India Market Expansion Analysis - Case Study Example

India Market Expansion Report 2007 Introduction Entering a new retail market is a complex process. It requires a thorough analysis of the economic background as well as the social, cultural and political scenario. Especially, for a global giant like Wal Mart to enter the Indian market, it requires a close scrutiny of the entire gamut of demographics, economic growth pattern over the recent past and the projections for the future, the regulatory framework, the consumer profile and the supply chain and infrastructure bottlenecks in India. Wal Mart has established itself as the global retail giant over the last 40 years. With its 3,500 supermarkets across the United States, Mexico, Britain, Germany and China, the company was the largest retail company in the world, with $285 million sales in 2005 (D’Innocenzo, 2005). Wal-Mart achieved 55 percent growth primarily as a result of the cost advantage that it can give its buyers, which in turn has been brought about by low wages and cheap sourcing that it ensures through its global purchase strategy (Economist, 2004). Wal Mart has recently entered into a 50:50 joint venture with Bharti Telecom, a major telecom player in India (Giridharidas & Rai, 2006). India is one of the fastest growing economies of the world and with its population of over 100 billion, provides a huge market for a competitive retail player like Wal Mart. Although the Indian government presently restricts foreign direct investment (FDI) in the retail sector only in the Cash and Carry Wholesale business, franchises and strategic alliances for single-brand products, the retail market in India is growing at a fast rate and is expected to be opened up soon. In this report, I will discuss the background of the Indian economy, the demographic changes taking place, the political economy and the trade and investment scenario. Thereafter, I will discuss in detail the current state of the Indian retail market and conduct a SWOT analysis on the country to see whether it provides a strong and conducive market for Wal Mart’s expansion. Finally, I will recommend a suitable strategy framework for Wal Mart’s expansion in India. The Indian Economy According to the World Economic Outlook, 2005, published by the International Monetary Fund, India accounted for a little less than one-fifth of economic growth in Asia and one-tenth of the world growth over the preceding 10 years (Merril Lynch, 2005). Growth Indicators of India Average Annual Economic Growth Rate (% p.a)   1984-94 1994-04 2003-04 2004-05 GDP 5.4 5.8 8.6 6.9 GDP per capita 3.3 4.1 7.0 5.4 Agriculture 3.4 2.0 9.6 1.1 Industry 6.3 5.6 7.0 7.7 - Manufacturing 6.2 5.6 6.9 7.7 Services 6.7 8.2 8.9 8.9 Private Consumption 5.7 4.7 11.3 8.0 Source: Merril Lynch Over the past decade, the services sector, comprising of Information Technology (IT), banking, transport and retail, has grown the fastest and it now contributes 50 percent of the GDP. On the other hand, the share of agriculture is 25 percent although 70 percent of the population continues to be dependent on farming. The principal driver to economic growth in India over the past decade has been consumption spending. In particular, the spending on luxuries like clothing, consumer durables, cars, housing and vacations have grown while the share of food and groceries in the consumption basket has come down (Merril Lynch, 2005). Source: Merrill Lynch, National Sample Survey (India) India has the largest proportion of young population in the world. According to Census data, 43 percent of the population is less than 20 years of age and 60 percent under 30 years (KPMG, a 2005). With the booming software and Business Process Outsourcing (BPO) industry, there is a large group of young people who have growing disposable income that they can spend on luxuries like clothing, footwear, jewelry, books, music and other consumer goods. According to a Euromonitor Retail Survey, there was a growth in disposable income in India to the extent of 20.9 percent over 1999 to 2003 (ICICI Bank, 2004). Also, traditional joint families in India are breaking down and nuclear families of young working couples are settling down in the urban centers which are the main locales of IT and BPO industries. Residential townships are also growing up around these centers, providing a large catchment of customers for supermarkets, shopping malls and other modern format retail outlets (Merrill Lynch, 2005). India liberalized its economy over the 1990s, when tariff rates were reduced on imports, multinational companies were allowed to invest in almost all sectors barring some strategic areas like defense, print media and retail. Quantitative restrictions on trade have been removed and tariff rates are much lower than earlier. However, tariff rates at 20percent on non-agricultural items as of 2004 is still high in comparison global comparisons (CIA). Foreign institutional investors are now allowed to invest in the Indian stock markets and foreign direct investments (FDI) are attracted in most major industries. As a result of the liberal economic regime, India’s exports have grown at a rate of 20 percent per annum since 2001 and its export