Shoprite: Expansion into India - Case Study Example

Shoprite: Expansion into India Introduction Shoprite Holdings Ltd. is the largest retail chain in Africa. The behemoth operates under different brand names like Shoprite, Checkers, Checkers Hyper, Usave, OK Furniture, House & Home, Liquor Shop and Hungry Lion (Shoprite Holdings Ltd., 2014). Shoprite Holdings Ltd (hereafter referred to as Shoprite) has grown steadily since its inception in 1979. At present, it has 1902 stores in 16 countries. Of these, 1525 stores are company-owned while 377 stores are run by franchisees. Shoprite has slowly but surely expanded its global footprint (Askew, 2012). The company has created many world-class supermarkets in different countries of Africa. Some of the countries where Shoprite has retail stores include Angola, Botswana, Madagascar, Mauritius, Nigeria, Swaziland, Tanzania, Uganda, and the Democratic Republic of the Congo (Shoprite Holdings Ltd., 2014). The growing prowess of Shoprite has been duly recognized in the Deloittes ‘Global Powers of Retailing 2013’ list where the Cape Town based retailer has been ranked as the number one retailer in South Africa and 93rd biggest in the world (Shoprite Holdings Ltd., 2014). The retail industry in South Africa is attracting a lot of foreign retailers. Shoprite may soon find these foreign players eating into its market share. With passage of time, markets will mature leaving little room for growth. It is therefore appropriate for Shoprite to be proactive and become aggressive on its international operations. Increasing its scale of operations and making a mark in international markets will benefit Shoprite in the long run. Hitherto, Shoprite’s focus of growth has been countries northward of South Africa. The company has also started operations in some Indian Ocean islands. The changing dynamics of the retail market space in Africa as well as in other parts of the world make a compelling case for Shoprite to venture in countries outside the African continent. About India India is one of the BRICS countries that have registered phenomenal economic growth rates in recent years. India may prove to be an ideal destination for Shoprite because of its booming retail sector and burgeoning middle class. Booming Retail Sector The Indian retail sector has outpaced the economic growth rate and has emerged as one of the fastest growing sectors in the country in recent years. The size of the Indian retail sector is estimated to be $450 billion. India is ranked 5th in the Global Retail Development Index 2012. The sector is expected to grow at 10-12 percent in the coming years (Asia News Monitor, 2013). Shoprite must cash on the mouth watering opportunity that India presents. Burgeoning Middle Class The sheer size of the Indian population, at more than 1.2 billion, is a major attraction for most marketers. The consumer expenditure on basic necessities and household items alone has the potency to keep the organized retail business well oiled. There is a burgeoning middle class in the country that has the inclination to buy and money to spend on branded goods. The income of a middle class household ranges between $4000 and $20,000. In 2012, the size of the middle class in India was 267 million. The tally of middle class individuals is expected to touch 583 million by 2025. At that juncture the middle class will constitute close to two-fifth of the total population of India (Varma, 2013). Shoprite can target these value conscious middle class consumers with its reasonably priced branded products. This segment of the society has high expectations and aspirations. Their high level of education enables them to make informed decisions (Sonthalia, 2010). The Indian middle class is expected to be the propeller of consumer spending in India. Spending on high-end brands has increased more than ever before as people with high incomes have become richer. The higher income section of the society will be an ideal target market for Shoprite’s stores that sell premium products. VRIO Framework The VRIO framework is an ideal tool to understand the internal environment of an organization. The ensuing paragraphs attempt to figure out whether Shoprite has valuable, rare and costly to imitate resources and capabilities that will enable it gain competitive advantage in India Valuable Shoprite has the requisite resources to conduct its retail business successfully. Its tangible resources like basic infrastructure and employees are valuable since they help the retailer to carry out day-to-day business operations. In 2013, Sunripe registered a 12 percent increase in revenue and 16 percent increase in profits before taxes (Shoprite Holdings Ltd., 2014). The robust financial position will help fund the company’s overseas expansion objectives. Rare Shoprite is termed as the Walmart of South Africa. It operates on the value proposition of providing branded products at low prices. The company’s intangible resources like its three decades of experience are also rare. The company made a humble beginning in 1979 by acquiring 8 stores in South Africa. Its experience has helped the company to more than double its store count from 766 stores in 2005 to 1902 in 2013. Imitability Shoprite’s capabilities are not easily imitable by competitors. The retailer operates on a large scale, achieves economies of scale, cuts