Retailers face big obstacles in India

11 October 2012

NEW DELHI: Retail sales in India are due to reach $700bn during the next five years, but numerous challenges covering areas such as the legislative environment and infrastructural development remain.

According to estimates from Booz & Co, the consultancy, total retail spending in the country should hit $700bn by 2016, compared with approximately $450bn in 2011, and $200bn in 2000.

Modern retail yields just 6% of revenues at present. This figure stands at 20% in China, rising to 30% in Indonesia. Thailand posted 40% here, with Malaysia on 55% and Taiwan on 81%.

The government recently allowed single-brand chains to take full ownership of their Indian arms, a share still limited to 51% for multi-brand firms like supermarkets, and a policy currently dividing opinion.

"A lot of clarifications are still required. Is there going to be a rollback? I don't know. That is something a lot of people are worried about," Raghav Gupta, a Booz & Co principal, told the Financial Times.

Thus far, eight of the 28 states in India, all ruled by the same party as the government, have opened up to foreign-owned stores. The prevalence of uncertainty, could greatly impact corporate strategies.

Debashish Mukherjee, a partner at AT Kearney, another consultancy, therefore predicted most major chains would pursue "a calibrated approach to rollout", favouring caution over rapid expansion.

"They will do enough to do statistically significant learning," he continued. "But ... they are [not] going to come [the] whole hog and build a $1bn business right away."

Firms must also source 30% of materials from Indian partners, and not engage in ecommerce. Regional governments have added strict rules, with New Delhi requiring $100m of investment in three years, half of which has to support logistics and infrastructure.

"The quality of retail real estate in India is still a challenge," said Pankaj Renjhen, a partner at Jones Lang LaSalle, the property agency. "Either it is not built right in terms of what the need of the retailer is, or it is not located in the right place."

As Indian domestic demand is forecast to increase by 5.2% in 2012, growing to 5.6% in 2013 and 6.7% in 2014. Arvind Singhal, chairman of Technopak, the consultancy, therefore proved optimistic.

"There are challenges in India in terms of policy and land availability, but at least you don't have a formidable set of competitors with whom you have to fight to get a share in the market," he said. "For most retailers, it's probably worthwhile to get a foot in the door."

Data sourced from Financial Times; additional content by Warc staff