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India as Destination for Western retailers

Opportunities, Challenges and Strategic Decisions

Diplomarbeit 2008 108 Seiten

BWL - Handel und Distribution

Leseprobe

Table of contents

List of tables

List of abbreviations

1 Introduction

2 Opportunities of the Indian retail market
2.1 Structure and size of the Indian retail market
2.2 Consumption
2.2.1 General facts
2.2.2 Urban vs. rural consumption
2.2.3 Consumption behavior
2.3 Demographic advantage
2.4 Deregulations

3 Challenges of the Indian retail market
3.1 Real estate
3.2 Infrastructure and logistics
3.2.1 Infrastructure
3.2.2 Logistics and dealing with suppliers
3.3 Bureaucracy, corruption, legal system
3.3.1 Bureaucracy
3.3.2 Corruption
3.3.3 Legal system
3.4 Culture
3.4.1 Power distance
3.4.2 The roots of the Indian understanding of hierarchy
3.4.2.1 Religion
3.4.2.2 Caste system
3.4.2.3 Gender roles and family
3.4.3 Time
3.4.4 The roots of a different understanding of time
3.4.5 Context

4 Strategic decisions
4.1 Choice of form of market entry
4.1.1 Liason office
4.1.2 Franchise systems
4.1.3 Joint ventures and 100% subsidiaries
4.2 Choice of format of retail outlets
4.3 Choice of location
4.3.1 Choice of target regions
4.3.2 Choice of target states
4.3.3 Choice of target cities
4.4 Assortment adaptation
4.5 Personnel
4.5.1 General facts
4.5.2 Identification of staff
4.5.3 Expatriates vs. Indian managers
4.5.4 The influence of culture
4.5.5 Motivation
4.5.6 Leadership style
4.5.7 Loyalty
4.5.8 Labor laws and trade unions
4.6 Pricing
4.7 Communication

5 Recommendations

References

List of tables

Table 1 Organized retail penetration across expenditure categories

Table 2 India’s consumer classes in million households over the past decade

Table 3 Consumer classes in million households

Table 4 Rural market shares of selected consumer durables

Table 5 Changes in structure of consumer expenditures from 1995-96 to 2002-03

Table 6 Consumption across different product categories in 1999 and 2003

Table 7 Development of age structure in India until 2015

Table 8 Percentage of population aged 65 years or older across selected countries

Table 9 Ease of registering property across selected countries

Table 10 Starting a business. Bureaucratic difficulties across selected countries

Table 11 Closing a business: Bureaucratic hurdles across selected countries

Table 12 Dealing with licenses: Procedures, time and cost to build a warehouse

Table 13 Predictable patterns between cultures with differing time systems

Table 14 Characteristics of selected forms of market entry

Table 15 The fastest growing retail formats in India

Table 16 Major Formats of In-Store Retailing

Table 17 Formats adopted by Key Retail Players in India 2004/2005

Table 18 Urban consumer expenditure per head in Rs – Top 12 states

Table 19 Distribution of income brackets across Indian states

Table 20 Distribution of income brackets across Indian cities

Table 21 MPVI 2004: Top 10 local consumer markets

Table 22 Top 5 Indian business schools

Table 23 Employment regulations across selected countries

Table 24 Spread of various media in selected Indian states

List of abbreviations

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1 Introduction

The Indian market is one of the key future markets for foreign investors and foreign companies. In 2010 the Indian market is estimated to be as big as the European Union with regard to the number of customers. Moreover, the Indian economy shows solid economic growth since the economical reform started in 1991, and the number of middle class households is continuously increasing. Thus, the purchasing power is rising in India. Hence, the Indian market has huge potential for foreign investment. All in all, the Indian market is a market multi-national companies should not miss because of its future importance. (Wamser, 2005)

This diploma thesis focuses on India as a destination for Western retailers. The Indian market is especially attractive to Western retailers searching for markets with huge potential and wishing to explore markets which are yet unsaturated in contrast to the home markets of the Western retailers. Both the Global Retail Development Index of 2005 and 2006 rank India as the top destination for Western retailers among the emerging markets with regard to the risk associated with doing business in India and the market attractiveness. India ranks even before East European countries and rising stars like China or Russia because the Indian retail market combines low market saturation with stable economic growth and moderate political risk. (ATKearney, 2005, ATKearney, 2006).

However, India is a country with a very complex culture which needs to be considered if a foreign retail company plans to enter the Indian market. India is a country full of contrasts and a conglomerate of diverse cultural influences (Penner 2002; Kreuser, 2002). Thus, Indianizing, i.e. adapting e.g. a retail company’s assortment, pricing strategy and approach to personnel management to the Indian market, is the key success factor for foreign retailers in India (Wamser, 2005, Kumar & Kumar Sethi, 2005).