basket has shifted from primary commodities to value added products like automobile components, textiles and apparel, leather products and gems and jewelry. However, the largest foreign exchange earner for India since the 1990s has been the IT sector. On the other hand, imports have grown faster than exports, 70 percent of the import basket being composed of petroleum and its products. The aggregate trade balance has, therefore, turned negative. Current account trade deficit for 2005-06 is expected to be $30 billion (Chandrashekhar & Ghosh, 2006). It has been estimated that in order to maintain the GDP growth momentum at 8 percent per annum over the future, India needs total investment of $1.5 trillion, of which FDI should be $72 billion, So far, India has been receiving only $5 billion FDI a year – less than 1percent of world FDI flows - compared to $60 billion or 10 percent of world FDI flows to China (Investment Commission, 2006). Investment Scenario in India ($ billion) 2001-02 2002-03 2003-04 2004-05 Public sector 27 32 45 61 Private sector 27 29 41 57 Households 54 65 72 82 FDI (incl. above) 6 5 5 6 Total investment 110 128 164 209 GDP at market prices 494 524 600 694 Investment as % of GDP 22.3% 24.4% 27.2% 30.1% Source: Investment Commission, 2006 Political Economy After its independence from British Rule in 1947, India adopted the mixed-economy model for self-sufficiency and import substitution. Hence, it promoted the public sector enterprises in heavy industries like heavy electrical and engineering. The consumer goods production sector was left to the private sector, which was protected from foreign competition by high tariff rates and quantitative restrictions on imports. However, by the 1980s, there was growing criticism over inefficiencies in industries as a result of lack of competition and corruption in the public sector. Simultaneously, dependence on imports, particularly for fuel, and lack of exports meant that foreign exchange earnings were extremely low. Hence, in 1991, the Congress Party, the majority political party that has ruled the country for most of the five decades since Independence, embarked in a liberalization process. Tariff rates were lowered, import and foreign ownership restrictions were withdrawn in most sectors and the licensing policy that earlier restricted competition was scrapped. Although Indian industry is now more open to competition, there are still some areas that have prevented full liberalization. For example, labor laws in India are stringent and industries cannot adopt a hire and fire rule openly. Also, there are exit barriers to players since factories cannot be legally shut down even if the companies run into losses since bankruptcy laws in the country are weak. Although international trade has more or less been liberalized in India, FDI is still restricted in many sectors. FDI in civil aviation and telecommunication was allowed as late as 2004, after which these sectors have witnessed spectacular growth. On the other hand, FDI is still not allowed in retail except in franchises, wholesale trading and strategic alliances for single-brand retailing. Since a large number of small businessmen are employed in the retail sector, the government is hesitant to open up this sector to foreign competition fearing political repercussions. The Monetary system The Indian monetary system is controlled by the Reserve Bank of India (RBI). India has a partially convertible foreign exchange regime since the 1990s, the government has allowed free flow of foreign exchange in and out of the country through foreign institutional investors (FII) and FDI but not made the currency fully convertible. The RBI’s role in the monetary system is to lend to the government in exchange of short term Treasury Bills when the government budget runs into deficit and to purchase and sell foreign exchange to maintain the value of the Indian currency (Brahmananda, 2002). The Indian Retail Market The Indian retail market is estimated at an approximately $300 billion. However, the industry is highly fragmented, with nearly 12 million retail outlets. Nearly 95 percent of the industry is composed of small mom-and-pop stores of less than 500 square feet as a result of which the retail space in India, at 2 sq feet person, is lowest in the world. Further, modern format retailing – in the form of supermarkets, hypermarkets, departmental stores and specialty stores – comprise only 2.5 percent of total retailing in India. Thus, India has the lowest share of organized retailing in total among all emerging economies (FICCI). Organized retail, at $6.4 billion, contributes only 3 percent of the total industry. However, there is a significant transformation in the Indian retail industry over the last couple of years, with the building of shopping malls, supermarkets and hypermarkets in all the major cities of India. In fact, large retailers have grown faster than in any other Asian country, as seen from the figure below. On the back of growth in disposable income of the middle class and the booming economy, organized retail is also expected to grow to $23 billion by 2010 (KPMG, a 2005). Source: KPMG, a 2005 With the saturation point of organized retailing