Wholesale retail: For those with staying power

As growth flattens in the developed countries of America and Europe, retail giants are looking to India as the market that could help put some life into their limp balance sheets. With a $500 billion retail market growing at roughly 15%, of which hardly 10% is organised retail, a roughly $2 trillion economy, and with 1.2 billion potential consumers, India is no doubt a mouth-watering proposition. But then, India with its derelict infrastructure, a vast but ropy supply-distribution network extending into the hinterlands, which in some places can be as old as 200 years, can test the nerves of even the most determined marketers. And with government policies skewed in favour of the traditional ‘kirana’ stores, the country, despite its big potential, often proves frustrating for global retail players wanting to spread their business wings in India.

But as everywhere, where there is a will, a way is always found. So despite being a tough market to crack, global retail biggies like Walmart, Carrefour, Metro and Tesco, are all agog and breaking sweat to make a go of the business to business retail model in the Indian retail sector. A small tailwind working in their favour is that the government allows 100% FDI in the wholesale retail space.

The wholesale cash-and-carry domain is dominated by the American retailer Walmart (with 19 stores), which has a 50:50 JV with its Indian partner Bharti, and German biggie Metro (with 12 stores). The second-largest retailer, French Carrefour, has only 4 stores so far in India, and plans to open 8-10 more in the next few years, across the country. The UK-based supermarket giant Tesco has no immediate plans of setting up shop here, and is happy partnering with Tata Trent Group’s Star Bazar chain of operations. The only Indian player who can take on these overseas giants is Reliance, but it has just 2 stores to show for on its wholesale retail scorecard.

Over the long term horizon, only Bharti-Walmart and Metro seem to have significant expansion plans. Both retailers aim to open 50 cash and carry stores across the metros, and tier 2, 3 towns of India. With a typical Metro store costing anything between Rs.60 to Rs.70 crore, that would entail an investment of roughly around Rs.35 billion from Metro. The group has already invested about $150 million so far in this market, and plans to invest roughly Rs.6 billion in opening 8-10 stores this fiscal. Says Rajeev Bakshi, MD of Metro Cash & Carry, “Our USP is that we have a long-term understanding of the India market, being the first one to set up shop in 2003. We are going to only focus on cash and carry format. And that doesn’t mean we are passive retailers.” Bakshi joined Metro from PepsiCo India, and is actively focusing on pro-actively using marketing to reach out to prospective consumers, and entering into long-term relationship with kirana stores.

The cash-and-carry segment entails supplying to the local kirana stores, and institutional sales like offices and restaurants. A $150 billion opportunity in itself, returns in the cash-and-carry business are less (roughly 5-6%) than in front-end consumer retail. But it ensures a steady cash flow and business model, as one knows the number of members to supply to and their needs can be profiled in advance. But except for Metro, which is committed to focusing on the cash-and-carry model in India, other retailers appear to be taking their wholesale business as the sourcing and feeder part for the more lucrative front-end multi-brand retailing.

A recent CII report says that India has the potential to become a $2-trillion retail market by 2020. AT Kearney, in its latest retail report, notes that organised retail is expected to reach 20% by 2020. Even though organised retail has made impressive inroads in the clothing and apparel space with 31% share, the food segment accounting for over 60% of Indian retail remains highly under-penetrated by organised retail, with hardly 1-2% share. And that’s where the big opportunity lies for the cash-and-carry business, as it has the potential to create a farm-to-fork ecosystem, by forging long-term sourcing relationships with local farmers. But, it’s not going to be easy, as farmers will trust Indian players more than foreign retailers.

Sandeep Gupta, MD, Protiviti Consulting, says, “The key will be how to win suppliers’ trust. Here, Indian players will have a home turf advantage, that’s why Walmart entered into a JV with Bharti probably.” He adds that most players are using cash-and-carry to create supply chain infrastructure and volume, so that they can improve margins and fill their global outsourcing needs from India. On the ground, however, the cash-and-carry format hasn’t seen any frenzy until now, despite the easy entry norms. Experts say one of the reasons could be that most multi-brand retailers continue to struggle for margins, due to inflation and rising input costs. A lot of them have put their expansion plans on the slow burner, instead focusing on maximising returns from the existing stores.

The current leader in the cash and carry format, Walmart, is trying to be more focused towards serving its B2B customers. In a deliberate move, it stocks lesser (only 6,000-7,000 SKUs) number of products than rivals like Carrefour and Metro (both offer over 10,000 SKUs), but has more relevant offerings for businesses. Slowly ramping up the operations — that’s the strategy that players like Walmart and Metro are currently looking at. Both players have plans to move to tier 2, 3 cities and to the outskirts of big cities, where it costs less to open shop. The idea is to reduce the overall operating cost and keep overheads to a minimum. For instance, a Wal-Mart ‘Best Price’ store in India is about 50,000-60,000 sq. feet in area compared to front-end retail stores of roughly 2 lakh sq. feet, which Walmart operates in China or the United States.

Though India is big on the radar of overseas retail players, revenues continue to be modest and that’s a wet blanket. Still, a player like Metro is aiming at 5% of its global revenue from India by 2015; currently it realises roughly 1% of its turnover from India. To keep costs to the minimum, retailers are aiming at over 90% local sourcing, as part of their future strategy.

Thus, the next 2-3 years will be critical, as stakeholders watch how the retail FDI policy shapes up. So, even though a Metro claims that it’s committed to cash-and-carry; its focus could metastasize in the face of lucrative multi-brand opportunities in the future. After all, India is one of the last major retail markets, which still remains untapped. To make the most of this opportunity, players will need to adopt regional strategies across India, as needs, cultures, and consumption habits vary from state to state. Keeping a regional skew in their product assortments could go a long way in making make the cash-and-carry model a success. But it will probably be a long slog before cash-and-carry players are able to hitch a ride on Indian retail’s gravy train. Until then, they need to knuckle up and just dig in to get over the hump.