To be able to succeed in the Indian retail market, knowledge of the unique characteristics of the Indian market and culture is vital. Thus, this diploma thesis starts with an overview of the opportunities of the Indian (retail) market such as growing consumption and a demographic advantage. The diploma thesis also describes the challenges of the Indian (retail) market such as the weak infrastructure and the challenges the Indian culture provides. Based on this knowledge, the second part of the diploma thesis introduces strategic decisions. Necessary adaptations to the Indian market, regarding e.g. dealing with Indian personnel or communicating with Indian customers, are discussed. Moreover, guidelines, e.g. for choosing the appropriate form of market entry and for choice of location, are presented as well. Finally, recommendations for Western retailers planning to enter the Indian retail market sum up the main results.

2 Opportunities of the Indian retail market

To determine what sets India apart from other foreign retail markets one has to take a closer look at the opportunities the Indian retail markets provides. Organized retailing is still not widespread which provides tremendous opportunities for Western retailers. The consumer base is growing and, which is a unique Indian characteristic, a very young one. Household incomes are rising. Further deregulation of the Indian retail market, which is expected, will provide more possibilities, e.g. for multi-brand foreign retailers, to benefit from the booming Indian market. (PWC, 2006/2007) Consequently, the Indian retail market’s benefits are worth to be closer examined.

2.1 Structure and size of the Indian retail market

The Indian retail market is the world’s 8th largest retail market and currently estimated to be a USD 200 - 350 billion industry (10% of the gross domestic product (GDP) in 2004), i.e. 1/3 of the Chinese retail market’s volume. The forecasted annual growth rate for retail sales is 10%. By 2010 the market is forecasted to have a volume of about USD 427 billion. Today 21 million people work in the Indian retail sector which equals 7% of the total workforce. 85% of India’s retail market is concentrated in the country’s eight largest cities. (Indian Business, 2007, BBC Online, 2007, PWC, 2007a, PWC 2007b, PWC, 2006/2007, Ernst &Young, 2006b, ATKearney, 2005)

India has the highest density of retail outlets in the world with a retail store per 125 inhabitants with an even higher densities in the cities. But the Indian retail market is also a highly fragmented one. Organized retail accounts for only 2 - 3% of the whole market. Hence, organized retail makes up only about USD 6-8 billion – this figure is estimated to increase to USD 20-30 billion, i.e. 10%, in 2020, i.e. an annual growth rate of 30% is expected. Retailing in India is predominantly fragmented through the 80% of the total 12 million stores which are operated as small family businesses (usually less than 100 square meters (sqm)) using household labor. The average size of an Indian retail outlet is 40 sqm staffed by six persons. Organized retail accounts for less than 0.5 million sqm retailing space. More than 7 million additional square meters are currently under construction in the top metropolitan cities. (Ernst& Young, 2006b, PWC, 2006/2007, PWC, 2005/2006, Metro AG, 2007, Indian Business, 2007, European Communities, 2001)

96% of organized retailing in India is located in the ten biggest cities. The top six Indian cities (Mumbai, Delhi, Madras, Kolkata, Bangalore and Hyderabad) already account for 68% of organized retail and over 60% of all shopping malls are located there. Thus, the target market for organized retail companies is the urban population. However, the combined market share of the 10 biggest Indian retailers is less than 2% and expected to be 10% by 2010. Hence, there is huge potential for Foreign Direct Investment (FDI) of Western retail companies. Experts agree that the low market penetration and the huge size of the market provide enough room for many new players to co-exist in the Indian retail industry in the near future. (PWC, 2007b, ATKearney, 2005, PWC, 2006/2007) The top 5 major retail players in India are (PWC, 2006/2007):

1. Pantaloon Retail India Ltd.
2. RPG Retail
3. Shopper’s Stop Ltd.
4. Landmark Group
5. Trent India Ltd.

Organized food retail accounts currently for USD 666 million. By 2015 a rise to USD 33,333 million is forecasted, i.e. an annual growth rate of 30%. Branded apparel retail today is a USD 422 million industry with an expected annual growth rate of 20%. International apparel retailers already established in the market are e.g. Esprit, Mango and Tommy Hilfiger. Organized watches retail is worth USD 622 million today with the fashion watch market growing by 20-25% annually. Luxury goods like higher-end automobiles, women’s jewellery and accessories, men’s clothing, gourmet food and wine and entertainment electronics account for USD 450 million today. Established international retailers are e.g. Burberry, Louis Vuitton and Porsche. (PWC, 2006/2007) All in all, as can be clearly seen in Table 1, organized retail penetration in most expenditure categories is very slow which means tremendous potential for foreign retailers. (Ernst & Young, 2006b)