in India being far from being reached, the economy on the fast track of growth and demographic changes driving consumer growth, the Indian retail industry provides immense potential of return on investment. Hence, the global consultant, A T Kearney ranked India as the most attractive retail destination in 2004. Country Attractiveness Index (2004) Country Country Risk Attractiveness Saturation Time Pressure Rank  Weightage 25% 25% 30% 30%   India 62 34 91 80 1 Russia 52 58 71 92 2 China 68 40 53 90 4 Turkey 51 56 66 65 9 Thailand 64 41 59 71 12 Malaysia 70 49 58 40 18 Egypt 51 35 85 30 25 Brazil 52 56 57 20 29 India's rank 24 14 1 7 1 Source: A T Kearney, FICCI The penetration level of organized retail so far has been the highest in clothing, consumer durables, footwear, books and music. For the future, food and grocery is expected to drive organized retail, with changing demographics of more working women, younger population and trend towards nuclear families. Penetration level of organized retail (2005) 2005 Estimates Total retail Organized retail Penetration Mkt Size Market share Mkt Size Market share     $bn % $bn %   Food beverages & tobacco 171.96 77.5% 1.44 18.6% 0.8% Clothing & textiles 15.91 7.2% 3.13 40.4% 19.7% Consumer durables 9.24 4.2% 0.96 12.3% 10.3% Jewelry & watch 9.24 4.2% 0.56 7.2% 6.0% Home Decor & Furnishing 6.67 3.0% 0.56 7.2% 8.3% Beauty care products 4.76 2.1% 0.16 2.0% 3.3% Footwear 2.31 1.0% 0.71 9.2% 30.8% Books, Music & gift 1.87 0.8% 0.24 3.2% 13.1% Total 221.96 1.00 7.76 100.0% 3.5% Source: KSA Technopak, FICCI Note: Figures converted from Rupees to US $ at the conversion rate of $1 = Rs 45 The present competition in the Indian retail market is composed entirely of medium and small sized Indian companies. The major market share is concentrated among the big players, Pantaloon, RPG and Shopper’s Stop. The Pantaloon group has retail outlets in different formats – department stores and hypermarkets; RPG has department stores and specialty stores in music and Shopper’s Stop has only department stores. RPG and Pantaloon retail all products from clothing, food and grocery, books and music, consumer durables and other lifestyle products. Market structure of Indian retailing Retailer Turnover Total floor space   Total number of outlets     ($ million) 00,000 sq ft       2003-04 Estimated) (2004-05) 2003-04 Estimated (2004-05) 2003-04 Estimated (2004-05) Pantaloon 14.44 288.89 11.0 30.0 31 74 RPG 121.11 177.78 5.2 7.5 110 130 Shopper's Stop 89.78 121.11 6.3 8.5 13 40 Lifestyle 51.11 68.89 3.2 3.2 7 0 Westside 26.67 NA 2.3 3.3 14 18 Ebony 18.89 22.22 1.7 2.4 8 12 Pyramid 16.00 31.11 1.3 5.0 3 7   (2002-03)           Globus NA NA 1.5 6 7 14         (next 3 yrs)   (next 3 yrs) Source: Business World, 2004 Note: Figures converted from Rupees to US $ at the conversion rate of $1 = Rs 45 SWOT Analysis Strength: India’s major strength is in its growing economy, the burgeoning middle class and the young population. The economy has been growing at an average rate of 8 percent per annum over the last decade, primarily as a result of service growth. The booming IT outsourcing industry has earned the country a lot of foreign exchange. The cost advantage of India’s low wage economy has attracted almost all the global multinationals to outsource parts of their non-core activities to India. The GDP growth is expected to maintain its momentum and hence disposable income of Indians will also grow. Along with GDP growth, India’s consuming population has also undergone a transformation. Number of Households by categories (mn)   1994-95 1999-00 2005-06 Income Class       Rich (above US$4,777) 1 3 6 Owns cars, PCs, luxury items       Consumers (US$1,000-4,777) 29 66 75 Owns bulk of branded consumer goods       70% of 2-wheelers, refrigerators       Climbers (US$ 489 – 1,000) 48 66 78 Have at least one major durable       (TV, mixer, sewing machine)       Aspirants (US$ 356 - 489) 48 32 33 Have bicycles, radio, fans       Destitutes (less than US$ 356) 32 24 17 Hand-to-mouth existence       Source: KPMG, 2005 (b) While a large number of Indian households lived just about subsistence in 1994-95, the proportion of such people nearly halved by 2005-06. On the other hand, consumers who own some consumer durables and year for more, on the back of growing incomes, have increased in number. More than half of India’s population is below the age of 30. Hence in the next decade or so, India is going to have the youngest population in the world and hence a high proportion of working-age people. This not only gives a boost to economic growth but also to consumer spending. Weakness: The most important weakness of the Indian economy is its poor infrastructure that limits growth, particularly retail. The telecommunication industry has been liberalized only recently drawing some FDI. Nearly 70 percent of its petroleum requirements are imported although it has its own refining capacities and has also found some oil and gas reserves. The FDI regime is not yet fully liberalized and there are restrictions on foreign ownership of retail companies. Procedural hurdles to FDI also exist because of bureaucratic norms (CIA). Opportunity: The major opportunity that the Indian