supermarkets. 36For the domestic retail industry as a whole, the hindrance to faster growth at presentis the lack of good investments.The Indian retail industry needs alternative funding routes. Currently, the Indiangovernment allows Foreign Institutional Investors (FII) and venture capital firms toinvest only in the secondary market on listed retail companies. The need of the hourhowever is for investments to be allowed in the primary market37 to raise therequired capital. The Indian retail sector would need investments to the tune of $22Billion (Rs.1 lakh crore) by 2010. However, given the current scenario, the sectormight only manage to rake in $1.1 Billion to $1.55 Billion in the next 5 to 7 years.38 Most of the current investments are in real estate.Some of the other possible measures that the government is considering areimposing a minimum limit of 10,000 square feet of floor space for foreign retailchains. Also, under consideration is the reservation of 500-600 square feet (out ofthe 10,000 square feet) of space for food items to help protect the interests ofsectors such as agriculture and help them integrate into the organized retail sector.These measures may however be short term in nature.Hence, given the demands of domestic retailers and the realities of the industry, it isimperative that foreign retailers plan their consolidation of retail real estate space in36 “Retail kick-off: RIL gets okay for land buy in Haryana,” The Economic Times,http://economictimes.indiatimes.com/articleshow/1475511.cms37 The primary market is the financial market for the initial issue and placement of securities. Unlike inthe secondary market, no organized stock exchanges are necessary. An organization that needs fundscontacts their investment banker who typically assembles a syndicate of securities dealers that will sell thenew stock issue (Source: http://en.wikipedia.org/wiki/Primary_market)38 “Retailers worried over plan to allow more FDI,” The Hindu Business Online,http://www.thehindubusinessline.com/2005/10/07/stories/2005100702830300.htm 37
  • 43. a strategic manner. The country is running out of space trying to cater to a growingpopulation that is 3 times that of the US but only one-third its size. This would createenvironmental issues and crowding in the future. It is the responsibility of organizedretailers in the country to have proper planning measures and efficient usage of realestate to help preserve the future of the country.Local Suppliers: Most foreign retailers have a special relationship when it comes tosourcing from local suppliers in India. Retailers like Wal-Mart already have a fullfledged sourcing office in Bangalore, India. But, when a foreign retailer enters thecountry, the biggest advantage he can gain from the growing organized market is bymoving into the food industry. This means a greater scope for retailers to sourcefrom more local suppliers. Foreign retailers have long identified the advantages ofsourcing locally in international markets. Carrefour was one of the first retailers tohave successfully used local suppliers in gaining bigger and better access to LatinAmerican markets.India also has a unique dimension with regards to its close geographical proximity tothe world’s largest sourcing house – China. Although this means that most foreignretailers can look to easily source products from their more familiar counterparts inChina than India, this may not be a viable option for the future. This measure mayhelp a foreign retailer initially while waiting for local suppliers in India to match up toretailer and consumer demand for goods. The reasons are to do with price andquality.In 2000-2001, the Indian government removed quantitative restrictions on import ofconsumer goods, allowing Chinese goods to take on Indian goods head on. This wasfollowed by flooding of a range of consumers goods from China. But, this did not lastfor long. Indian manufacturers started to fight back by matching the low prices thatChinese goods offered and by improving their quality of goods. Indian manufacturingfirms started restructuring their operations. Some Indian manufacturers, especiallyin the automobile industry began sourcing their goods from China. Chinesemanufacturers were also happy to sell their goods under any brand name instead ofpushing forward their brands. Chinese electronic goods also didn’t make majorinroads more due a consumer perception that these goods could be of a lesserquality. This behavior is attributed to Indian consumer’s experience with Japaneseproducts, which entered the country much earlier. But, this overall trend can also beexplained by a certain lack of interest among Chinese manufacturers in expandinginto India at present.39The largely unorganized sector has not helped local suppliers over the years inexpanding their operations or improving their offerings. But, organized retailing withthe support of domestic and foreign retailers can change the scenario. Thisemphasizes the bubble in the model – “Channel”. A foreign retailer’s distributionchannel strategy needs to take the local supplier into consideration. But to tightenthe noose, it also has to participate in initiatives that reduce the involvement ofmiddle agents and help in the efficient transfer of goods. India had historicallysupported the Small Scale Industries (SSI) by offering a lot of sops and regulatoryprotection. Most of these were also family owned and took advantage of a largely“suppliers-market” to gain decent margins. But this also limited their need fortechnology and better operation practices for maximizing productivity. This left the39 “Dragon not spewing fire on India Inc.,” Economy & Business, Deccan Herald,http://www.deccanherald.com/deccanherald/sep132004/eb7.asp 38
  • 44. Indian manufacturing industries largely underdeveloped as compared to othernations.With the opening of the economy, several of these small manufacturers’ incentiveswere removed to promote better growth of the industrial sector. However, still a lotneeds to be done in the fields of government policies, institutional finance,technology, infrastructure and education to see changes that make manufacturingindustries in India globally competitive. A foreign retailer would be required to notonly backward integrate to some extent, but also promote the growth of the supplierbase from the bottom. This helps in the strengthening of the supply chain in the longrun.When these developments are made with supply chain efficiencies in mind, it leadsto better logistics. This is another important bubble that has been attached to thelocal suppliers in my model. The relationship between the foreign retailer and thelocal supplier in this bubble is vital. India has suffered heavily from logisticaldeficiencies. Complicated sales tax systems made companies maintain warehousesspread across different states in the country, thereby compromising efficiencies incost, labor and transportation. Rampant corruption in the supply chain was acommon occurrence. A lack of good highways and poor storage facilities added to thewoes. Absence of a proper channel mechanism also left many suppliers looking forways to sell their products, often ending up going through a chain of middlemenbefore the product reached the end consumer.Recently, things have changed for the better. The introduction of the VAT system hasstarted to eliminate the inefficient sales tax mechanism. This could be a good avenuefor retailers to look forward to implementing a Hub-and-Spoke distribution system.India has also invested around $17 Billion to upgrade highways with two majorprojects – the Golden Quadrilateral Network and the North-South-East-WestCorridor. There also seems to be a huge scope for the extensive growth of the thirdparty logistics market (3PL). Foreign retailers may find it difficult to handle thecomplex logistical system initially and would probably need to rely on the expertiseof domestic 3PL companies to gain control of their operations. Domestic logisticscompanies already have an extensive network setup in this complex country and arewell aware of the myriad laws ruling interstate transportation.The Indian 3PL market is expected to grow at the rate of 20% p.a. in the next 3-5years. Although this growth is largely driven by the automotive industry, thepotential boom of the organized retail market may result in retailers being theirlargest clients. 