Table 1: Organized retail penetration across expenditure categories

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2.2 Consumption

2.2.1 General facts

Household incomes are distributed very unequally in India (Gini index: 32.5) (CIA World Fact Book, 2007). The following table provides an overview of India’s consumer classes (see table 2) and illustrates the great disparities in income. Currently, 48.7% of all households have an annual income below USD 1,000, whereas only 3.1% have an annual income above USD 4,700. However, it is necessary to note that an Indian households consists on average of 5.5 people (Metro AG, 2007).

Table 2: India’s consumer classes in million households over the past decade

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RICH means an annual income of more than USD 4,700 (215,000 Rupees (Rs)) per household. These consumers are benefit maximisers, they own cars and PCs.

CONSUMING means an annual income per household of USD 1,000-4,700 (45,000-215,000 Rs). These consumers are cost-benefit optimizers, they have various branded consumer goods like two-wheelers, refrigerators or washing machines.

CLIMBERS means an annual income per household of USD 500-1,000 (22,000-45,000 Rs). These consumers are cash-constrained benefit seekers, they own at least one major durable good like e.g. a mixer, a sewing machine or a television (TV).

ASPIRANTS means an annual income per household of USD 350-500 (16,000-22,000 Rs). These consumers are new entrants into consumption, they own bicycles, radios or fans.

DESTITUTES means an annual income per household of less than USD 350 (16,000 Rs). These households are not buying, their existence is a hand-to-mouth one.

Source: Based on European Communities ( 2001), Ernst & Young ( 2006b)

The households grouped in the RICH consumer class are very concentrated. About 50% of them are located in three cities: Mumbai, Delhi and Bangalore; and they spend around USD18 billion p.a. Not surprisingly, about 62% of the retail market for premium products in India is also situated in these three cities. The target consumer base for Indian retailers consists of about 405 million individuals. Of them, 30 million individuals have a combined purchasing power of USD 230 billion. The six million of the richest Indian individuals spend USD 28.36 billion annually. 2.8% of the total population (about 30 million individuals) is able to spend more than USD 30,000 p.a. (Ernst & Young, 2006b, Wamser & Sürken, 2005) Hence, the share of households which are able to buy Western premium products is very small. Whereas, the upper 20% of all households are responsible for 41.6% of the total consumption, the lower 20% make up only 8.9%. (Kaufmann et. al., 2006)

The real growth driver of the Indian retail sector, the so-called Indian middle-class with an annual household income of USD 2,000-5,000, consists of the bottom 80% of the RICH and the upper half of the CONSUMING, i.e. about 40 million households with about 5.5 people each (about 220 million individuals). This sector is expected to grow to 65 million households by 2010. (Metro AG, 2007) Table 3 illustrates the changes in consumer class structure till 2015.

Table 3: Consumer classes in million households

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AFFLUENT: annual household income > USD 5,000

SPENDERS: annual household income USD 2,000-4,999

ASPIRERS: annual household income USD 1,000-1,999

DESTITUTES: annual household income < USD 1,000

Source: Based on Metro AG (2007)

The Indian middle-class provides the consumer base for durables like automobiles, appliances, and consumer electronics (European Communities, 2001); and according to forecasts, it will soon be as big as the European Union. It consists of high-skilled fluent English speaking professionals who often lived abroad for a certain period of time. Besides the rising middle-class, the average per head income also increased from 2000 to 2006 by 62% (Metro AG, 2007); but all in all, it is still low compared to Western countries. However, the upper-income classes are rising faster than the lower-income classes, and the lowest segments are shrinking. About 1.5 million households have an annual income above USD 22,990 and this consumer segment is growing by 20% annually. (PWC, 2005/2006, PWC, 2006/2007) However, the per-head expenditure of the lower 70% of consumers has not experienced big chances in the past decade, i.e. the economic growth did not yet increase the prosperity of the majority (Kaufmann et. al., 2006).

Due to the growing disposable incomes, private consumption expenditure rose on average by 11.5% p.a. in the past decade. Till 2015 disposable incomes are expected to increase at an average of 8.5% annually. (PWC, 2005/2006, Ernst & Young, 2006b) Consumer demand is driven by (Ernst & Young, 2006b, Indian Business, 2007):

- economic growth which results in rising disposable incomes for the Indian middle-class

- demographics (see chapter 2.3.)

More than 50% of the total Indian population is under 25 years of age. This age bracket is expected to continue to grow.