market provides is the increasing disposable income at the hands of the young population. This drives consumption spending that will have a spiraling effect on the retail industry as well as on the entire economy. Threat: The major threat on the Indian economy arises from its excessive dependence on the urban population. Although 70 percent of the population continues to live off agriculture, 50 percent of the GDP is contributed by services, which are essentially urban professions like IT, banking, insurance, transport and retail. Hence, although the growth momentum is expected to continue over the next decade as a result of the booming urban middle class, there are chances of the growth getting saturated unless it is more widespread encompassing a larger proportion of the population. The human development index in India is low as a result of poor levels of health and education of the rural and urban poor. Recommendations India provides a huge market for Wal Mart since organized retailing is a new industry in the country and provides huge opportunities. However, it must be remembered that FDI is not allowed in all areas of retailing. As of now, the government has allowed FDI only in strategic alliances for single-brand products, franchises and wholesale retail. Many global retailers like Mark & Spencer, have opened retail outlets in India while Metro of Germany has begun a retail wholesale outlet in the country. Wal Mart has entered into a JV with an Indian company to enter wholesale retailing now and according to media reports, it would open supermarkets when the government allows it. Although Wal Mart is a global giant in the retail industry, it should not attempt to transplant the western business model on India. The consumers in India are very different from the western societies and the company should first undertake an in-depth study of the consumer psychology regarding buying habits, product preferences and purchase modes. Further, India is a huge country and local conditions and markets across the country are widely different. So, even within India, the formats, the product portfolio and the store designs may need to be modified accordingly. The weakest part in the Indian retail industry is in the supply chain and human resource management (KPMG, 2005). Tie-ups with manufacturers, farmers and suppliers need to be organized ahead of opening up the stores so that the logistics are in place. In particular, since food and groceries are expected to be the major focus of the large retailers in the future, the storage and transportation of perishable and non-perishable items is of crucial importance. Since Wal Mart plans to begin with wholesale retailing, it gives the company an opportunity to organize the logistics before it opens the supermarket chain. Wal Mart’s global business model rests on its sourcing strategy of purchasing from the cheapest sources. India provides a cheap sourcing market for textiles and food while consumer durables and electronic items can be sourced from south east Asia. It is recommended that Wal Mart arranges its entire supply chain in advance. Despite the growing consumption trends, the Indian consumer trend is still concerned for the value for money of their purchases. Hence, Wal Mart’s business model of offering low priced products will be found attractive. Besides, the development of private labels for its grocery, apparel and other products will also add value to its products. Works Cited D’Innocenzo, Anne, Wal-Mart formula fading; low price not the only draw, The Enquirer, May 30, 2005, retrieved from http://news.enquirer.com/apps/pbcs.dll/article?AID=/20050530/BIZ/505300314/1076/rss01 The Economist, Wal-Mart: How Big Can It Grow, April 15, 2004, retrieved from http://www.economist.com/printedition/displayStory.cfm?Story_ID=2593089 Giridharadas, A and S Rai, Wal-Mart plans to open hundreds of stores in India, International Herald Tribune, November 27, 2006, http://www.iht.com/articles/2006/11/27/business/store.php Federation of Indian Chambers of Commerce and Industry (FICCI), Indian Urban Retail: Opportunities and Challenges, 2005, www.ficci.com/media-room/speeches presentations/2005/feb/feb23-fdi.ppt KPMG India (a), India Retail: On the Fast Track, Bridging the Capabilities Gaps, 2005, www.kpmg.com/Industries/CM/Other/IndianRetail.htm KPMG India (b), Retail: The Next Big Thing, 2005 Business World, Retail Survey, February 16, 2004, http://www.businessworld.in/feb1604/indepth02.asp Investment Commission, Investment Strategy for India, February 2006, http://finmin.nic.in/downloads/reports/Investment%20Commission%20Report.pdf Merrill Lynch in its report, India: Retailing & Real Estate – Future Growth Lies Here 2005 ICICI Bank, Foreign Direct Investment in Retail in India, 2004 Chandrashekhar, C.P and J Ghosh, The export growth story, Business Line, February 2006, http://www.thehindubusinessline.com/2006/02/07/stories/2006020700211100.htm CIA, World Factbook, Country Report – India, https://www.cia.gov/cia/publications/factbook/print/in.html Brahmanada, P R, Forex Reserves and Monetary System – Alternate Policy Scenario, Business Line, May 16, 202, http://www.blonnet.com/2002/03/16/stories/2002031600071000.htm Read More