40 Logistical efficiencies could be a long wait for a foreign retailer inIndia as it is directly tied to one of the country’s biggest challenge – infrastructure.When organized retailers work along with local suppliers in utilizing the services oflogistics companies, they in effect result in a leaner supply chain. With time,suppliers or retailers can look towards joint-logistics or self-logistics mechanism.Consumers: The special significance of this entity especially in the Indian Retailmarket has been highlighted in earlier sections. A foreign retailer can set strategiesto woo Indian consumers by emphasizing on two bubbles- “Marketing” and“Services”. Marketing encompasses every possible tactic used by a retailer toincrease his market share in the industry. This includes but is not limited to – market40 Deepak Mohan, “The Third-Party Logistics Market in India -- Set for Growth,” 8 Apr 2006,Frost & Sullivan 39
  • 45. segmentation, consumer targeting and positioning, product, pricing, placement,promotion and market research.As with any ambitious marketing initiative, it is required that a retailer identify whathis best selling point or competence is in. Many foreign retailers need to redefine thisfor the Indian market. For example, Wal-Mart’s competence is in superior logisticsand distribution systems. But for India, their competence will be adapting to changesover the initial years of operations. For Wal-Mart, experience with store offeringsusing investments in sophisticated technological systems will be a competence tostart with. For obvious reasons, a foreign retailer will attempt to generate a demandfor his store products and gain market share by acquiring new consumers. However,the 4P’s (Product, Price, Place and Promotion) play a prime role in the retailer’sstrategy. 41Domestic retailers such as RPG have a unique way of offering a lot of products. Theyhave been using different formats of stores. They sell food items through their “FoodWorld” supermarket whereas they sell about 20,000 products through their “Giant”hypermarkets. Although less in number, these hypermarkets are also involved in B2Bbusiness, which constitutes 25% of their total revenues. RPG also sells health andbeauty products through their “Health and Glow” chain stores and music throughtheir “Music World” Stores. These stores are again divided into several formats suchas “Music World Express” and “Music World Unplugged”. The products offered in eachof these store formats varies according to the consumer needs, tastes andpurchasing power. Foreign retailers also need to realize the need for strategicplacement of their products based on the geographic, social, cultural and economiccapabilities of their consumers. 42Pantaloon, a successful domestic retailer introduced the hypermarket discount storesfor the first time in India through “Big Bazaar”. Price of the products are about 2-60% lower than the market prices. 43 Domestic retailers have been able to providegoods at wholesale prices and have come up with their own private label brands infood products. These practices, although not new to foreign retailers, needs to bedone with care to not spark off a self-destructive price war.In India, consumers are used to a wide array of shopping formats. Although themiddle class is currently attracted to the mall culture, a vast majority of thepopulation still considers malls as a place for the highly affluent. Moreover, foodretailers have used very conservative store formats and placed their stores incrowded and small spaces to attract much larger customers. This consumer attitudecan be read as indicative of how a foreign retailer can approach the consumer.Many domestic retailers provide a lot of incentives to the customer such as customerloyalty points. Pantaloon’s Big Bazaar has focused a lot on the consumer byproviding value for money by ‘The Great Exchange Offer’ offered throughout the yearin 2006. The exchange offer was ways of letting consumers dump their old productsat the Big Bazaar for a price in exchange for new products. This attracted around200,000 customers to its 24 Big Bazaar stores nationwide. Innovative promotionalcampaigns are very important for the sustained business of a retailer. A foreign41 Prof. Christie L. Nordhielm, Clinical Associate Professor of Marketing, “Marketing Management:The Big Picture”, Stephen M. Ross School of Business, University of Michigan42 “RPG’ s Retail Chains - Thinking big,” Business India Intelligence, The Economist Intelligence UnitLimited, January 14th 200443 Source: Pantaloon India (www.pantaloon.com) 40
  • 46. retailer needs to lay special emphasis on this aspect by hiring local talent to takeadvantage of the testing Indian consumer market. Domestic retailers are alsostressing the importance of market research in determining the choice of theconsumer. Market research is usually done by door-to-door campaigns, storefeedback campaigns and interviews. Online market research is not something thathas caught up yet in the consumer market. But retailers can gain valuable consumerinformation and sales patterns by conducting regular and robust research.I identified retail services as an overlap with marketing activities and divided it intotwo broad categories – internal services and external services. Internal servicesinclude Information Systems, loss prevention and visual merchandising. Externalservices include customer service, credit purchases, public relations and specialevents.Vigorous Information systems enable a retailer to handle large volumes of valuabledata information and produce meaningful information out of them to drive company-wide strategies. Foreign retailers have used these systems extensively byconsistently investing in sophisticated hardware and network systems. Wal-Mart’s“Retail Link” is one such example of a massive data management system in place. Inthe domestic front, retailers have been slow in realizing the potential of IT systems.However, Shoppers Stop, a leading departmental store in India, realized thepotential of IT systems way back in 1991. They were the one of the first retailers touse the barcode scanning systems in India. They also have retail ERP in place, whichis integrated with Oracle Financials and the Arthur Planning System, the best retailplanning system in the world. 