Will Wal-Mart Succeed in India? Perhaps...But It Won't Be Easy
"He doesn't realize it, but I know everything about him," says
Indian retail magnate Kishore Biyani about a young man sitting with him
in a Mumbai hotel meeting room in early December. "I see that he is
wearing Colour Plus trousers. I know his waist size ... I know
everything about him. We are a company of observers, and everybody is
trained to observe customers," says Biyani, who is CEO of the Future
Group and managing director of its flagship Pantaloon retail chain that
last year had revenues of Rs. 2,018 crore ($450 million) and expects to
become a $1 billion company by mid 2007.
Biyani often spends Sundays hanging about unobtrusively and watching
shoppers at his company's 200 clothing stores in 32 Indian cities. The
home-grown retailer's obsession for observing the average Indian
consumer also at public places like temples and movie halls underscores
what could be Wal-Mart's biggest challenge as it sets up shop in India
in partnership with Bharti, a leading telecom services provider. "India
is a very diverse country -- we have 6,000 castes and sub-castes in 28
states, and every community has its own tastes; every state has its own
nuances," says Biyani. "To manage the diversity and the heterogeneity
will be one of the biggest challenges for anybody who comes to this
market."
Cash and Carry
India's retail industry is one of its fastest growing (with a 5%
compounded annual growth rate) and has $320 billion in annual revenues
this year, according to a report titled, "Retail in India: Getting
Organized to Drive Growth," released recently by consulting firm A.T.
Kearney and the Confederation of Indian Industry (CII). Never mind that
Wal-Mart's $315.6 billion in global sales last year is about the size
of the entire Indian retail industry. "Rising incomes and increased
consumerism in urban areas along with an upswing in rural consumption
will further fuel this growth to around 7%-8%," the authors say,
pegging India's consumer class with rising disposable income at 400
million people.
But now that Wal-Mart plans to enter India, attention is focused on
the retail giant's India strategy. Wharton professor of marketing Jagmohan Raju
says one big challenge Wal-Mart will face in India has to do with how
it is perceived by consumers. "In the U.S., when you think of a big
warehouse store, you think of lower prices, and small, boutique stores
have higher prices," he says. "In India, the perception is exactly the
opposite -- the bigger store has higher prices; smaller shops can offer
lower prices because their overheads are lower. How will Wal-Mart's
positioning of lower prices carry forward in a mindset where customer
perceptions of big versus small are so different?"
Consumer Behavior
David Bell,
Wharton professor of marketing, says Wal-Mart's business model is
founded on "everyday low prices for consumers and squeezing costs out
of the system, and customer service with friendly people who greet
you." But those, he argues, do not guarantee shopper traffic, as
consumer behavior is dramatically different across global markets.
Coca-Cola might adjust to people's preferences in different markets by
making its drink sweeter or more effervescent. Or McDonalds could allow
people to consume alcohol at its restaurants in France and make
hamburgers with rice patties in Japan. "But there's considerably more
variation in the way people shop for products than their underlying
preference for the products themselves," Bell says. "This is what makes
it more difficult -- not just for Wal-Mart in particular, but for any
retailer -- to be truly global."
Changes in consumer preferences that Wal-Mart will encounter have to
do with simple things like how often people like to go to a store or
what motivates them to choose one store over another. "In local
markets, you have dynamics of retail competition, variations in the
frequency with which people like to shop, variation in the kind of
products that drive people to the store, variation in the importance of
the retail assortment."
It is too early to tell if some of the controversies Wal-Mart has
faced in the U.S. will crop up in India, too. "In the U.S., a number of
small towns did not like Wal-Mart for a couple of different reasons,"
says Bell. "One is purely aesthetic -- these big boxes look pretty ugly
-- and the practice of having huge buying power can be detrimental to
the local economy -- people who try and compete on price. Thirdly, they
are criticized for their employment practices, such as their benefits,
and ethnic and gender discrimination in hiring."
