Indian retail changing; multi-brand FDI ‘will occur’

The Indian retail landscape is changing and will move towards a supermarket/hypermarket model with or without foreign direct investment (FDI) according to analysts, which will present the packaging market with huge growth opportunities.
 
Retail FDI was initially proposed at the end of November 2011, although, at the time of going to press, had been scaled back due to political opposition over concerns about the impact on smaller, independent retailers who account for the bulk of retail sales in India.
 
The initial proposal approved 51 percent retail FDI in multi-brand stores and 100 percent in single-brand stores, a portion of the bill which was approved in early January. It also included stipulations regarding the areas where such retail outlets could open, investment in infrastructure and sourcing of goods from small- and medium-sized Indian enterprises.
 
For Benjamin Punchard and Lamine Lahouasnia, both from market research and analyst firm Euromonitor International, the Indian retail market is evolving and moving towards a supermarket/hypermarket model regardless of the Indian government’s actions on retail FDI.
 
‘The Indian retail landscape is changing at pace,’ said Punchard, head of packaging research at Euromonitor, while Lahouasnia, a retailing analyst at the firm, said: ‘Foreign entrants would quicken the move towards hypermarkets, but it will occur regardless.’
 
Lahouasnia notes many large foreign retailers, such as Walmart and Tesco, are already operating in India through wholesale arrangements, and that allowing them a direct route to the market would benefit both consumers and India’s economy, especially given the requirements to invest and support local suppliers.
 
‘They can provide expertise and investment in the back end, which is essential for the development of this format. They would have had to invest US$1 million into the Indian market, with 50 percent going into things like cold storage, shipping and supply.’
 
Paul Gaster, a consultant at flexible packaging industry market intelligence organization PCI Films Consulting, said: ‘The Indian retail market is incredibly underdeveloped. Less than five percent of the food that reaches the table in India is pre-packaged, with around 40 percent of farmed goods going to waste as they rot by the roadside because the infrastructure is dire. There’s also very little refrigeration and the distribution chain is insufficient.
 
‘Putting a block on opening up the market to retail FDI will be an absolute disaster for India and the country’s economy. With investment in infrastructure part of the offer, it will be a huge disadvantage to local farmers.’
 
Gaster said the likes of Tesco and Walmart will continue to work with the wholesale channel to build up their position, although added: ‘There’s nothing like opening their own supermarket.’
 
Indian supermarket chains, supported by wholesale arrangements with foreign players, are already starting to change shopping habits according to Lahouasnia and, although still small, are making in-roads to the dominant position held by the country’s small, independent retail community, referred to as the unorganized retail channel, which accounts for 95 percent of sales. Lahouasnia said this channel is most at threat from retail FDI but if allowances are restricted to cities with populations of more than one million as originally tabled, would maintain a healthy presence due to the low level of car ownership, lack of refrigeration available to consumers at home and a preference to shop locally and buy small quantities.
 
The prevailing trend to shop locally and buy only what is needed leads Lahouasnia to state that it is more likely that retail brands like 7-Eleven, rather than Tesco or Walmart, who could revolutionize retail in India.
 
‘Indians prefer to shop in small format stores at the moment. This will change but if 7-Eleven were to be allowed to start a retail operation it could lead the revolution as running very small stores in large cities is its domain.’