44Shrinkage is defined as the loss of inventory, a common occurrence in the retailindustry. This can happen due to a combination of factors such as shoplifting bycustomers, pilferage by employees, and documentation or transaction errors that gounnoticed. Shoppers Stop has a Loss Prevention Department and a PerpetualInventory Count System (PICS) to handle shrinkage. Since the use of the system,the shrinkage for the retailer has come down from 0.66% in 2002 to 0.54% in 2005.45 Indian retailers lose about $125 Million due to inventory shrinkage. However,Indian retailers are still better than foreign retailers who lose as much as 0.5% oftheir revenues from theft as against 0.3% in India.Moreover, visual merchandising as an art is picking up soon in India. Organizedretailing has fuelled the demand for better presentation of products and Indianretailers are realizing the need to spend money on hiring professional visualmerchandisers. Foreign retailers, with their vast experience in this field have an edgeover the domestic retailers in this department.Better customer service attracts more loyal customers. Indian consumers, especiallyin the upper and middle class society are highly receptive to good customer servicepractices. Shoppers Stop, has had a successful customer loyalty program called“First Citizen”. The program enables the customer to collect points on purchasesmade and avail special benefits in the future. Many grocery stores, although small insize, provide free home delivery of goods as a service to the customer. As mentioned44 “Company Profile” (Source: www.monsterindia.com)45 Sources: Sagar Malviya, “Caution: thieves at work in retail”, The Financial Express,http://www.financialexpress.com/fe_full_story.php?content_id=104955; “Shoppers Stop IPOdeclaration,” http://www.myiris.com/shares/ipo/draft/SHOPPERS/SHOPPERS.pdf 41
  • 47. in earlier sections, Indian consumers are attracted to free sops, special discounts andloyalty rewards.Many Indians are using credit cards in Urban India although the penetration level ofcards is still low in the country. The credit card industry in India is growing at anannual rate of 30%. But retail merchants are not keeping pace with this growth. Thegrowth of organized retail in India is however changing this scenario. Retail accountsfor 72% of the total share among Credit Card Acceptability (CCA) outlets. The splitup of credit card acceptance among retailers is shown below.Figure 15: Category shares among CCA outletsSource: retailbiz.comSome of the reasons for the low credit card usage from a consumer’s perspectiveare: 46 • India has a huge “parallel economy” wherein several transactions happen in cash. This has been largely due to a historical economic measure in the country in the name of the “License Raj”.47 License Raj was a socialist measure based on Stalinist ideals that existed between 1947 and 1990 until economic reforms dismantled the system. The License Raj imposed several restrictions on the conducting of business that led to many people taking the path of the parallel economy. Many people in the non-salaried class of the country possess a lot of “cash”. This section of people with credit cards usually doesn’t use it frequently. • Large value purchases are usually on major occasions in India. With an overabundance of events such as festivals and marriages, cash is used as the preferential mode of payment. This also has historically been a way to avoid excess income tax. Income tax rates were exorbitantly high until the early 1990’s when reforms led to the relaxation of income tax rules. However, the trend towards evasion of tax and possession of black money still exists. • Customers also receive cash discounts on purchases made by cash instead of credit cards. Retailers are stretched for margins in a competitive market and hence cannot afford to offer discounts to customer for card payments. Moreover, this helps them avoid the around 2.5% charge that credit cards levy. Cash discount is an easy way for retailers to lure more customers.On the other hand, retailers tend to prefer cash over cards for the following reasons:46 “Cash on the Credit”, Retail Biz classroom (Original Source: KSA Technopak)47 The License Raj was a result of Indias decision to have a planned economy, where all aspects of theeconomy are controlled by the state and licenses were given to a select few. The term was coined byIndian statesman C. Rajagopalachari, who firmly opposed it for its potential for political corruption andeconomic stagnation. (Source: Wikipedia.com); Some arguments indicate that the License Raj wasformulated as a protectionist policy by a nexus between large business houses and politicians to maintainmonopoly/oligopoly in the market (Source: revolutionarydemocracy.org) 42
  • 48. • For small retailers largely in the unorganized retail sector, accepting cash is a way of making unrecorded transactions to evade tax. Also, this helps them maintain their working capital by avoiding longer credit cycles for card payments. • Although this has vastly improved, telecommunication issues have hampered faster processing of payments and several retailers have preferred to discourage customers from using credit cards for small amount transactions. • In smaller cities where the credit card issuing banks don’t have branches, charges are levied on using telecommunication service for making long distance connects. This is usually avoided by small-time retailers.Foreign retailers can learn a lot from this about the pattern of card usage in differentparts of the country to plan their sales operations. They also need to be cognizant ofthe fact that better public relations need to be constantly maintained to avoid anypublic out lash from sections still opposed to the entry of foreign establishments.This can be in several forms like better relations with press, domestic charityinitiatives, development of local economies and healthy competitive tactics in theindustry.India is one of the largest secular nations in the world which celebrates festivalsacross all religions and cultures. There are about 35 festivals, a majority of thembeing occasions when Indians spend a lot of money. Foreign retailers need to have agood understanding of this multicultural and multi-religious nature of the country toexpand into special events related campaigns. Similar to the US where retailerstarget Thanksgiving Day as a major source of retail sales growth, the festival ofDiwali and New Years Day are big days in the retailer’s India calendar.India also has a massive entertainment industry which is also largely unorganized.However, the industry is growing at a cumulative annual growth rate of 27% withprojected revenues of $10 Billion in 2005. The Indian film industry is the largest inthe world in terms of number of movies produced. India produces 800-900 moviesevery year in 52 languages providing employment to around 5 million people. 48Thisis largely due to an entertainment savvy country where consumers across all incomelevels spend considerable money on irrespective of their spending ability. Foreignretailers can tap this interesting aspect of the Indian market in several ways.Starting from promotional activities involving celebrities, it can also make forays intothe highly competitive music and video retail markets.Competition in the Indian retail industry could be more than foreign retailers canafford to chew. “Changing the behavior of the Indian consumer” could possiblyhappen in the long run but it is also difficult in a nation that has uniqueness attachedto every possible dimension of its existence since its history. A foreign retailer mustbe appreciative of this aspect when dealing with the Indian retail market.Organization: The last piece of the model is the retail organization itself. Foreignretailers have defined their organizational functioning based on the success of amodel they tried over the years. While Carrefour was successful with a decentralizedoperation in international markets, Wal-Mart found success with its centralizedoperation. This led to their regional office being either the one driving the strategyfor the country or the one receiving strategic inputs from the head office.48 Source: Ministry of External Affairs, Government of India, http://mib.nic.in 43
