SHOPRITE Mumbai Store South Africa's largest departmental chain has just one franchisee store today, but more are planned

It was just another day in January this year when the uncontrolled downward spiral of potato (yes, of all things) prices at the newest supermarket in Mumbai made every retailer worth his salt sit bolt upright. The spanking new franchisee store of South Africa's largest departmental chain, ShopRite, had pulled the trigger for an ensuing potato war by dropping prices from Rs 8 to Rs 5.50 per kg. A major Indian retailer retaliated with a similar drop to Rs 5 per kg. ShopRite promptly went down to Rs 4.90; the Indian retailer responded. Finally, at Rs 4.80, ShopRite had won game, set and match. No Indian retailer could have withstood sales at that rock bottom rate. Laughs one CEO of an Indian retail chain: "That was just a taste of what can happen to the entire retail trade in India when global retailers are actually allowed into the country. They can bleed for market share. Now, we can just sit back and wait for Wal-Mart to sell television sets at Rs 5,000."

With the Union Commerce Minister, Kamal Nath, indicating that foreign direct investment (FDI) in retail may be allowed (there's even talk of using that as a bargaining tool in WTO negotiations), there's considerable hubbub in the industry. Trade associations, activists, even some big retailers are rallying support to pre-empt the entry of retail behemoths from other parts of the world. At stake, we are reminded, is the livelihood of 40 million people who work in the unorganised retail sector, which makes up a staggering 97 per cent of the Rs 9,30,000 crore of retail trade in India. Says Mohan Guruswamy, Director of the New Delhi-based Centre for Policy Alternatives: "In the short run, a major entry will entail the loss of livelihoods."

It's not just the small kirana stores that are worried, but big retailers too. Actually, make it the biggest retailer. Pantaloon Retail, which has grown Rs 658-crore big in just seven years with a total of 75 stores under four different formats, is upset that the government wants to throw open the industry at a time when the home-grown retailers have just about got their act together after years of struggle. "We've barely brought modern retail to India and the government wants to gift the whole business to foreign entrants. Why do they want to do that?" asks Pantaloon's promoter and Managing Director, Kishore Biyani.

Since 40 million people mean a sizeable vote bank, the government is unlikely to open the sluice gates to FDI in one go. Instead, the sector may be opened up gradually, like it happened in the case of telecom. That said, there's little doubt that the inevitable will happen sooner than later. In anticipation of that, some of the biggest names from the world of retailing have taken a dekko at India several times over. Retail's King Kong, the $288-billion (Rs 12,67,200-crore) Wal-Mart Stores, UK-based Tesco, and Hutchison Whampoa are said to have drawn up India plans. In a letter to the Central government in February this year, the Federation of Associations of Maharasthra, an apex body representing major retail trade associations, listed other potential entrants, including Sears Roebuck, jcpenney, Kroger, Safeway, Home Depot (all American) and Carrefour of France.

PANTALOON Kishore Biyani/MD "We've barely brought modern retail here and the government wants to gift it away"

Each of them has a worldwide presence and pockets deep enough to overwhelm what little India has experienced in terms of organised retail so far. Most of the global retailers contacted for this story did not respond to queries on their plans for the Indian market. But Tesco, which already has a massive procurement operation for fabric and textiles out of India like some others, did not rule out the suggestion. "We never say never, but we have no specific plans at the moment either," says Greg Sage, International Corporate Affairs Manager at Tesco. However, according to global consulting firm A.T. Kearney's "The 2004 Global Retail Development Index", which talks about "emerging market priorities for global retailers", India is the second-most attractive destination after Russia. That puts it even ahead of China.

Virgin Territory, Almost

Indian retailing's problem-that is, its unorganised nature-is also its biggest attraction. In the developed countries, markets are getting saturated, besides which in countries like the US, retailers like Wal-Mart are facing opposition from local communities. Despite the fact that Wal-Mart may have almost single-handedly held inflation down for the American consumer over the years, few want them in their neighbourhood. The reasons are pretty much the same in India. That they devastate smaller stores.

India, in contrast, is almost virgin territory. A bare 3 per cent of retail sales is via organised stores. That means key categories like food and grocery, apparel, and consumer durables are fair game for any retailer with the money and know-how to create a national chain (see The Organised Retail Pie: 2004). And just as Biyani of Big Bazaar himself has proved it, the Indian consumer is more than willing to shop with a retailer who offers the most value for her money. Says Arvind Singhal of consultancy firm KSA Technopak: "We estimate organised retail to be growing at 5 per cent a year." That means it could be a $275-billion (Rs 12,10,000-crore) industry in another five years.

