In Pursuit of India

In India, small food retailers are big business. They ring up 98 percent of the estimated $270 billion spent on groceries, according to the U.S. Department of Agriculture. And to protect the mom-and-pop stores, called kiranas, strict regulations have prohibited foreign investment in retail for years.

But the situation is poised to change. On Sept. 14, 2012, the Indian government announced reforms that will allow foreign direct investment (FDI) of up to 51 percent in multibrand retail, or stores carrying more than one brand. "It will take some time for the issues to play out," says K. Sudhir, a professor of marketing at the Yale School of Management and director of the China India Insights Program. "Once these are clarified, one should see entry by many [large foreign] firms."

"It will take some time for the issues to play out....Once these are clarified, one should see entry by many [large foreign] firms."

– K. Sudhir,

Yale School of Managemen

The clarification, however, could be a long time coming. The barriers to setting up shop in India exceed those of other emerging markets, experts say, starting with an entrenched bureaucratic system that supports thousands of independent middlemen. It's not uncommon for four or five middlemen to earn a commission – and a living – by taking a small piece of the food distribution chain, but the process also significantly inflates the cost of food.

Size of Indian Food Retail
Sector Estimated size in 2011
Total Retail (Food and Non-Food) $450 Billion
Food Retail (Modern and Traditional) $270 Billion (60% of total retail sales)
Modern Food Retail $5.4 Billion (2% of total food retail sales)

The food retail market includes the retail sales of all food products, both packaged and unpackaged, as well as beverages (including retail sales of all alcoholic and non-alcoholic beverages).

Source: U.S. Department of Agriculture Foreign Agricultural Service Mumbai analysis and trade estimates

The government isn't likely to wipe out these positions because they support the local economy. But the fragmented system makes India ripe for corruption. The U.S. Securities and Exchange Commission is investigating Anheuser-Busch InBev NV's joint venture in India for possible violations of the Foreign Corrupt Practices Act, which prohibits bribes to foreign officials. And Walmart disclosed in November its own internal probe of possible corruption in India and has subsequently worked to shore up its compliance procedures and increase training for its 1,700 workers in India. The company also faces an investigation in India related to its disclosure that it spent $25 million during the past four years to lobby U.S. lawmakers as it pursued greater market access in India, The Wall Street Journal reported. It also has been under investigation for allegedly making an investment in a supermarket chain in 2010 through a joint venture with Bharti Enterprises before India's laws allowed it. Walmart has said it is in compliance with India's foreign direct investment laws.

Aside from avoiding political landmines, foreign supermarkets face a variety of obstacles. India's climate, coupled with an absence of cold storage facilities and roads so bumpy trucks sometimes can't travel faster than 15 miles per hour mean much of what's grown locally rots or is discarded because it can't get to market fast enough, The Wall Street Journal reported in an April news feature on the challenges of doing business in India. The India government has pledged to invest $4.2 billion over the next five years in improvements to the food supply chain, but it also has said $1 trillion will be necessary to facilitate modernization, The Wall Street Journal reported. It has earmarked half of the $100 million in capital that it's requiring foreign supermarkets to invest go toward infrastructure improvements.

Fragmented Marketplace

Today, grocery shopping in India is a vastly different experience than grocery shopping in the West. Typical kiranas are small, run by a single family and handed down the generations. Often they are located in converted garages or other remnant spaces, where a shopper tells the proprietor what she needs. The storekeeper picks the items out from the back room and presents them to the shopper along with a price.

The USDA estimates 12 million to 15 million of these little stores and other tiny food retail outlets are distributed throughout urban and rural areas. On the opposite end, some 2,000 modern grocery stores account for about $5.4 billion in sales, or about 2 percent of the total, the USDA reports. Reliance Retail Ltd., based in Mumbai, is India's largest grocery store chain with about 600 locations.

"India's supply chain is unique, multilayered, expensive and has often lacked an emphasis on product safety and quality."

– Krish Kumar,

Sannam S4

Like the retail situation, India's supply chain also is less sophisticated than in the West. "India's supply chain is unique, multilayered, expensive and has often lacked an emphasis on product safety and quality," says Krish Kumar, head of research and partnerships for Sannam S4, a consulting firm that aids companies entering the Indian market.

Western Presence

While foreign ownership in retail was limited until the latest reforms, India has allowed foreign ownership in wholesalers since 1997, with most operating "cash-and-carry" businesses. Walmart launched a cash-and-carry business in 2009 in a joint venture with Bharti Enterprises and has opened 20 outlets, including five last year. It operates Best Price Modern Wholesale, which sells produce, dry groceries and other items to retailers. Walmart has said it plans to open supermarkets in India by 2015.

Target Corp.'s presence in India currently is limited to back-office operations. France-based Carrefour opened its fourth cash-and-carry store in India in December. "Target, Carrefour, Tesco and others have all set up offices in India to study the market for a while and have been waiting for the liberalization of the rules," Sudhir says.

Multiple Challenges to Foreign Retail

Dense urban areas mean foreign retailers seeking to open large groceries will most likely head to the suburbs and the outskirts of large cities, leaving the crowded inner-city markets to smaller operations, Kumar says.

But the lack of reliable supply chain infrastructure could be a more significant problem without a simple solution. "The cold chain and logistics infrastructure and transportation systems are all taken for granted here in the U.S.," Sudhir says.

Local taxes, trade restrictions, limits on farm size and other issues also promise to affect foreign companies interested in expanding to India, Kumar says.

Despite the new rules allowing some foreign investment, the government has a long list of restrictions and requirements. Firms accepting foreign direct investment must source one-third of their goods from small and local industries. "This policy constraint implies that retailers should have at least 30 percent [of] sales from private-label brands or unbranded products sourced from small industries," Kumar says.

2011 Indian Food Expenditures
2011 US $ billions
2006 – 2011 Growth Percentage
Bread and Cereals
Milk, Cheese and Eggs
Oils and Fats
Sugar and Confectionery
Other Food
Fish and Seafood

*Growth rates are based on inflation-adjusted real values.
Source: Euromonitor

The Indian government also has restricted FDI liberalization to cities with a population exceeding 1 million in states that approve it. As of early February, 10 of India's 28 states had approved the measure, covering 19 cities with a population of more than 1 million. But Sudhir believes this issue will fade. "FDI will take off, even if it is in few states," he says. "Its success in initial states where they will be allowed will create an environment for takeoff and relaxation of rules in other states."

The political climate warrants attention. The kirana lobby is strong and can generate a lot of opposition, Sudhir warns. But ultimately, he says, "economic logic will prevail and the modern retail will grow."

Once government restrictions and logistical problems are overcome, Western grocers still will face the hurdle of navigating an enormous market. "India is not one market," Kumar notes. "States in India differ in terms of culture, language, socio-economic development, etc. Further, different spending power results in different customer segments even within a state. This makes it imperative on the part of the international retailers to customize their offerings to suit regional Indian tastes."

Long Time Coming

The liberalization of foreign direct investment in September did not lead to a sudden flood of investment, of course. A Walmart executive said in an interview with The Wall Street Journal shortly after the reform passed that it would be 12 to 14 months before Walmart could realistically open a retail grocery in India, and others have named 2014 as the year foreign investment takes off.

"Retail is a long-term play in India, and success is a combination of several factors: localizing products to delight and excite Indian consumers and mastering the supply chain to drive competitive advantages," Kumar says. "India's retail ecosystem after all is evolving rapidly."

Ed Avis is a frequent contributor to Retail Leader.