costs and passes on the benefit to the consumer by way of lower prices. Such massive scale of operation can act as an entry barrier for other companies. Organization Shoprite is well organized to take advantage of the Indian operations. Its value proposition of low prices will appeal to the value conscious Indian consumers. The Group carries out its operations through the following subsidiaries; Shoprite Checkers (Pty) Ltd., Shoprite International Ltd., Shoprite Insurance Company Ltd., and Shoprite Investments Ltd. Shoprite Checkers (Pty) Ltd. has two wholly-owned subsidiaries; Medirite (Pty) Ltd., and Computicket (Pty) Ltd. Institutional Constraints Padmanabhan (2012) avers that institutional constraints are the ‘rules of the game in the society’ that shape human behavior. These constraints could be formal rules or informal constraints. The Indian consumer’s social relationship with the small, neighborhood retailer and prevalence of corruption in the country are two institutional constraints that Shoprite must be wary of. Social Relationship When big retail chains entered India, it was widely speculated that they will lead to the decline of traditional kiryana (as mom and pop) stores. That has not happened though. Instead the local kiryana stores continue to dominate the unorganized retail market space in the country. The dominance of kiryana stores can be gauged from the fact that organized retail constitutes merely 6 percent of the total retail business in India. Shoprite has to be aware of the relationship that the kiryana stores enjoy with the local population. The personal touch, presence of the store just round the corner, and availability of credit are aspects that still attract consumers to kiryana stores. The South African retailer will be able to overcome this constraint if it opens small sized, accessible stores in the vicinity of residential areas in India (Layak, 2008). Corruption Shoprite must also be aware of the corruption prevalent in the country. Business houses tend to bribe government officials to get the work done. It is recommended that Shoprite stays clean and adheres to all rules and regulations governing the retail business in India. Cultural and Political Aspects The cultural and political forces are two important macro environment forces that can affect the operations of Shoprite in India. Cultural Aspects India is a land of geographical, racial, linguistic, religious, social and political diversity. It is important for Shoprite to understand that the tastes, preferences, likings and attitudes of people vary from one part of the country to the other. The cuisines are different and so is the clothing style. People in north India are pompous and tend to flaunt their possessions while their counterparts down south are relatively humble. People living in western parts of the country are known for their astute business sense. While some parts of the country especially the metropolitan cities and Tier 1 towns are highly civilized, people living in remote villages are pretty backward in their traditions and customs. Shoprite’s product assortment and store strategy should be geared to cater to the nuances of Indian culture. The company should therefore be prepared to have different product assortments for stores located in different parts of the country. A logical corollary is that Checkers Hyper stores may be viable in one state while Usave stores may make more commercial sense in a different state. The Indian constitution contains a list of 22 scheduled languages. It is estimated that more than 400 languages are spoken in the country. Furthermore, there are numerous dialects spoken in different parts of the country. Communicating with all the citizens of India, even in the mother tongue Hindi, is next to impossible. English is the acceptable language so far as formal meetings and business dealings are concerned. The effect of this cultural dimension will be on Shoprite’s communication strategy. The company will have to roll out different advertisements in different languages so as to reach its audience throughout the country. Political Aspects General elections are being held in India at present to elect a new government. The results will be declared on May 16, 2014 after which the party which bags majority votes will form the government in the country (The Financial Express, 2014). In case no single political party is voted to power, there will be a coalition government. Normally such a coalition tends to be a marriage of convenience between two or more parties. The conflicting interests of political parties that form the government leads to delay in important administrative decision making. The risk of government not lasting the full terms also looms large and thus there is a lot of political instability in the country. The Bharatiya Janata Party (BJP), one of the leading national level political parties in the country, has emphatically stated in its election manifesto that it is opposed to FDI in multi brand retail in India (The Financial Express, 2014). If this party is voted to power, Shoprite may not get a favorable business environment in the country Fortunately for Shoprite, the election results will be out shortly. The retailer can take a final call about its entry decision in India after the declaration of results. Entry Mode Foreign multi brand retail companies are