  • 49. The regional operations of a retailer span all the strategic initiatives and operationsthat we have talked about so far. “Finance” and “Best practices” could be looked intoas two dimensions that are important for the long term sustainability and success ofthe foreign retailer in India. A retailer must always be aware of where his money isbeing spent in and how it is being spent. In India, currently only about 3% of theretail operations are in the organized sector. This also means that a majority ofpotential customers are used to shopping in a very conservative and plannedmanner. Even with the supposed growth rate of organized retail at roughly 30%,consumer behavior will not make the same leaps and bounds. Hence, a foreignretailer entering India in the next two to three years faces a unique challenge offighting domestic competition by investing heavily. At the same time, he also needsto plan for the long term as the return on investments need not be reflective of thecapital spent.For experienced retailers like Wal-Mart and Carrefour this is no big surprise.However, a sound financial analysis for market entry must include a thoroughsensitivity analysis centered on the political, cultural and social realities of India.Sound investments need to be made in areas such as real estate as this is beingconsumed at a faster pace by domestic retailers and large corporate houses planningto enter retailing. Barring a few companies like the petrochemical company,Reliance, most domestic retailers are in need of foreign investments to boost theirprospects in organized retailing. Reliance is already shopping middle and high levelmanagers for its major foray into retail with an estimated initial investment of $750million and a required 500,000 employees. 49Foreign retailers on the other hand havethe luxury of adequate capital to infuse life into its operations.Foreign retailers can also reign in organizational best practices to have an edge overthe competition in India. Although this can prove to be a very strong tool tocompete, foreign retailers must realize that it is in their best interest not toimplement every single strategic practice in their arsenal. Some initiatives likevendor price negotiations will take time to materialize in India. This is mostly due tothe prospect of full FDI not opening up for the retail sector. Even if it does open,there may be possible protectionist practices for local suppliers and merchants. Oneof the measures that can be put in practice is RFID implementation and itscompliance across the supply chain.Wal-Mart already has a sourcing office in India and is on full steam in implementingRFID with its suppliers. Even if it is a slow process in India, foreign retailers like Wal-Mart stand to gain from a RFID implementation as it helps the country operations tobe consistent with its global operations. In 2005, the Wireless Planning andCoordination (WPC) wing of India’s Ministry of Communication assigned 865-867MHz UHF band for use by RFID devices. This is a joint industry-government initiativein the development of Electronic Product Code (EPC) for use in RFID. 50The majorsoftware players in India are already wooing retailers and suppliers in the US inproviding RFID management systems. Advanced levels of Information Technologywill be the biggest advantage that a retailer will have in India for years to come.The next big thing happening in IT systems usage in Retail is the development ofCustomer Intelligence. These systems utilize an extensive mining of customer data,49 Abhay Singh and Subramaniam Sharma, “Indias retail shopping revolution,” The Standard,China’s Business Newspaper,http://www.thestandard.com.hk/news_print.asp?art_id=15910&sid=736676150 “India adopts 865-867 MHz for RFID implementation,” RFID Journal, www.rfidjournal.com 44
  • 50. external data sources and others in drawing conclusion about the customer. Alsoknown as Business Intelligence reporting, retailers are using huge data-warehousesto store any type of data ranging from POS to customer behavior. Online retailing isanother strength that foreign retailers can bring to the Indian market.Although still in its infancy, online retailing can soon catch up in India too. E-commerce retailing is only 0.3% of the total retailing business in India. Onlineretailing is however estimated to be between $110 million and $332 million in thenext 5 years. A survey by management consulting firm KSA Technopak indicates that47% of consumers will prefer to buy books and music online. However, Indianconsumers are still not comfortable in using credit cards for online purchases forsafety concerns. The level of credit card penetration is also low in the country andhence e-retailing will take time to catch up. But cross channel retail operations willsoon open up in India and experienced players like Wal-Mart must be ready to jumpin at the opportunity. 51Currently, foreign retailers are not allowed to enter the e-retailing market but can operate on a B2B basis. Cross channel may take years toeffectively be used in India, but the best practices need to be kept in mind.Foreign retailers have over the years mastered the art of lean operations and fasterturnover of inventory at stores. This has however been possible due to therelationship that retailers maintained with their suppliers in identifying inventory athand and replenishing it as and when needed. In India, due to a poor supply chainnetwork and a local supplier base that is still learning, domestic retailers haven’treally been effective in managing their inventory. Moreover, changing consumerpreferences from region to region poses a huge challenge for modern retailers usedto purchasing in bulk to realize cost savings. Foreign retailers need to adapt to thelocal needs, bring the suppliers up to efficient operations and challenge competitorsby encouraging them to go the lean way.The role of a buyer for retailers is significant as he is the key in negotiating dealswith suppliers and in determining what product stays on the shelf or how it is placed.Vendor Management and Assortment Management are two key roles that buyershave developed over the years. The responsibilities of a buyer include merchandiseselection, merchandise pricing and product development. Foreign retail buyers arehowever familiar with purchasing outside merchandise. 52Some of the reasons for thistrend in foreign retailers of buying outside goods are low cost, better quality and apossible unavailability of merchandise in the US. Domestic retailers in India face ashortage of skilled professionals in the retail field. This poses a huge challenge toeven foreign retailers who need buyers with a good domestic acumen to bringresults. However, with their strength in providing training programs for potentialbuyers, foreign retailers have an edge over their domestic counterparts.Summary of the modelOverall, this retail model serves as a guide for retailers to understand how severalfactors affect the key entities in the Indian retail industry and the steps that can betaken to handle them. A key factor in the model that has not been discussed is themode of entry of a foreign retailer. The Green colored pointer boxes represent twoways in which a foreign retailer can enter the market, namely, Joint Venture and a51 “E-commerce set to boom in India,” Rediff.com,http://us.rediff.com/money/2005/jun/28ecom.htm52 Jay Diamond and Gerald Pintel, Retail Buying (6th Edition, Prentice Hall, Inc.) 45