- urbanization

About 30% of the total population currently lives in urban areas. By 2020 it is forecasted to be 40%.

- easy consumer credit availability

- higher number of working women (22% in 1991, 26% in 2001), hence, double-income households especially in the cities

2.2.2 Urban vs. rural consumption

The rural population makes up about 70-75% of the whole population spread over 0.6 million villages. About 60% of the total population live in villages with less than 5,000 inhabitants. (European Communities, 2001, PWC, 2005/2006, Kaufmann et. al., 2006). But as the urbanization is expected to further increase, the share of the population living in rural areas is forecasted to fall to 60% by 2020 (Ernst & Young, 2006b). Increased urbanization leads to a higher customer density. Thus, in urban areas more customers can be reached with the same number of stores, which helps to realize economics of scale. (Indian Business, 2007)

The rural population has 58% of the total income at its disposal and contributes significantly to the Indian middle class (41%) (PWC, 2005/2006). In fact, rural consumers represent about 50% of India’s consuming classes (see chapter 2.2.1). The rural market is estimated to be worth USD 28.6 billion (PWC, 2006/2007). The consumption of goods and services depends on the following factors, which vary greatly from urban to rural areas (European Communities, 2001, PWC, 2007b, PWC, 2005/2006, Ernst & Young, 2006b):

- income level

As mentioned above, the rural population has 58% of the total income at its disposal and contributes significantly to the Indian middle class (41%). In fact, rural consumers represent about 50% of India’s consuming classes.

- penetration of English

The penetration of English is low outside urban areas.

- disparity in education and literacy levels

Literacy levels are higher in urban areas as well as the overall education level.

- mass media coverage

Outside urban areas penetration of many modern mass media like internet or TV is low.

- infrastructure

The infrastructure (especially power supply, road system and telecommunications) is most inadequate in rural India. Hence, it is very difficult to reach the virtually untapped rural market.

- consumption behavior

The rural consumer is economically, socially and psychologically very different from the urban consumer. Whereas urban consumers orientate themselves on international lifestyles and consider shopping to be a leisure time activity, rural consumers are much more traditional with expenditures for leisure activities being of almost no importance. Moreover, on average, urban households spend 2.5 times more than rural ones. Rural households spend larger amounts of their incomes towards purchasing food.

The rural market is characterized by

- seasonal demand

- language barriers

- gender dominance in decision making

The oldest male family member is the head of the family and makes all decisions.

- absence of organized distribution structures and

- perception barriers to several lifestyle products.

Awareness levels of international brands and lifestyle are much lower in rural areas.

Penetration trends of some lifestyle products, especially appliances, are also much lower than in urban areas (see Table 4) despite a noticeable share of rural households at the high-income level. (European Communities, 2001)

Table 4: Rural market shares of selected consumer durables

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Source: Based on European Communities (2001)

2.2.3 Consumption behavior

Most Indians shop in small retail stores close to their home. Shopping is done daily for food and groceries because many Indians do not own a refrigerator. Due to the fact that some food like e.g. fruits, vegetables and rice are not allowed to be sold in retail stores, a lot of shopping is done on markets. Depending on social status shopping is done by employees or by the household members themselves. It is also common that the small retail outlets employ men who take the desired goods to the customer’s home. Moreover, it is common, that the customers do not pay the goods immediately but that they are given credit by the shop owners. (Metro AG, 2007)

However, especially the young urban Indian population experiences a transformation in lifestyle by moving away from traditional spending pattern to more Western spending pattern due to a number of reasons:

- admiration of capitalism
- longing for adopting a Western lifestyle
- higher disposable incomes
- more exposure to international media
- more frequent foreign travel
- increasing number of nuclear double-income families and
- a significant shift towards a credit-based economy.

There are certain implications of the facts presented above. First of all, expenditure categories like health, well-being, and recreation become more important, because the Indian consumer spends more and more not just to meet basic needs, like in the past, but to feel good. Luxuries are accepted more easily. Moreover, shopping became a leisure-time activity rather than a need-based activity. In addition, the growing Indian middle class is very interested in buying international brands due to their increasing brand awareness. However, these brands are expected to be adopted to the specific Indian needs and regional differences. Furthermore, there is an increasing use of credit cards for shopping due to the drop in interest rates and easy availability of credit. Moreover, Indian consumers slowly place more importance on a huge assortment of retail stores, design and quality of goods, and convenience overriding price considerations. (Indian Business, 2007, Metro AG, 2007, PWC, 2005/2006, Ernst & Young, 2006b, ATKearney, 2005)