forbidden by law to set up wholly-owned subsidiaries in India. Big foreign retailers were hitherto reluctant to enter India because of uncertain laws governing foreign direct investment (FDI) in retail sector (Roy, 2013). The Indian government allowed 51 percent FDI in multi brand retail in 2012. This led to entry of international retail chains like Walmart, Metro and TESCO to dip a toe in the Indian market (Mody et al, 2012). This relaxation in FDI norms has also paved the way for Shoprite to test the Indian waters. Shoprite began moving east by acquiring a retail chain in Madagascar (The Economist, 2005). However the company cannot use mergers and acquisitions as a means to gain immediate traction in India due to regulatory restrictions. The government’s intent is that foreign retail chains build the requisite infrastructure like back end supply chain operations from scratch and not gain a toehold in the market simply by taking over the existing infrastructure. Shoprite is in the business of selling merchandize through its brick-and-mortar stores therefore merely exporting goods to India is also ruled out. It is recommended that Shoprite enters India through a joint venture with an Indian company. An alliance with a domestic company will stand in good stead for Shoprite. The Indian partner will be well versed with the intricacies involved in doing business in India. Furthermore, association with an Indian company will give instant recognition to the Shoprite brand. The same entry strategy has been followed by other foreign retailers. Walmart has inked a pact with the Bharti Group of India, while Tesco has tied up with the Tata Group. As a normal practice, the foreign partner in such joint ventures provides the backend support while the Indian partner handles the front end activities. Possible Difficulties in Joint Venture Entering India through a joint venture will bestow certain benefits on Shoprite. However the entry strategy may also pose certain difficulties as discussed below. Clarification of Objectives It is important for Shoprite to team up with a company that shares the same mission and vision. Joint venture partners with different objectives are bound to part ways. If Shoprite intends to expand slowly in India, it must not enter a deal with a partner who wants to grow aggressively. Clarification of objectives prior to signing the contract will not only provide long term direction but will also rule out day-to-day operational problems. Difference in Work Culture Most joint ventures fail as the partners have incompatible work cultures (The Economist, 2005).  To overcome this problem, Shoprite must invest time and scout for the ideal partner. It is better to play the waiting game and join hands with a player with whom Shoprite can continue the association for a long time rather than jumping in the fray only to realize that it was the wrong decision. Imbalance in Financial Contribution, Level of Expertise There may be bickering amongst joint venture partners on account of unequal financial contributions and differences in level of expertise of employees. It is recommended that Shoprite should enter into a 50:50 partnership so that the capital investment is the same and the profit or loss (as the case may be) is also shared equally. The problem of gaps in level of expertise can be resolved through training and development of employees. References Askew, K. (2012, Nov 05). South Africa: Shoprite bucks downturn with sales growth. Just - Food Global News Retrieved from http://search.proquest.com/docview/1126101870 Business: Africas Wal-Mart heads east; Shoprite. (2005, Jan 15). The Economist, 374, 64-62. Retrieved from http://search.proquest.com/docview/224013122 India: Walmart delays plans to enter Indian retail market. (2013, Oct 15). Asia News Monitor Retrieved from http://search.proquest.com/docview/1441689074 Layak, S. (2008, Sep 07). Wholesale Interest. Business Today, Retrieved from http://search.proquest.com/docview/198248220 Mody, T., Saldanha, B., Sawhney, H., Finnerty, C., Hongo, J., Parsch, K. Vishwanath, R. (2012). India permits foreign direct investment in retail sector. Journal of International Taxation, 23(12), 8-9. Retrieved from http://search.proquest.com/docview/1437355611 Narendra Modi and Indian elections. (2014, Apr 07). The Financial Express Retrieved from http://search.proquest.com/docview/1512932697 Padmanabhan, M. (2012). Walmart’s Struggles in India: How Institutional Contexts Can Limit Foreign Entry. Journal Of Communication, Culture & Technology, Volume XIII Issue I Fall 2012). Retrieved from http://gnovisjournal.org/2012/11/30/walmarts-struggles-in-india-how- institutional-contexts-can-limit-foreign-entry/ Roy, R. (2013, Jul 23). India rethinks its retail rules; proposals would ease foreign investment limits in supermarket sector. Wall Street Journal (Online) Retrieved from http://search.proquest.com/docview/1411097362 Shoprite Holdings Ltd. (2014). Shoprite Holdings Ltd. Retrieved 3 May 2014, from http://www.shopriteholdings.co.za/Pages/home.aspx Sonthalia, M. (2010). India’s middle-class story.  Investment Week, , 70-71. Retrieved from http://search.proquest.com/docview/816449522 Varma, P. (2013). Indias middle class awakes. Retrieved from http://timesofindia.indiatimes.com/home/opinion/edit-page/Indias-middle-class- awakes/articleshow/26221440.cms Read More