  • 51. Greenfield operation. Several factors in the political economy front combined withinfrastructure and the need for real estate influence a foreign retailer’s decision intaking one or both the paths.A joint venture with a domestic competitor would open the avenue for faster growthof a foreign retailer by taking advantage of the operational benefits already achievedby the domestic partner. However, going the Greenfield way gives the advantage ofstarting things fresh and creating a niche of its own in the market. But, Greenfieldoperations may prove to be highly challenging in a market like India where amajority of a foreign retailer’s best practices don’t get implemented right away. Acombination of both is also possible although the retailer may run the risk of losinghis identity and trying to find a common ground for a joint operation. But, no matterwhat would be the mode of entry, a foreign retailer must look towards consolidationin the future by means of acquisitions. This is one of the forces depicted in themodel. With an acquisition, not only does the foreign retailer grow in the market, butthis also leads to a better competitive position.Although the tone of this model speaks more about a foreign retailer’s work in India,most of the factors mentioned can be linked to a domestic retailer too. Eventually,it’s not only about how much a retailer knows about the market but also about howmuch successful he is in implementing what he learns. On a closing note, a quote bythe legendary founder of Wal-Mart, Sam Walton, drives home a major lesson inperseverance very relevant to the Indian retail industry, which any foreign retailerneeds to appreciate– “I had to pick myself up and get on with it, do it all over again,only even better this time.” 5353 “Sam Walton Quotes,” About,http://quotations.about.com/od/stillmorefamouspeople/a/SamWalton1.htm 46
  • 52. APPENDIX A54Country Risk Ratings:BMI RATINGS Region Global Markets India Score Rank*Trend Avg. Avg. Composite Rating 68.4 55 67.0 64.5 L-T Political Rating 68.3 47 57.0 63.0 S-T Political Rating 65.0 81 67.1 67.8 L-T Economy Rating 63.9 46 68.3 60.5 S-T Economy Rating 72.0 34 67.4 62.0 Business Environment 61.8 50 63.5 58.3 RatingTrend arrows reflect two consecutive months of significant movement in samedirection *: out of 130 global markets ratedREGIONAL PEER GROUP L-T S-T L-T S-T Business Country Composite Political Political Economy Economy EnvironmentAustralia 74.1 85.0 82.0 78.1 67.0 73.6Bangladesh 44.0 41.7 46.0 67.7 42.0 38.1Cambodia 57.5 50.0 58.0 84.5 57.0 -China 81.2 45.0 74.0 73.5 89.0 64.2Hong Kong 76.5 55.0 75.0 58.7 78.0 85.8India 68.4 68.3 65.0 63.9 72.0 61.8Indonesia 60.4 51.7 57.0 65.0 64.0 48.3Japan 75.5 92.5 76.0 70.3 75.0 82.5Laos 56.1 41.7 75.0 - 42.0 -Malaysia 75.0 52.5 75.0 73.5 75.0 61.4Myanmar - 41.7 77.0 - - -New Zealand 79.0 85.0 80.0 71.0 78.0 73.6North Korea - 28.3 55.0 - - -Pakistan 53.3 45.0 49.0 57.4 58.0 49.5Philippines 53.0 55.0 53.0 54.8 53.0 60.9Singapore 86.0 74.2 84.0 85.2 88.0 88.0South Korea 72.3 63.3 63.0 78.7 83.0 65.9Sri Lanka 47.5 54.2 49.0 47.1 46.0 51.5Taiwan 76.8 66.7 71.0 75.5 83.0 71.0Thailand 70.3 58.3 65.0 65.8 76.0 57.9Vietnam 66.3 41.0 80.0 58.1 55.0 46.0Regional Averages 67.0 57.0 67.1 68.3 67.4 63.5Global Markets Avg. 64.5 63.0 67.8 60.5 62.0 58.354 Copyright 2005 Business Monitor International Ltd. I
  • 53. India has moved towards the “hot zone” of the Asian market: II
  • 54. APPENDIX B55BMI Risk Ratings are a systematic gauge of the working conditions facing companiesdoing business in 80 countries around the world. Our ratings rank the ability ofnations to provide an environment that allows firms to sustain profits and growth. Inpart this means an assessment of stability. Stability of politics, security, the economyand the law is critical in the decision-making process of any business planning for aremunerative future. But stability alone is not enough. Our ratings measure whetherthe national institutions, structures and policies, as stable as they may be,encourage competitiveness. They may be stable, but when it comes tocompetitiveness, they may stifle.The BMI Ratings are presented as a barometer of risk: of political risk, of the risk ofa deterioration of the health of the economy, of vulnerability to financial crisis, and ofthe risk of a drop in the quality of the business environment. There are four ratings:a composite rating, a political rating, an economic rating, and a businessenvironment rating. The political and economic ratings have short- and long-termcomponents. The long-term ratings are designed to reflect structural considerationsand will not change much in the short term. The short-term ratings will change morefrequently.CompositeThe composite rating is an un-weighted geometric mean of the short-term politicaland short-term economic ratings, allowing a ranking of all countries in our emerging-markets and developed-country universe.L-T PoliticalThe political ratings are an indicator of political stability, seen as a pre-requisite for astable economy and business environment. The long-term political rating considersstructural questions, such as: Is there a functioning democracy? Are there free andfair elections? Is there separation between party and state? Have recentgovernments pursued similar, enlightened policies amid a stable politicalenvironment?S-T PoliticalAs a measure of political stability, the short-term political rating considers transientpolitical influences, such as: Have there been recent large-scale demonstrations orstrikes? To what extent have these threatened the political status quo? Isunemployment currently a potential source of political instability? What is the currentposition in the political cycle - to what extent is this contributing to political risk? Isthe government having trouble passing legislation?L-T EconomyThe economic ratings assess the degree to which the country approximates the idealof non-inflationary growth with contained fiscal and external deficits and manageabledebt ratios. The ratings use historical data and forecasts from BMIs countrydatabases: as data is revised and forecasts change, so the ratings change. The long-term rating takes into account GDP growth, unemployment, inflation, real interestrates, exchange rates, the fiscal balance, the current account balance and externaldebt. A number of other structural factors are also thrown into the equation including55 Copyright 2005 Business Monitor International Ltd. III
