Retail Supply Chains in India: Weak Links or Building Blocks?
21 November 2013
India's $500-billion-plus retail market is finally open to foreign investors who can fully own single-brand stores and have 51% ownership in multi-brand supermarkets in the country. In approving foreign investment in the retail sector last fall, the ruling Congress-party-led minority government braved much opposition, survived a vote of no confidence, and lost its largest coalition partner.
Despite the political theater, however, not much has changed. Big-box retailers are not rushing to set up shop in India. In all likelihood, domestic requirements that are part and parcel of the new policy are deterring foreign investors.
Configuring the right supply chain for India is tricky business, indeed. Global big-box giants must source at least 30% of the value of manufactured and processed products from small Indian producers with less than $2 million in assets — though new changes announced in August this year allow retailers to continue relying on suppliers that grow beyond this threshold. Retailers are also expected to commit to investments worth at least $100 million, half of which must go toward building new back-end infrastructure.
And even those who meet these conditions won't secure nationwide presence. Franchising is prohibited and foreign retailers require local government approvals to operate. So far, only 10 of 28 states and three of seven union territories have welcomed foreign investors.
Still, for all the complexity of operating in India, ignoring this market would be a mistake. As this graphic shows, India's consumers are the real drivers of its economy — and winning them over has become a strategic priority for many global businesses. India is an incredibly complex and diverse market, where consumer tastes can change about every 100 miles. A mix of modernity and tradition, uneven development patterns, 22 official languages, and multiple cultural norms all add up to make India a complicated puzzle.
The painstakingly slow liberalization of the Indian economy actually offers a useful window of opportunity, forcing foreign retailers to take a cautious, step-by-step approach. And, from a supply chain point of view, that might be the best way forward in India.
As this recent PwC 10Minutes article shows, companies with high-performing supply chains have one thing in common: they know what sets them apart from their customers' perspective — be it cost, quality, innovation or customer experience. While all attributes are important, they pinpoint the one that matters most and design their supply chains "from the customer in." All aspects of operations — like service delivery, sales channels, and asset/tax footprint — follow from there.
Indeed, in a recent PwC report on the experience of foreign businesses operating in India, John Flannery, GE’s senior vice president for corporate business development (who led GE India until earlier this year), discussed how India forces established companies to change their mindset and approaches: “As a long-term legacy product engineering company, we tend to say, ‘here’s what we make — now who can we sell that to?’ The first thing we’ve had to really crack and break down in India is answering questions like: How does a village healthcare provider operate? How much can customers pay? What do they really appreciate? How will the workforce want to operate the equipment? And you really have to go backwards from there.”
In India, it will take time for retailers to put together the supply chain building blocks. For example, they have to create the necessary back-end infrastructure and, even more importantly, nurture relationships required to open and stock a big-box store. Establishing footholds in the wealthy and cosmopolitan megacities of New Delhi and Mumbai before going nationwide could be the best way forward. Slow and deliberate expansion would help retailers manage the uncertainties facing multi-brand retail investment.
What next for multi-brand retail? With India's next elections coming up in mid-2014, global investors should not be daunted by the sloganeering and political posturing in New Delhi. Rather, they must carefully evaluate opportunities across India's increasingly powerful states. Local and regional players are competing aggressively to attract capital and projects, and becoming important decision makers and stakeholders in India's future.