At a recent management conference in Delhi, Mr Doug Baillie, the new CEO of Hindustan Lever, wryly remarked that he was amazed by the interest India had in the retail sector and that since his arrival in India five months ago, almost not a day passed when the financial dailies were not carrying some report or news relating to retailing.
Even to "veterans" like this author, the current spate of announcements for investments in retail businesses appears somewhat incredible. About four months ago, my company started tracking the quantum of planned investment in the retail sector (over the next 3-5 years), using a combination of proprietary information, some hypothesis building, and some extrapolation using variables such as demographic, economic, and lifestyle changes over the next five years.
We could total up such investments to about $18 billion or about Rs 75,000 crore. Last week, we had upped this number to almost $24 billion (over Rs 100,000 crore) and believe that by the time this year ends, we could be seeing a further escalation of these estimates.
This investment estimate, by the way, excludes direct investment in real estate (which is likely to be $8-10 billion). The top 7-8 players (mostly new entrants) are each likely to invest upwards of $1 billion and target revenues of over $4 billon or more by 2011. The most aggressive of them, Reliance, is looking at revenues in the range of $25 billion in that year.
There are many who doubt if these investments will come through and if so, if the players have the management capability to start and expand at this rapid pace. I have no doubt about the intentions or the managerial competence of the current and the incumbent players. Nor do I have much doubt about their ability to raise the requisite capital - with or without any FDI policy relaxations.
My concerns are largely on three major counts - availability of suppliers and supplies, availability of land at the "right" location and price to build or lease retail space, and availability of "trainers" to train the millions that need to be hired, and inducted at the shop floor level.
Let me first take up the challenge of finding suppliers who have the capability of delivering ten or hundred times more quantity - at improved quality and lowered prices - for the thousands of products these retail businesses would need to stock at any point of time.
It is well-known that the Indian agriculture sector is exceptionally fragmented with average land holdings of just about a hectare. To put this in perspective, a single (average size of about 75,000 square feet) hypermarket doing just about 30 per cent of its business in food & grocery products would require a farm output equivalent of 1,500 hectares.
Each of the large players is talking about setting up hundreds of hypermarkets alone (besides supermarkets) in the next few years and each would need some degree of consistency in supply of farm produce. Almost every consumer product in India is reserved (or till recently, was reserved) for the small-scale sectors. There are thousands of producers, for example, of injection-moulded plastic ware and yet not one that can individually meet the needs of even a chain of 50 hypermarkets.
Some of the non-retail giants who are entering retail now have, in the past, first created supply capacity and then the marketing channel and networks. In the case of retail, their business is to create marketing channels and, at best, work with suppliers to create capacity.
Unfortunately, with such a small-scale supplier base, the task is gargantuan and could take more than a few years before a more robust supply base comes up. In the interim, with all current and new retailers making a beeline to the same farm sources and same suppliers will, ironically, increase the price of sourcing and therefore dis-economies of scale will happen, severely impacting the budgeted gross margins for the retailers.
As far as real estate is concerned, unfortunately the government of India and its various entities (including PSUs) are the largest owners of land almost everywhere in urban India.
With no clarity on optimising this scarce resource, and practically no vision on having a policy that periodically releases land (and increases FSI) for more pressing needs such as housing, commercial offices, retail shops, schools, hospitals, and hotels - the sudden spurt of investment activity in retail alone will create a demand of at least 300 million square feet of additional retail space in the next 3-5 years. Demand-supply imbalance will severely dent the growth (and of course, the financial viability) plans of most of the players.
And finally, if anyone needs to appreciate the challenge in training the sales staff to efficiently manage the thousands of new supermarkets, hypermarkets, department stores and specialty stores, a visit to the nearest shopping mall and an interaction with the sales staff with some of the current leading modern retailers should be adequate to highlight the gross inadequacy.
I can only conclude by stating that while the fundamental case for having a modern retail sector is very strong, and hence the business opportunity extremely attractive, an acknowledgment of some peculiar-to-India ground realities would be quite pragmatic and therefore ambition should be tempered with some patience.