METRO Harsh Bahadur/MD "Retail is simply not our business model, and I don't even want random buyers walking in"

For every big retailer who wants FDI blocked, there's one who wants it allowed. For instance, both Shoppers' Stop (a K. Raheja Group company) and RPG Retail (the holding company for RPG's retail ventures, which include FoodWorld and Spencer's, among others) are in favour of FDI. Their reasoning: To take organised retail from the current level to about 10 per cent of the total retail business in the next five to six years, India would need as much as Rs 10,000 crore in investment. "Indian entrepreneurs just can't put in that kind of money," says B.S. Nagesh, MD & CEO of Shoppers' Stop. "And I don't buy the argument that small retailers will get affected by the arrival of foreign players." Nagesh's argument is simple. The average Indian household, he notes, requires many more SKUs (number of items) than any western household, and this requirement can only be serviced by neighbourhood stores. "Look at the way neighbourhood stores have fared so far. They will flip the product and format, but they won't lose money," says Nagesh.

Nagesh probably credits the mom-n-pop stores with more ingenuity than they actually possess, but the point to be noted is this: the kirana store is under threat, and it's not just from the foreign retailer. Rather, the competition is from organised retail per se-whether that's Indian or foreign doesn't really matter. So should India halt the progress of organised retail in the country? Not recommended and not possible either. Says Raghu Pillai, CEO, RPG Retail: "Look at the FDI policy on retail in any case. It's just a narrow sliver of protection. How else do you explain Hindustan Lever's Sangam Direct or ShopRite's franchising agreement? Ultimately it's a political decision, but I wish we had a better retail policy roadmap."

SHOPPERS' STOP B.S. Nagesh/MD & CEO "I don't agree that small retailers will get affected by foreign players coming in"

Grey Areas

The myriad loopholes in the FDI policy, as Pillai mentions, have already allowed significant foreign players to start testing the waters in India. ShopRite currently operates through a franchisee here and has just one store (in Mumbai), while Metro Cash & Carry (a euro 26-billion or Rs 1,45,600-crore German wholesale chain) sells only to commercial establishments out of its Bangalore store.

Despite their limited presence, the two retailers have managed to attract a disproportionate amount of controversy. When ShopRite began selling some of its branded products below the cost price, Pantaloon's Biyani hauled up the manufacturers and threatened to take their products off the shelves in his stores. Among the manufacturers were companies like HLL, Pepsi, Tata Tea and P&G, most of whom assured him that no discounts were offered to ShopRite. That meant ShopRite was selling below purchase price to buy market share. "This is nothing but predatory pricing," says a miffed Biyani. But Director of ShopRite Holdings, Ram Harishunker, thinks otherwise. "We don't plan our pricing keeping in mind other retailers. Right now our pricing policies are geared to benefit consumers," he says.

Metro, whose operations in India involve selling to business entities registered with it, has drawn its share of flak. "They have conveniently redefined what retail means," alleges Sanghvi of Maharashtra's Federation of Associations. "The (membership) cards they issue (to authenticate commercial buyers) are a farce. It's more or less a ploy to sell to retail customers." Metro's India head, Harsh Bahadur, dismisses the allegation outright. "Retail is simply not our business model, and I don't even want random buyers walking in, which would mean making space for more units."

FOODWORLD Raghu Pillai/CEO "The FDI policy on retail is just a narrow sliver of protection... I wish we had a better policy roadmap"

Metro says its gameplan in India is very clear. It sees the market as a huge fragmented one that is crying for aggregation of procurement and cutting of layers in the supply chain. This, in fact, is the crux of the argument of those defending the entry of foreign players in retail-that a complete overhaul of the way procurement is done will not just benefit the retailer, but also the end consumer. Says Bahadur: "The retailer can come into one location as often as he needs to and procure all his stocks. Not only will he need to stock less, but also increase his own margin by a quarter, since we sell at a 2 to 3 per cent discount."

Now, place a store like Wal-Mart in the position Metro occupies and it becomes clear how centralised procurement by a mammoth retailer can completely reinvent the game. As Vidya Srinivasan, retail specialist at A.T. Kearney explains: "Backward integration is the only way global retailers are able to sell at the prices that they do."

In other words, going forward, the retail battle will be fought on scale. The bigger the player, the better its chances of winning. Says Ireena Vittal, Partner, McKinsey & Co.: "The issue here is not about ownership (Indian or foreign), but about who understands the customer the best and adopts the best differentiators. The Indian retailers have pretty much cracked the value game, and I think the new entrants will face a fair share of competition from the existing players."

After all, one would be foolhardy to underestimate a street-smart competitor like Biyani. Even if you are Wal-Mart.