Wal-Mart's most immediate challenge could be finding real estate at
preferred locations and financing it at the prevailing prices. Biyani
says his group bought most of its real estate long before the current
price boom. "If we were to do business at today's rates, we'd have to
shut down," he says. "The Wal-Mart model is very real estate hungry,"
says Raju. "They need a lot of real estate, close to where people live,
and have easy access to them. The Wal-Mart model also relies on the
fact that everything is on display, which requires lots of space."
Raju notes that if, as many industry watchers expect, Wal-Mart sets
up its stores on the outskirts of urban centers, other challenges could
emerge. "If you are going to travel by train, you'll have to carry your
purchases in a bag, and then you'll buy less," he says. "If you drive
your car there and load it up, Wal-Mart should have a place to park all
those cars." Some industry experts have argued that the typical Indian
consumer does not travel more than 6 km (3.75 miles) or 7 km to shop,
and that few suburbanites own cars.
Raju says he expects Wal-Mart to adopt a blended model of its
traditional format tweaked to fit the reality of Indian real estate.
"It would be stores where you have all the products on display, but you
don't pick it up and put it in your cart yourself." This would involve
something like a handheld computerized device, he says, into which
customers enter information about the products they want to buy. They
would then collect their purchases at a checkout point at street level
and drive away, or have them delivered to their homes.
More blending might be on the way, especially in cultural nuances.
Wal-Mart's recent debacles in Germany and Korea, where it sold out to
local retail players and exited, could be wake-up calls. In Germany,
Wal-Mart's low price strategy failed to win it a distinctive market
position simply because two other well-entrenched retailers -- Aldi and
Lidl -- have been following that strategy for years, says Bell. He
notes that Wal-Mart was also faulted for relying too heavily on a
U.S.-driven view of how Germans shop, made worse by populating its top
management in the country with U.S. expatriate executives, many of whom
couldn't speak German. Thirdly, the Wal-Mart strategy of a
price-service combination with friendly greeters and so forth
backfired. "Culturally, greetings and friendliness in stores are viewed
by the Germans with a lot of suspicion," says Bell.
Rites of Passage
Wal-Mart also had some lessons to learn in South America a couple of
years ago, when it discovered that the design and layout of its stores
did not match shopper preferences. "In South America, shopping for some
families is a social or an entertainment-driven event," says Bell. "You
have the whole family or the extended family shopping together, so you
need much wider aisles." That, he says, is unlike what Wal-Mart is used
to in the U.S., where a single person typically shops for the entire
household, while other family members are looking after the children or
at work. "It seems like a fundamental thing, but you could never
predict that coming from the outside unless you have a local partner."
Chastened by these experiences, Wal-Mart may not face the same
problems in India. Bharti, its local partner, is a leader in the mobile
phone services industry and must have deep insights into Indian
consumer behavior patterns. Even so, there could be surprises, as
Biyani's Big Bazaar store chain learned the hard way a couple of years
ago. The chain had bought 100,000 white cotton shirts, expecting good
demand. But sales were slow, and promotional campaigns fell flat. It
soon figured out why: The demographic profile of Big Bazaar's
middle-class shoppers meant people who commute in crowded trains and
buses and not in air-conditioned cars. For them, white shirts are
high-maintenance hassles, needing frequent laundering. The group
eventually liquidated its unsold inventory of white shirts through
heavily discounted sales.
Wal-Mart's legendary success at procuring its supplies at extremely
competitive prices has no doubt pleased its customers to whom those
savings are passed on, but critics have accused it of compelling its
suppliers to survive on very thin margins. Here, Biyani says he works
differently. "We are not like Wal-Mart; we believe in a situation of
win, win and win," he says. "The supplier should win, we should win and
the customer should win. In Wal-Mart's strategy, and maybe that of
other international retailers, the company wins and the customer wins.
Somebody has to lose for those two to win." Future Capital Holdings, a
Biyani-run private equity firm, last month raised $830 million that it
has begun investing as vendor financing in manufacturers of foods,
garments and fashion jewelry, among others. Products of these companies
get captive shelf space at the Future Group stores.