Table 5 and Table 6 illustrate the changing structure of consumer expenditure in India. As in most developing countries, a large share of consumer expenditure is dedicated to basic necessities like food and groceries. Food and groceries are the single largest component of private consumption. But its share has been continuously declining because Indian consumers place more and more emphasis on enhancing quality of life and a certain standard of living. Hence, expenditures for more lifestyle-oriented goods and services, like e.g. mobile phones or cars, have increased significantly (see Table 5), and a further decline for expenditure on food and groceries is expected. (PWC, 2005/2006, PWC, 2006/2007, Kaufmann et. al., 2006, Wamser, 2005) However, Indian consumers do not follow the consumption pattern seen in other Asian countries. Spending in India increased especially for transportation, communication and eating out in restaurants rather than on clothes, housing/rents, personal care or household goods. (KPMG, 2005, Kaufmann et. al., 2006)

Table 5: Changes in structure of consumer expenditures from 1995-96 to 2002-03

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Source: Based on PWC (2005/2006)

Table 6: Consumption across different product categories in 1999 and 2003

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Basic goods are groceries, simple clothes, etc.

Simple goods are sophisticated clothes, soap, tooth paste, etc.

Superior goods are mobile phones, two-wheelers, TV sets, etc.

Luxury goods are cars, travels, etc.

Source: Based on Wamser (2005)

As can be seen in Table 5 consumer expenditure on food, beverages and tobacco has fallen by 8%, nevertheless, the branded food and beverages market grew by more than 5%, due to rising incomes, which caused the total expenditures for food and beverages to go up even if the share of food and beverages of the consumer pie went down. Growth occurred especially in the packaged food and ready-to-eat segment, i.e. fast food, due to the increasing desire for convenience, and in fresh fruit beverages, due to the rising health consciousness of the consumers. However, this segment is still controlled by the typical small retail stores. Penetration of organized retail is only about 1%. Moreover, gross margins are low, but there is enormous growth potential for organized retail. (PWC, 2005/2006, Ernst & Young, 2006b)

For electronics, there was strong growth in consumer durables categories like flat-screen TVs and frost-free refrigerators, but the overall penetration level of consumer durables is still low. Mobile phones have a 37% share of the market for electronics, and computers have an 8% share. Currently, the share of electronics is higher than the share of appliances. However, this is expected to change till 2010 due to the higher growth rate of appliances (20% p.a.) compared to electronics (15% annually). (PWC, 2005/2006, Kaufmann et. al., 2006)

For clothes, typical Indian clothing, like e.g. the Sari for Indian women, dominated until the latter 1990s. But in adopting a more Western lifestyle, fashion styles have changed and taboos related to dressing behavior vanished. Instead, there is an increasing willingness to experiment with Western mainstream fashion. Men’s branded apparel grows at 22% annually, women’s apparel grows at 23% p.a., and both currently make up 35% of the total branded apparel market. In 2003 the total apparel sales in retail outlets grew by 25%-30%. Remarkable is also the fact that, due to a transition from watches being a necessity to becoming a fashion accessory, India emerged as one of the key target markets for international watch brands. (PWC, 2005/2006, Ernst & Young, 2006b, ATKearney, 2005)

2.3 Demographic advantage

The favorable demographics are a major growth driver for consumption in India (Pitroda, 2006). India has the youngest population on earth. About 60% of the whole Indian population of 1.1 billion people is younger than 30 years, about half of the total population is even younger than 25 years, 24% are between 20 and 30 years. Thus, the average age is 24 years only. This age structure is favorable for launching new products and introducing Western retail formats. (Indian Business, 2007, PWC, 2007a, PWC, 2007b, ATKearney, 2005, Waldkirch, 2006) Moreover, the whole Indian population continues to grow, the growth rate of 1.4% (about 15 million people) is higher than the Chinese one (0.6%) (Mehl-Lammens, 2006, Waldkirch, 2006). Hence, the share of individuals aged 16-64 years, which is the major consuming age class, will increase further. In 2005, it made up 58% of the whole population (about 660 million individuals), in 2010, it is estimated to make up more than 63% (about 720 million people) (see Table 7). Hence, the ratio of non-working population to working population, with the latter being a major growth driver for consumption, will decline over the next years, which is favorable for consumer demand. (PWC, 2005/2006, KPMG, 2005)

Table 7: Development of age structure in India until 2015

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Source: Based on PWC (2005/2006)

Moreover, India is one of the few countries where the share of people over 65 years of age is expected to increase only slowly (see Table 8). The labor force continues to grow, which is favorable for driving economic growth and, thus, increasing consumption due to rising incomes. Moreover, because of the lower share of non-working population public finances will probably come under less strain compared to many Western countries. Hence, monetary means for investments in infrastructure will probably be easier available. (KPMG, 2005, Kaufmann et. al., 2006)