  • 55. dependence on the primary sector, reliance on commodity imports, reliance on asingle export sector, and central bank independence.S-T EconomyIf our long-term economic rating can be thought of as providing a long-termdiagnosis of a countrys economic lifestyle, our short-term rating is a gauge ofcurrent economic health. It measures GDP growth, unemployment, inflation, realinterest rates, exchange rates, fiscal balance, the current account balance andexternal debt. As a gauge of risk, it provides, to some extent, an early warningsystem of financial vulnerability. It is devised to help reveal the warning signs offinancial crises. Our rating system does, however, have its limits. No set of economicindicators exists that can detect future crises sufficiently early, with a high degree ofcertainty and without giving false signals. If such indicators could be identified theywould soon lose their usefulness: markets would take them into account and, as aresult of anticipating financial trouble ahead, would precipitate that trouble evenearlier. Our short-term economic risk rating provides no sure-fire indicator ofimpending financial turmoil. It will indicate vulnerability and no more.Business EnvironmentThe business environment rating is a broad indicator of the investment climate, forboth domestic and foreign players. While areas such as competitiveness, finance,openness and environment comprise the bulk of the rating, there is also animportant feed from the political and economic ratings. The factors consideredinclude: the state of the national infrastructure, the education system,cronyism/corruption, red tape, the legal framework, property rights, market access,and the corporate tax regime.BMI View: India will remain one of the fastest-growing economies. We expectgrowth to accelerate this fiscal year (ending March 2006), rising to 7.9%, up from anestimated 7.0% growth in fiscal 2004, due to strong growth in services andmanufacturing. Although the economy grew 8.1% y-o-y in the first quarter of fiscal2005 (April-June), thanks to industrial and agricultural expansion, disruptions causedby strikes and the impact of the October bombings could cause a slight dip in growthrates ahead. Meanwhile, robust domestic demand and sustained high crude oil pricesare expected to boost imports, leading to a widening of Indias trade and currentaccount deficits.Government View: The Reserve Bank of India has raised its projection for GDPgrowth this fiscal year to 7-7.5% from an earlier forecast of around 7%, amid highindustrial production and rising export earnings. IV
  • 56. APPENDIX C 56Figure 16: Map of AsiaSource: CIA World Fact Book Reference Maps(http://www.cia.gov/cia/publications/factbook/docs/refmaps.html)56 Entire Appendix sourced from: “CIA World Fact Book,” Central Intelligence Agency,http://www.cia.gov/cia/publications/factbook/geos/in.html V
  • 57. Figure 17: Map of IndiaSource: CIA World Fact Book(http://www.cia.gov/cia/publications/factbook/geos/in.html)Introduction IndiaBackground: The Indus Valley civilization, one of the oldest in the world, dates back at least 5,000 years. Aryan tribes from the northwest infiltrated onto Indian lands about 1500 B.C.; their merger with the earlier Dravidian inhabitants created the classical Indian culture. Arab incursions starting in the 8th century and Turkish in the 12th were followed by those of European traders, beginning in the late 15th century. By the 19th century, Britain had assumed political control of virtually all Indian lands. Indian armed forces in the British army played a vital role in both World Wars. Nonviolent resistance to British colonialism led by Mohandas GANDHI and Jawaharlal NEHRU brought independence in 1947. The subcontinent was divided into the secular state of India and the smaller Muslim state of Pakistan. A third war between the two countries in 1971 resulted in East Pakistan becoming the separate nation of Bangladesh. Despite impressive gains in economic investment and output, India faces pressing problems such as the ongoing dispute with Pakistan over Kashmir, massive overpopulation, environmental degradation, extensive poverty, and ethnic and religious strife. VI
  • 58. Geography IndiaLocation: Southern Asia, bordering the Arabian Sea and the Bay of Bengal, between Burma and PakistanGeographic 20 00 N, 77 00 Ecoordinates:Map Asiareferences:Area: total: 3,287,590 sq km land: 2,973,190 sq km water: 314,400 sq kmArea - slightly more than one-third the size of the UScomparative:Land total: 14,103 kmboundaries: border countries: Bangladesh 4,053 km, Bhutan 605 km, Burma 1,463 km, China 3,380 km, Nepal 1,690 km, Pakistan 2,912 kmCoastline: 7,000 kmMaritime territorial sea: 12 nmclaims: contiguous zone: 24 nm exclusive economic zone: 200 nm continental shelf: 200 nm or to the edge of the continental marginClimate: varies from tropical monsoon in south to temperate in northTerrain: upland plain (Deccan Plateau) in south, flat to rolling plain along the Ganges, deserts in west, Himalayas in northElevation lowest point: Indian Ocean 0 mextremes: highest point: Kanchenjunga 8,598 mNatural coal (fourth-largest reserves in the world), iron ore,resources: manganese, mica, bauxite, titanium ore, Chromite, natural gas, diamonds, petroleum, limestone, arable landLand use: arable land: 48.83% permanent crops: 2.8% other: 48.37% (2005)Irrigated 590,000 sq km (1998 est.)land:Natural droughts; flash floods, as well as widespread andhazards: destructive flooding from monsoonal rains; severe thunderstorms; earthquakes VII
  • 59. Environment deforestation; soil erosion; overgrazing; desertification; air- current pollution from industrial effluents and vehicle emissions;issues: water pollution from raw sewage and runoff of agricultural pesticides; tap water is not potable throughout the country; huge and growing population is overstraining natural resourcesEnvironment party to: Antarctic-Environmental Protocol, Antarctic-Marine- Living Resources, Antarctic Treaty, Biodiversity, Climateinternational Change, Climate Change-Kyoto Protocol, Desertification,agreements: Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical Timber 94, Wetlands, Whaling signed, but not ratified: none of the selected agreementsGeography - dominates South Asian subcontinent; near important Indiannote: Ocean trade routesPeople IndiaPopulation: 1,095,351,995 (July 2006 est.)Age 0-14 years: 30.8% (male 173,478,760/female 163,852,827)structure: 15-64 years: 64.3% (male 363,876,219/female 340,181,764) 65 years and over: 4.9% (male 27,258,020/female 26,704,405) (2006 est.)Median age: Total: 24.9 years male: 24.9 years female: 24.9 years (2006 est.)Population 1.38% (2006 est.)growthrate:Net -0.07 migrant(s)/1,000 population (2006 est.)migrationrate:Sex ratio: At birth: 1.05 male(s)/female under 15 years: 1.06 male(s)/female 15-64 years: 1.07 male(s)/female 65 years and over: 1.02 male(s)/female total population: 1.06 male(s)/female (2006 est.)Nationality: noun: Indian(s) adjective: IndianEthnic Indo-Aryan 72%, Dravidian 25%, Mongoloid and other 3%groups: (2000) VIII
  • 60. Religions: Hindu 80.5%, Muslim 13.4%, Christian 2.3%, Sikh 1.9%, other 1.8%, unspecified 0.1% (2001 census)Languages: English enjoys associate status but is the most important language for national, political, and commercial communication; Hindi is the national language and primary tongue of 30% of the people; there are 14 other official languages: Bengali, Telugu, Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi, and Sanskrit; Hindustani is a popular variant of Hindi/Urdu spoken widely throughout northern India but is not an official languageLiteracy: Definition: age 15 and over can read and write total population: 59.5% male: 70.2% female: 48.3% (2003 est.)Government IndiaCountry name: conventional long form: Republic of India conventional short form: IndiaGovernment Federal Republictype:Capital: New DelhiAdministrative 28 states and 7 union territories*; Andaman and Nicobardivisions: Islands*, Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chandigarh*, Chhattisgarh, Dadra and Nagar Haveli*, Daman and Diu*, Delhi*, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Jharkhand, Karnataka, Kerala, Lakshadweep*, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Pondicherry*, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttar Pradesh, Uttaranchal, West BengalIndependence: 15 August 1947 (from UK)National Republic Day, 26 January (1950)holiday:Constitution: 26 January 1950; amended many timesLegal system: based on English common law; limited judicial review of legislative acts; accepts compulsory ICJ jurisdiction, with reservations; separate personal law codes apply to Muslims, Christians, and HindusSuffrage: 18 years of age; universalLegislative bicameral Parliament or Sansad consists of the Council of IX
