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One of the great challenges and opportunities in any business is knowing what you’re really selling to whom, but this takes on a special flavor in international contexts where what you’re really selling can be quite different in one country than the next, and not just on the level of products such as sarees versus sea cucumbers.
The recent sagas of foreign retail in India illustrate this, as well as other special characteristics of markets like India, China, and Japan, characterized by many layers of distribution and middle-men, high regulatory requirements, and politics.
As Bijou Kurien, an executive of India’s Reliance Retail was quoted, “The regulatory and non-regulatory pressures in India are the way of life,” he said. “So any person running a business in India has to be able to figure out how to steer their way through all the obstacles that can be in their path.”
This includes realizing that the race may be run several times before it’s over, in a kind of two-steps-forward-one-step-back pattern, and therefore designing ways to get benefit along the way to the finish line as well as after crossing it. We’ll see a story like this develop below.
This sounds like a lot of trouble (and it is), but the prizes are big and worth it. In this case, modern stores make up only 5% of India’s $500 billion retail industry, in a country where the size of the middle class is in the hundreds of millions and growing. High growth opportunity knocks. No wonder companies like Walmart, Ikea, Carrefour, and Tesco want to get in.
Daunting? How much growth are you looking at in Europe or the US next year? Which prospect is more daunting?
I discuss 2 stages of succeeding in these complex-distribution, high-politics markets using the example of multi-brand retail in India.
STAGE 1 – OPENING THE DOOR
Joint ventures are very tricky to manage and can be counted on to give all parties involved constant headaches. It’s difficult to find the right people with the patience, cross-cultural awareness and experience base to make them work. It’s a challenge to avoid becoming the pawn of a local player with strong government backing. When they go awry, the results can be nightmarish.
But they are a “fact of life” in this type of market, especially for entry into new segments, and the point is to do them well, not avoid them.
Joint Ventures and local partnerships:
To this end, there are various joint venture and local partnership angles in this story:
Walmart + Bharti Enterprises = Best Price Modern Wholesale and Bharti Wal-Mart
Tesco + Trent/Star Bazaar
Foreign partner such as Metro or Carrefour + local companies like FlipKart.com, Big Bazaar, Future Group, Aditya Birla, etc.
Picking up money along the way
The foreign partners above of course want to sell direct to customers, but while waiting for regulatory admission to the sector, they’ve worked with their JV partners running wholesale stores which have let them to build up valuable infrastructure and relationships (and, of course, make money). This infrastructure and these relationships are immediately useful and will be even more so later.
The key point here is that those who will succeed didn’t wait until all regulatory barriers fell before moving, but worked to do as much as possible, gained supply-chain partners, gained understanding of local markets, and found ways to make money within the regulatory framework which existed at each step of the way.
Something for everybody
Deal, deals, deals. Players, players players. But who sold what to whom?
As Matthias Williams and Abhijit Neogy note, re the recent effort to allow 51% foreign ownership of multi-brand retail in India, “To appease its opponents, the government insisted foreign retailers source almost a third of their produce from small industries, invest a minimum of $100 million in India and spend half of that on “back end” infrastructure.”
The infrastructure spend was particularly appealing to the government. Fragmented traditional local retail industry hasn’t been able to capitalize required investments in warehousing, transportation and cold-storage infrastructure. As a result up to 35% of Indian fruits and vegetables spoil before they get to market and Indian food prices often rise quickly when there are minor disruptions in the supply or harvest of staple crops, giving rise to double-digit inflation and angry consumers. So the government is buying inflation control and political appeasement.
To typical Western businesses all these conditions are annoying at best and often occasions of deep concern. They want to see the profit “signal”, this stuff is “noise” and risk.
A perspective better suited to this type of market is to take a perverse and quiet joy in the correct “extraneous” conditions becoming attached to a deal — if they are well negotiated, they will deblock the way forward. The correct signal must have these “harmonics”.
So who wins in the deal?
– Small-scale local manufacturing get guaranteed customers and export possibilities as well as domestic distribution
– Recipients of the $100M FDI requirement get investment
– Local governments who get jobs and infrastructure without having to pay for them
– All 3 of these offer opportunities for local political patronage to operate, so many configurations of politicians can also win – perhaps not a bad thing if we want something to happen.
– Finally the central government gets a tool to control inflation and appease angry consumer.
Who didn’t win?
– Existing keepers of small “kirana” (??????) shops perhaps