New Delhi: India’s opening up of foreign investment in retail may see Wal-Mart Stores Inc. be the first to tap the $505 billion (Dh1.85 trillion) market as Carrefour SA and Tesco Plc focus on battling falling profits and consumer spending.
Global retailers may need to invest at least $500 million over three to five years in the world’s second-most populous nation to expand retail operations across the country, Jagannadham Thunuguntla, Delhi-based chief strategist at SMC Global Securities Ltd, said. Such investment could pose a challenge for the European retailers, which are struggling amid the region’s debt crisis.
In the biggest policy push of Prime Minister Manmohan Singh’s second term, India on Friday opened the gates for overseas retailers to enter a market that Technopak Advisors Pvt. estimates will expand 44 per cent from this year to $725 billion in 2017. Wal-Mart stands to be the first beneficiary of the change, helped by its position as the biggest foreign company to offer wholesaling in partnership with local companies, according to CNI Research Ltd.
“Even when Tesco and Carrefour come into play, Wal-Mart will grow further,” Kishor Ostwal, managing director at CNI Research in Mumbai, said. “It will take a decade’s time before you can see all other multinational brands come in and fight in India.”
Overseas companies will be allowed to take a stake of as much as 51 per cent in retail stores in a local partnership, selling more than one brand of products after India’s government reversed that decision in December because of political opposition. Companies must put half of their investment in infrastructure such as processing, manufacturing, storage, warehouses and packaging.
Pantaloon shares gain
Pantaloon Retail Ltd., the country’s largest operator of supermarkets, led gains among local retailers on Monday on expectations they may become targets for cooperation.
“We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation,” Raj Jain, president of Wal-Mart India, said in an emailed statement shortly after the government announcement.
Wal-Mart, based in Bentonville, Arkansas, will add three to five wholesale outlets in India this year, Kevin Gardner, a spokesman for the world’s largest retailer, said in an email. He didn’t provide details of the company’s plans for retail outlets.
India offers great potential to Wal-Mart as the country is “three times the population, one third the land mass” of the US, Scott Price, head of the retailer’s Asia operations, said in an interview on September 6. “With that density of population, these sorts of properly regulated openings will only benefit.”
Wal-Mart’s net sales for the company’s international business rose 16 per cent in the three months ended July 31, compared with a 0.4 per cent increase in the US. The company boosted its profit forecast for the year in August after the Sam’s Club chain and changes in merchandising helped halt a decline in its US store sales.
The logistics challenge
“Logistics has always been one of Wal-Mart’s great strengths and logistics is one of the great challenges in India,” Bernie Sosnick, an analyst at Gilford Securities in Melville, New York, said. He recommends buying Wal-Mart shares.
A push into India isn’t likely to affect results for several years because Wal-Mart will probably do a lot of testing before a large expansion, Sosnick said.
Foreign companies are currently permitted to invest in supply chains and wholesale stores, which sell to local retailers and businesses. In January, India allowed overseas companies full ownership of stores selling a single brand.
Wal-Mart began setting up wholesale operations through a joint venture with India’s Bharti Enterprises Pvt in 2007 and now runs 17 outlets that sell to retailers and businesses.
Carrefour, the world’s second-largest retailer, has two wholesale stores in India; Tesco, the third-largest, helps manage wholesale operations for Star Bazaar, a hypermarket for Trent Ltd., a unit of India’s Tata Group.
“Foreign market expansion is very expensive,” Boris Planer, Frankfurt-based chief economist at Planet Retail Holdings Ltd, said. “You have to expect to make losses for several years and perhaps a decade. Not all retailers can afford that.”
Too much debt
Carrefour, which has cut its profit outlook five times in the past two years, has too much debt and costs that are too high, chief executive officer Georges Plassat said in June. The executive said he needs at least three years to revive the ailing retailer as Europe’s debt crisis weighs on consumer spending and it struggles to attract shoppers to its largest stores.
Plassat, who announced job cuts in France in August, has said he will evaluate operations in markets where local competition is better placed, after agreeing to sell Carrefour’s Greek business to its local franchise partner. The retailer plans to exit Singapore, where it has two stores. A Carrefour spokesman declined to comment on its plan for India.
Tesco saw four straight quarters of sales declines while its US business has yet to make a profit five years after entering the West Coast. There will be “minimal” growth in earnings this fiscal year, it said in January.
The UK’s largest retailer will wait to see details, such as sourcing and investment requirements, before commenting on its plans in India, Sameer Barde, Tesco’s Mumbai-based spokesman, said.
J Sainsbury Plc, the third-largest UK grocery chain which was considering entering the India market, has no plans for international expansion in the short term, Tom Parker, a spokesman, said.
High inflation
India has been battling inflation of almost 7 per cent and an economy that’s growing at close to its slowest pace in three years.
Singh’s government said it will be up to state governments to decide whether they want to adopt the new retail regulation, to ease discontent among regional leaders who have said they plan to protest the new policy on concern it will put millions of small shopkeepers out of work.
Pantaloon Retail surged as much as 32 per cent in Mumbai trading, headed for the biggest gain since February 1999, before trading up 17 per cent at Rs184.90 (Dh12.57) as of 10.33am. Shoppers Stop Ltd., the country’s second-largest retailer, gained as much as 17 per cent and Trent Ltd. jumped as much as 16 per cent. The looser rules may encourage Indian retailers to partner with international businesses for funding and expansion.
Shoppers Stop will consider teaming up with a foreign partner to expand its hypermarkets as it needs global technology, sourcing and a large amount of funding, managing director Govind Shrikhande said.
“Capital deployment will take a cautious route” for foreign retailers such as Carrefour and Tesco that are struggling for growth in domestic markets, Ankur Bisen, associate vice president at Technopak Advisors, said. Still, “growth exists for the next decade,” he said. “They cannot afford to lose out on the Indian market.”