  • 61. branch: States or Rajya Sabha (a body consisting of not more than 250 members, up to 12 of whom are appointed by the president, the remainder are chosen by the elected members of the state and territorial assemblies; members serve six-year terms) and the Peoples Assembly or Lok Sabha (545 seats; 543 elected by popular vote, 2 appointed by the president; members serve five-year terms) elections: Peoples Assembly - last held 20 April through 10 May 2004 (next must be held before May 2009) election results: Peoples Assembly - percent of vote by party - NA; seats by party - INC 145, BJP 138, CPI(M) 43, SP 36, RJD 24, BSP 19, DMK 16, SS 12, BJD 11, CPI 10, NCP 9, JDU 8, SAD 8, PMK 6, TDP 5, TRS 5, JMM 5, LJSP 4, MDMK 4, independents 5, other 30Judicial Supreme Court (one chief justice and 25 associatebranch: justices are appointed by the president and remain in office until they reach the age of 65 or are removed for "proved misbehavior")International AfDB, ARF, AsDB, ASEAN (dialogue partner), BIMSTEC,organization BIS, C, CERN (observer), CP, EAS, FAO, G- 6, G-15, G-participation: 24, G-77, IAEA, IBRD, ICAO, ICC, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Interpol, IOC, IOM (observer), IPU, ISO, ITU, MIGA, MONUC, NAM, OAS (observer), ONUB, OPCW, PCA, PIF (partner), SAARC, SACEP, SCO (observer), UN, UNCTAD, UNESCO, UNHCR, UNIDO, UNIFIL, UNMEE, UNMIS, UNMOVIC, UNOCI, UPU, WCL, WCO, WFTU, WHO, WIPO, WMO, WToO, WTOFlag Three equal horizontal bands of saffron (subdued orange)description: (top), white, and green with a blue chakra (24-spoked wheel) centered in the white band; similar to the flag of Niger, which has a small orange disk centered in the white bandEconomy IndiaEconomy - Indias diverse economy encompasses traditional villageoverview: farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for half of Indias output with less than one quarter of its labor force. About three-fifths of the work-force is in agriculture, leading the UPA government to articulate an economic reform program that includes developing basic infrastructure to improve the lives of the rural poor and boost economic performance. Government controls on foreign trade and investment have been reduced in some areas, but high tariffs (averaging 20% on non- agricultural items in 2004) and limits on foreign direct X
  • 62. investment are still in place. The government in 2005 liberalized investment in the civil aviation, telecom, and construction sectors. Privatization of government-owned industries essentially came to a halt in 2005, and continues to generate political debate; continued social, political, and economic rigidities hold back needed initiatives. The economy has posted an average growth rate of more than 7% in the decade since 1994, reducing poverty by about 10 percentage points. India achieved 7.6% GDP growth in 2005, significantly expanding manufacturing. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Despite strong growth, the World Bank and others worry about the combined state and federal budget deficit, running at approximately 9% of GDP; government borrowing has kept interest rates high. Economic deregulation would help attract additional foreign capital and lower interest rates. The huge and growing population is the fundamental social, economic, and environmental problem.GDP $3.699 trillion (2005 est.)(purchasingpower parity):GDP (official $720.3 billion (2005 est.)exchangerate):GDP - real 7.6% (2005 est.)growth rate:GDP - per $3,400 (2005 est.)capita (PPP):GDP - Agriculture: 20.6%composition industry: 28.1%by sector: services: 51.4% (2005 est.)Labor force: 496.4 million (2005 est.)Labor force - agriculture 60%, industry 17%, services 23% (1999)by occupation:Unemployment 9.9% (2005 est.)rate:Population 25% (2002 est.)below povertyline:Household lowest 10%: 3.5%income or highest 10%: 33.5% (1997) XI
  • 63. consumptionby percentageshare:Distribution of 32.5 (2000)family income- Gini index:Inflation rate 4.6% (2005 est.)(consumerprices):Investment 24.8% of GDP (2005 est.)(gross fixed):Budget: Revenues: $111.2 billion expenditures: $135.8 billion; including capital expenditures of $15 billion (2005 est.)Public debt: 82% of GDP (federal and state debt combined) (2005 est.)Agriculture - rice, wheat, oilseed, cotton, jute, tea, sugarcane,products: potatoes; cattle, water buffalo, sheep, goats, poultry; fishIndustries: textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, softwareIndustrial 8.2% (2005 est.)productiongrowth rate:Electricity - 556.8 billion kWh (2003)production:Electricity - fossil fuel: 81.7%production by hydro: 14.5%source: nuclear: 3.4% other: 0.3% (2001)Electricity - 519 billion kWh (2003)consumption:Electricity - 187 million kWh (2003)exports:Electricity - 1.4 billion kWh (2003)imports:Oil - 785,000 bbl/day (2005 est.)production:Oil - 2.32 million bbl/day (2003 est.) XII
  • 64. consumption:Oil - exports: 350,000 bbl/dayOil - imports: 2.09 million bbl/dayOil - proved 5.7 billion bbl (2005 est.)reserves:Natural gas - 27.1 billion cu m (2003 est.)production:Natural gas - 27.1 billion cu m (2003 est.)consumption:Natural gas - 0 cu m (2001 est.)exports:Natural gas - 0 cu m (2001 est.)imports:Natural gas - 853.5 billion cu m (2005)provedreserves:Current $-13.19 billion (2005 est.)accountbalance:Exports: $76.23 billion f.o.b. (2005 est.)Exports - textile goods, gems and jewelry, engineering goods,commodities: chemicals, leather manufacturesExports - US 17%, UAE 8.8%, China 5.5%, Hong Kong 4.7%, UKpartners: 4.5%, Singapore 4.5% (2004)Imports: $113.1 billion f.o.b. (2005 est.)Imports - crude oil, machinery, gems, fertilizer, chemicalscommodities:Imports - China 6.1%, US 6%, Switzerland 5.2%, Belgium 4.4%partners: (2004)Reserves of $145 billion (2005 est.)foreignexchange andgold:Debt - $119.7 billion (2005 est.)external:Economic aid - $2.9 billion (FY98/99)recipient: XIII