Table 8: Percentage of population aged 65 or older across selected countries

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Source: Based on KPMG (2005)

2.4 Deregulations

Until recently, FDI in the retail sector were forbidden. Currently, foreign retailers can participate in the Indian retail market with wholesaling formats, through indirect access strategies such as franchise systems or licensing (KPMG, 2005) or with single brand retailing formats that fulfill the following conditions (PWC, 2006/2007, Indian Business, 2007, Waldkirch, 2006):

- the sold products are of single brand only.
- the products are to be sold under the same brand internationally.
- products have to be branded during manufacturing.
- only up to 51% FDI is permitted (since January 2006). Currently, a relaxation of this rule is under discussion.
- a approval of the Foreign Investment Promotion Board or the Department of Industrial Policy and Promotion is needed.
- a new approval of the government is needed if any addition to the product or product categories takes place.

However, FDI are permitted up to 100% in Cash and Carry (C & C) wholesale formats which is one of the most popular forms of market entry for foreign retailers (Ernst & Young, 2006b). In C & C wholesale trading there is still huge potential for growth, which attracted global retailers like the German Metro AG and the South African Shoprite Holding which are already established in Mumbai and Bangalore. These C & C stores get large volumes from numerous smaller retailers who benefit from not having to maintain relationships with multiple suppliers for all their needs. (Indian Business, 2007)

Another hurdle for foreign retailers is the fact that in some states (like e.g. Karnataka) the selling of fresh fruits and vegetables is only allowed for small stores according to the Agricultural Produce Marketing Act, but especially in fruits and vegetables lies huge potential because many Indians are vegetarians. (Metro AG, 2007)

Currently, the government is considering to “allow foreign retailers like Wal-Mart, Metro and Carrefour to enter the Indian market through joint ventures for multi-brand stores.” (Indian Express, 2008, n.p.) However, FDI in multi-brand retailing are expected to be even more limited than FDI in single-brand retailing (Indian Express, 2008, n.p.):

The officials said that the foreign partner would have a very limited role in the management of the venture, with curbs on the number of positions on the board. In addition, the chairman of the board would have to be an Indian. Foreign partners would not be allowed special powers by way of board resolutions or articles of association.

In addition, the venture would have to seek Government permission before opening each additional store or changing the format of the venture. Besides, there will also be restrictions on the floor area of shops and the areas where they can be set up.

3 Challenges of the Indian retail market

The Indian retail markets does not only provide tremendous opportunities, the Indian market also provides enormous challenges foreign retail companies have to overcome. Such challenges, like a weak overall infrastructure or a lack of qualified suppliers, strongly influence the strategic decisions discussed in chapter 4. The Indian culture as one major challenge will be presented in-depth, because it is a very vital one, which influences all aspects of doing business in India. However, chapter 3 not only provides an overview of the challenges of the Indian retail market. Recommendations are added on how to deal with these challenges, e.g. how to develop a qualified supplier or how to deal with the omnipresent corruption in India.

3.1 Real estate

It is challenging to find appropriate real estate space in central and downtown areas in most metropolitan Indian cities, because large government owned vacant lands are only infrequently auctioned, and private holdings are fragmented. Hence, a shift to suburban areas has taken place. Moreover, it takes typically between 18 to 24 months from the identification of the retail property to the move-in stage. There are also time-consuming registering processes. According to World Bank (2006), it takes a company 62 days on average to secure rights to property. Besides, the bureaucratic procedures are also costly. 7.8 % of a property’s value is consumed by payments to official departments (see Table 9). The implication for foreign retailers who plan to expand to (or further in) India is that advance planning is vital. (PWC, 2005/2006)

Table 9: Ease of registering property across selected counties

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Source: Based on World Bank (2006)

Furthermore, there is a rapid rise in real estate prices in many Indian states (Metro AG, 2007). Lack of quality real estate at reasonable prices has traditionally been a key challenge for growth of foreign retailers in India. Currently, there are significant commercial projects under construction for retail purposes in most major Indian cities. (PWC, 2005/2006) Moreover, there is a lack of efficient mall management. The preferred form of real estate acquisition is through long-term leases. On average, lease rentals account for about 8% of the revenue and 40%-45% of non-material costs. (PWC, 2006/2007, Ernst & Young, 2006b)

3.2 Infrastructure and logistics

3.2.1 Infrastructure

Much improvement is needed in infrastructure. Governmental improvement projects exist but the current condition of the infrastructure is generally bad. In 1999, the Indian infrastructure ranked 41st of 60 countries surveyed with China ranking even worse than India. Experts agree that short water and power supply are the major obstacles for economic growth in India. Especially power supply fell behind the economic growth. Hence, capital is needed to improve the infrastructure, to modernize the transportation sector and to adapt the power supply to the demand of the growing economy. (Wamser & Sürken, 2005, Waldkirch, 2006) In the following sections a closer look will be taken at the various parts of the infrastructure.