Raju says existing national brands will need to plan their response
to Wal-Mart very carefully to ensure that while they get to supply the
retail giant, they also don't alienate their smaller store buyers.
"They are used to it in the U.S.," he says. "Right now, Hindustan Lever
deals with a lot of small stores. Tomorrow they will be dealing with
large buyers like a Wal-Mart or Reliance Retail, so the relative power
structure of buyers and who is supplying will change. This is a
challenge they have faced in developed markets where they deal with the
Tescos and Safeways." He expects the national brands in India, such as
Hindustan Lever and Procter & Gamble, to figure out ways to help
small stores with specially tailored services "to ensure they also
thrive and do well."
Raju sees bigger benefits flowing to other players in the retail
supply chain, such as farmers. "Companies like Wal-Mart coming to
India, I hope, will help farmers because there will be fewer players in
the chain," he says. "Farmers could form cooperatives to supply
directly to Wal-Mart rather than have to deal with multiple
intermediaries."
Party Spoilers
India's retail promise must seem tempting, but that outlook "is
tempered by the fact that the country is grappling with severe
infrastructure and policy issues," says the CII in the report it
produced with A. T. Kearney. "Cold chains [distribution chains for
perishable items], warehousing and logistics infrastructure will fast
become unmanageable challenges for India if proactive action is not
taken." It points to policy regimes that vary across states,
"inadequate quality control and the lack of a skilled workforce."
Biyani doesn't buy all that, arguing that "India is a nation of dukaandars
(shopkeepers) and that enough retail talent is available. He also
dismisses concerns about distribution and logistics infrastructure with
a simple, rhetorical question: "Have you [in the recent past] faced a
shortage of anything you wanted to buy?" Biyani scoffs at Wal-Mart's
logistics and supply-chain strengths. "Where will they run their Volvo
trucks here?" he asks, adding in a lighter vein, "They will probably
have to have bullock carts and handcarts in their supply chain."
Raju points out that Wal-Mart's efficiencies stem from the scale of
its purchases, which determines what prices it pays suppliers.
"Suppliers are willing to work with them because if they don't work
with them they lose a big part of the market," he says. The Wal-Mart
buying center at its Bentonville, Arkansas, headquarters "is huge, and
that's why most of the companies' vendors have their branch offices in
the city where Wal-Mart's headquarters are located," adds Raju.
Coping with Oversupply
Organized retail is just beginning in India, but plans call for some
600 malls to be built over the next decade across the country. The
nascent industry in India could learn valuable lessons about what went
wrong with retailers in the U.S., leading to bankruptcies, closures and
sell-offs at companies like K-Mart, Caldor and Bradlees.
"What went wrong [in the U.S. market] is oversupply," says Martyn
Chase, chairman of Donaldson, a London-based company that manages 350
retail malls across Europe. "One mall gets built, and somebody builds a
new and bigger mall nearby, so the previous one is killed." He doesn't
see an immediate threat of that happening in India, but says "you will
get casualties in 10 years when you have too many of them." He attended
a CII-organized two-day conference on the retail industry in Mumbai in
late November, and is trying to persuade his European retail mall
clients to invest in India.
Chase says the way to prevent hemorrhaging and consolidation in the
industry is to bring regulatory oversight. "You need proper regulations
governing mall locations, mall size and the like," he says. "Before you
are allowed to build a mall in the U.K., you have to demonstrate there
is a need for it, by proving that there is enough demand from people
who live in that area to make the mall work."
Biyani argues that the underlying dynamics of standalone retail are
not attractive. (Pantaloon's urban locations put it in a different
market segment from that of the big box centers Wal-Mart might put up
on city outskirts.) "In India, no retailer has made big money so far,"
says Biyani. (Pantaloon's profits last year were 3% of revenues.) "The
money is in the peripheral activities; it's never in the retail itself.
It's the power of retail that gets you the money; it's never the
transaction that gets you the money."
Source: Knowledge@Wharton