  • 65. Currency Indian rupee (INR)(code):Currency code: INRExchange Indian rupees per US dollar - 44.101 (2005), 45.317rates: (2004), 46.583 (2003), 48.61 (2002), 47.186 (2001)Fiscal year: 1 April - 31 MarchCommunications IndiaTelephones 67.285 million (2005)- main linesin use:Telephones 62,019,144 (2006)- mobilecellular:Telephone general assessment: recent deregulation and liberalizationsystem: of telecommunications laws and policies have prompted rapid change; local and long distance service provided throughout all regions of the country, with services primarily concentrated in the urban areas; steady improvement is taking place with the recent admission of private and private-public investors, but telephone density remains low at about seven for each 100 persons nationwide but only one per 100 persons in rural areas and a national waiting list of over 1.7 million; fastest growth is in cellular service with modest growth in fixed lines domestic: expansion of domestic service, although still weak in rural areas, resulted from increased competition and dramatic reductions in price led in large part by wireless service; mobile cellular service (both CDMA and GSM) introduced in 1994 and organized nationwide into four metropolitan cities and 19 telecom circles each with about three private service providers and one state-owned service provider; in recent years significant trunk capacity added in the form of fiber-optic cable and one of the worlds largest domestic satellite systems, the Indian National Satellite system (INSAT), with five satellites supporting 33,000 very small aperture terminals (VSAT) international: country code - 91; satellite earth stations - 8 Intelsat (Indian Ocean) and 1 Inmarsat (Indian Ocean region); nine gateway exchanges operating from Mumbai (Bombay), New Delhi, Kolkata (Calcutta), Chennai (Madras), Jalandhar, Kanpur, Gandhinagar, Hyderabad, and Ernakulam; 5 submarine cables, including Sea-Me-We-3 with landing sites at Cochin and Mumbai (Bombay), Fiber- Optic Link Around the Globe (FLAG) with landing site at Mumbai (Bombay), South Africa - Far East (SAFE) with XIV
  • 66. landing site at Cochin, i2icn linking to Singapore with landing sites at Mumbai (Bombay) and Chennai (Madras), and Tata Indicom linking Singapore and Chennai (Madras), provide a significant increase in the bandwidth available for both voice and data traffic (2004)Radio AM 153, FM 91, shortwave 68 (1998)broadcaststations:Radios: 116 million (1997)Television 562 (of which 82 stations have 1 kW or greater power andbroadcast 480 stations have less than 1 kW of power) (1997)stations:Televisions: 63 million (1997)Internet .incountrycode:Internet 787,543 (2005)hosts:Internet 43 (2000)ServiceProviders(ISPs):Internet 50.6 million (2005)users:Transportation IndiaAirports: 334 (2005)Airports - total: 239with paved over 3,047 m: 17runways: 2,438 to 3,047 m: 48 1,524 to 2,437 m: 75 914 to 1,523 m: 79 under 914 m: 20 (2005)Airports - total: 95with 2,438 to 3,047 m: 2unpaved 1,524 to 2,437 m: 6runways: 914 to 1,523 m: 39 under 914 m: 48 (2005)Heliports: 27 (2005)Pipelines: gas 6,171 km; liquid petroleum gas 1,195 km; oil 5,613 km; XV
  • 67. refined products 5,567 km (2004)Railways: total: 63,230 km (16,693 km electrified) broad gauge: 45,718 km 1.676-m gauge narrow gauge: 14,406 km 1.000-m gauge; 3,106 km 0.762- m gauge and 0.610-m gauge (2004)Roadways: total: 3,851,440 km paved: 2,411,001 km unpaved: 1,440,439 km (2002)Waterways: 14,500 km note: 5,200 km on major rivers and 485 km on canals suitable for mechanized vessels (2005)Merchant total: 313 ships (1000 GRT or over) 7,550,865marine: GRT/12,891,376 DWT by type: barge carrier 4, bulk carrier 90, cargo 70, chemical tanker 13, combination ore/oil 1, container 8, liquefied gas 16, passenger 3, passenger/cargo 10, petroleum tanker 97, roll on/roll off 1 foreign-owned: 11 (China 1, Greece 1, Hong Kong 1, UAE 7, UK 1) registered in other countries: 51 (Bahrain 1, Comoros 1, Cyprus 7, Denmark 1, North Korea 1, Liberia 4, Malta 1, Marshall Islands 1, Mauritius 4, Panama 16, Philippines 1, Saint Vincent and the Grenadines 6, Singapore 4, Venezuela 1, unknown 2) (2005)Ports and Chennai, Haldia, Jawaharal Nehru, Kandla, Kolkataterminals: (Calcutta), Mumbai (Bombay), New Mangalore, VishakhapatnamMilitary IndiaMilitary Army, Navy (includes naval air arm), Air Force, Coastbranches: Guard, various security or paramilitary forces (includes Border Security Force, Assam Rifles, National Security Guards, Indo-Tibetan Border Police, Special Frontier Force, Central Reserve Police Force, Central Industrial Security Force, Railway Protection Force, and Defense Security Corps)Military 16 years of age for voluntary military service (2001)service ageandobligation:Manpower males age 16-49: 287,551,111available for females age 16-49: 268,524,835 (2005 est.)militaryservice: XVI
  • 68. Manpower males age 16-49: 219,471,999fit for females age 16-49: 209,917,553 (2005 est.)militaryservice:Manpower males: 11,446,452reaching females age 16-49: 10,665,877 (2005 est.)militaryservice ageannually:Military $19.04 billion (2005 est.)expenditures- dollarfigure:Military 2.5% (2005 est.)expenditures- percent ofGDP:Transnational IndiaIssuesDisputes - Since China and India launched a security and foreigninternational: policy dialogue in 2005, consolidated discussions related to the dispute over most of their rugged, militarized boundary, regional nuclear proliferation, Indian claims that China transferred missiles to Pakistan, and other matters continue; various talks and confidence-building measures have cautiously begun to defuse tensions over Kashmir, particularly since the October 2005 earthquake in the region; Kashmir nevertheless remains the site of the worlds largest and most militarized territorial dispute with portions under the de facto administration of China (Aksai Chin), India (Jammu and Kashmir), and Pakistan (Azad Kashmir and Northern Areas); in 2004, India and Pakistan instituted a cease fire in Kashmir and in 2005, restored bus service across the highly militarized Line of Control; Pakistan has taken its dispute on the impact and benefits of Indias building the Baglihar Dam on the Chenab River in Jammu and Kashmir to the World Bank for arbitration; UN Military Observer Group in India and Pakistan (UNMOGIP) has maintained a small group of peacekeepers since 1949; India does not recognize Pakistans ceding historic Kashmir lands to China in 1964; disputes persist with Pakistan over Indus River water sharing; to defuse tensions and prepare for discussions on a maritime boundary, in 2004, India and Pakistan resurveyed a portion of the disputed boundary in Sir Creek estuary at the mouth of the Rann of Kutch; Pakistani maps continue to show its Junagadh claim in Indian Gujarat State; discussions with Bangladesh remain stalled to delimit a small section of river boundary, to XVII
  • 69. exchange 162 miniscule enclaves in both countries, to allocate divided villages, and to stop illegal cross-border trade, migration, violence, and transit of terrorists through the porous border; Bangladesh protests Indias attempts to fence off high-traffic sections of the border; dispute with Bangladesh over New Moore/South Talpatty/Purbasha Island in the Bay of Bengal deters maritime boundary delimitation; India seeks cooperation from Bhutan and Burma to keep Indian Nagaland and Assam separatists from hiding in remote areas along the borders; Joint Border Committee with Nepal continues to demarcate minor disputed boundary sections; India maintains a strict border regime to keep out Maoist insurgents and control illegal cross-border activities from NepalRefugees and refugees (country of origin): 92,394 (Tibet/China) 57,274internally (Sri Lanka) 9,761 (Afghanistan)displaced IDPs: 600,000 (resulting from 26 December 2004persons: tsunami); 500,000 (Jammu and Kashmir conflicts; most IDPs are Kashmiri Hindus) (2005)Illicit drugs: worlds largest producer of licit opium for the pharmaceutical trade, but an undetermined quantity of opium is diverted to illicit international drug markets; transit point for illicit narcotics produced in neighboring countries; illicit producer of methaqualone; vulnerable to narcotics money laundering through the hawala system XVIII

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