Water supply: Sufficient water supply is given in most locations but unstable. Moreover, the quality of the water is low, because the water supply network is aged, and the material of the pipes is in bad condition. (Wamser & Sürken, 2005)

Power supply: Power supply is unstable because demand exceeds supply, and demand is further increasing due to the growth of the Indian economy. Experts forecast that India will be able to provide only 80% of the power needed in the next years. The average power shortage is 6%-12% of the demand with 5% till 25% missing depending on the location. In Mumbai there is an average power shortage of 12 minutes (min) a day which is very good, for Delhi the average is 45min, in Madras, Kalkotta, Hyderabad and Bangalore it is 40min and in Indore, Bhopal, Lucknow and Kanpur it is up to six hours a day. On average, there are 4 to 5 power cuts per week with urban areas experiencing fewer shortages in power supply than rural areas. In rural areas there is often only power for a few hours a day. Furthermore, the average prices for power are high compared e.g. to China or Thailand. Much power is drawn illegally from the power net. The major power suppliers are inefficient, aged and badly managed state companies. The power network is also of low quality and a lack of modernization leads to 30% of the power produced being lost. (Kaufmann et. al. ,2006, Waldkirch, 2006, Wamser & Sürken, 2005)

The implications for foreign retailers expanding to India is that they should never rely on state power supply alone. Instead one’s own power generators are necessary to be able to maintain a constant power supply, e.g. for maintaining the cool chain of fresh products. (Kaufmann et. al., 2006)

Roads : The road system has the highest importance for the Indian traffic. There are about three million kilometers of roads all over India consisting of National Highways, State Highways, Major District Roads and Village Roads, which makes the Indian road system one of the largest worldwide. In general, these roads are in bad condition with lack of fixed road surfaces, and damages due to flooding during the monsoon season. Hence, accidents occur very often and aged transport vehicles lead to high damage rates for transported goods. Moreover, the possible speed rates are limited to 60-80 km per hour with an average speed of only 30-40 km per hour. Hence, it takes a lorry six times more to drive 600 km than e.g. in Germany. But transportation times are also high in inner city transportation, e.g. in Mumbai, due to a lack of enough roads. Furthermore, only about 57,700 km are highways (for comparison: Germany has more than 230,000 km of highways) but over 45% of all transportation is done on them. Hence, they are constantly overloaded. Indian highways are not comparable to European ones regarding their general condition. Furthermore, about 25% of the Indian villages are not connected to the road system. (Ernst & Young, 2006b, Wamser & Sürken, 2005, Waldkirch, 2006, Kaufmann et. al., 2006, Mehl-Lammens, 2006)

However, government projects have been introduced, especially to improve long-distance traffic with the construction of the so called Expressways (comparable to European highways), e.g. between Mumbai and Pune. The National Highway Development Project aims to connect Indians major cities and is probably finished by 2010. An indicator of the urgent need for highway development is the fact that the average daily traffic volume of 39,000 passenger car units (PCU) far exceeds the highway capacity of 15,000 PCU. (Ernst & Young, 2006b, Wamser & Sürken, 2005, Waldkirch, 2006, Kaufmann et. al., 2006, Mehl-Lammens, 2006)

The implications for foreign retailers expanding to India are that (Waldkirch, 2006):

- over large distances punctual deliveries are difficult if not impossible.
- goods can be damaged during transportation, i.e. the needed quality is hard to guarantee.
- especially rural areas or customers are difficult to reach.

Railroads: The railroad system is one of the largest worldwide and dates back to the British Empire. It lags behind in efficiency, security and modernization. Only 25% of the entire railroad system is electrified. 40% of all goods are transported by train but the average speed of a freight train is less than 25 km per hour and packing, unpacking and changing gauges (there are three different ones) takes much time. Freight trains are also expensive because freight trains subsidize passenger trains. (Kaufmann et. al., 2006, Waldkirch, 2006, Wamser & Sürken, 2005)

Air travel: Airports are in bad condition but the air travel sector is the most efficient transportation sector. There are direct flights from Mumbai, Delhi, Madras and with limitations from Bangalore, Hyderabad and Calcutta to all Indian states. (Wamser & Sürken, 2005, Kaufmann et. al., 2006)

Harbors: The average transshipment duration is six days which is more than three times the global average of two days. The waiting time for a mooring is 0.9 days on average. However, there are big differences between harbors regarding transshipment and waiting time. Customs duty is inefficient, it takes up to four times the global average of time. Hence, freight costs are relatively high. (Wamser & Sürken, 2005, Waldkirch, 2006, Kaufmann et. al., 2006)

Telecommunication: The telecommunication sector is underdeveloped, i.e. phones are not widespread. There are 71 phones or mobile phones per 1,000 inhabitants (2003). Over 50 million mobile phone contracts exist but only 46 million landlines because establishing a mobile phone net is cheaper. Experts expect high growth rates for mobile phones for the near future. All in all, most Indian cities provide stable telephone and internet networks. (Wamser & Sürken, 2005, Kaufmann et. al., 2006)

3.2.2 Logistics and dealing with suppliers

The Indian supply chains are highly fragmented. Between farmer/producer and consumer there are up to six middlemen (Metro AG, 2007). According to Kaufmann et. al., 2006, there are three major obstacles for an effective supply chain management in India:

- bad condition of the Indian infrastructure
- insufficient availability of qualified suppliers and
- low or insufficient quality of goods delivered.

The bad Indian infrastructure results e.g. in frequent power cuts at the supplier’s production facility and even whole days without power supply are possible. Therefore, companies investing in India have to take care of the needed infrastructure themselves. Hence, the supplier should be equipped with a sufficient number of emergency power generators. The bad condition of the Indian infrastructure also results in problems in logistics. Just-in-time or punctual deliveries are not to be expected because of the bad condition of the railroad or road system, which results in long transport durations. Moreover, there is always the risk of goods getting damaged during transportation. However, suppliers often do not inform the foreign retail company if deliveries are expected to be late. Instead, commitments are made, although the supplier already knows that a punctual delivery will not be possible or that there is not enough capacity. The reason is that, due to differing cultures, the Indian supplier will not reject a request of the multinational retailer, and, moreover, the Indian supplier has a different understanding of time (see chapter 3.4.). The implication for foreign retailers is to contact the suppliers regularly, to check the possible capacity of the supplier, and to schedule buffer time. Moreover, the foreign retailer should increase stock keeping if possible and the chosen suppliers should be nearby (maximum distance recommended: 300 km) the retail outlets or warehouse. For identifying suppliers it can be useful to travel around the preferred locations. It could also be useful for the foreign retail company to get an impression of the delivery route by driving it along to be able to assess the risks and the duration of transportation. (Kaufmann et. al., 2006, Waldkirch, 2006)

Moreover, during the monsoon season, which lasts up to six month a year, roads are floated, damaged, and destroyed, making it very difficult or impossible to pass them. Thus, punctual deliveries during monsoon are hardly possible. But the monsoon season has not only an impact on infrastructure but production facilities or warehouses may also be flooded. Stored goods are often damaged due to the wet and/or hot climate in India. The implication is that the foreign retail company should install preventive measures and actions. If possible, higher orders should be placed before the monsoon season starts and warehouses should be made as waterproof as possible. (Waldkirch, 2006, Ernst & Young, 2006a)

Furthermore, establishing long-term partnerships with suppliers is essential for establishing the desired quality standards for the goods to be delivered because Indian suppliers have a different understanding of quality than Western companies. A lack of quality awareness is widespread among Indian suppliers. Deliveries may also vary in quality over time. Hence, the expected quality should be clearly defined. The first delivery should be checked in person by a representative of the foreign retail company. Later deliveries can be checked by an independent party or the foreign retailer may establish a quality manager at the supplier’s production facilities. Furthermore, the equipment of the supplier has to be checked. Often there is no possibility to cool the goods during transportation. Hence, due to the tropical monsoon climate, 25%-40% of fresh food and groceries rot before reaching the consumer. “[...] the northern and central parts of the country experience extreme temperatures during summer (above 40°C)” (Ernst & Young, 2006a, p.2). (Kaufmann et. al., 2006, Waldkirch, 2006, Metro AG, 2007)

[...]

Details

Seiten
108
Erscheinungsform
Originalausgabe
Jahr
2008
ISBN (eBook)
9783836616515
Dateigröße
443 KB
Sprache
Englisch
Katalognummer
v225980
Institution / Hochschule
Technische Universität Bergakademie Freiberg – Wirtschaftswissenschaften - Fakultät 6, Marketing und Internationaler Handel
Note
1,3
Schlagworte
retail india marketing personnel challenge

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Titel: India as Destination for Western retailers