By: Malavika Sharma
Source: http://www.bloomberg.com
Category: Investment In India
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| Wal-Mart India |
Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA) waited seven years for access to
India’s $400 billion retail market. They may have to wait almost as long to make a profit in the world’s second most populous nation.
Expensive real estate, a warehouse shortage and congested roads will force foreign retailers to spend about 20 billion rupees ($382 million) on supply systems, said Anand Ramanathan, associate director at KPMG Advisory Services in
India.
India on Nov. 24 said it will allow overseas companies to invest up to 51 percent in retail stores selling more than one brand. The decision, which ends at least seven years of debate, may benefit local merchants, such as Pantaloon Retail India Ltd. (PF), that foreign retailers need as partners. The market will almost double to $785 billion by 2015, London-based Business Monitor International estimates.
“It will take at least two to three to five years before we see the full impact of this change in policy,” said Saloni Nangia, senior vice president at Technopak Advisors Pvt. “While all these retailers would invest in the supply chain and food processing, it’s going to take time, so this expectation that things would transform very soon or overnight won’t happen.”
Head Start
Overseas retailers such as Tesco Plc (TSCO) and Metro AG may not be able to set up more than 10 stores each in the first year and may take at least five years to break even because of infrastructure and real estate hurdles, Ramanathan said. “I don’t think any of the foreign players is looking at a return over the next five years,” he said.
Shares of India’s three biggest retailers jumped in Mumbai trading on news about the changes. Pantaloon climbed 13 percent on Nov. 24, the day after a government official said the cabinet may ease restrictions, and rose a further 16 percent the day after the news was confirmed. The stocks fell back on Nov. 29 when lawmakers demanded the policy be reversed. Still, Pantaloon is up 9.5 percent since Nov. 23, while Shopper’s Stop Ltd. (SHOP), India’s No. 2 retailer, has gained 2.1 percent and Trent Ltd. (TRENT), the third-biggest, has advanced 3.7 percent.
Local companies have a “positive” outlook because they may get chosen as partners by retailers seeking to do business in India, said Nangia. They also have a head start over foreign companies that were barred from multi-brand retailing in India and restricted to wholesale ventures before last week’s decision.
Possible Credit Boost
The easing of rules may improve Indian companies’ credit profiles as they gain access to equity and improved liquidity, Fitch Ratings India Pvt. said in a statement today. The effect would be moderated by the need for
investment in logistics and increased competition in the long term, the statement said.
Pantaloon, which began as a men’s clothing retailer in 1997, operates as many as 498 supermarkets and department stores and more than 17 million square feet of retail space, according to the company’s website. Reliance Industries Ltd. (RIL), India’s largest public company, has more than 1,200 stores through a subsidiary.
India’s retail industry will get
investments of $8 billion to $10 billion over the next five to ten years as overseas competitors enter and local companies spend to keep pace, according to billionaire Kishore Biyani, Pantaloon’s founder and managing director. “It’s still going to be a while” before a foreign retailer can catch up, Biyani said in a Nov. 18 phone interview.
Bharti Venture
Wal-Mart has 14 wholesale outlets through a joint venture with Bharti Enterprises, Germany’s Metro owns six and France’s Carrefour announced the opening of its second wholesale store on Nov. 28.
Less than $1 billion of
Wal-Mart’s $422 billion sales last year came from
India. The company has plans to aggressively expand its
India operations, Scott Price, chief executive officer for Asia, said in March.
The chains face the challenge of finding affordable locations and the competition may intensify as newcomers enter, said Nangia.
As the industry grows, “spaces won’t be available where the customers are,” said Biyani. The nation’s largest retailer on Nov. 10 reported a 36 percent drop in fiscal first-quarter earnings because of interest costs on borrowing to increase retail space.
India has the highest interest rates among Asia’s major economies.
Rising Overhead
Real-estate costs for retailers have risen at least 2 1/2 times since 2006, according to Kumar Rajagopalan, chief executive of the Retailers Association of
India. Merchants in India pay 9 percent to 10 percent of revenue in rent, he said. The global average is 3.5 to 4 percent, Rajagopalan said.
Retailers such as Carrefour, the world’s second-biggest, and Tesco, the U.K.’s largest supermarket chain, face infrastructure that lags China’s and Brazil’s. “There are still very frequent power outages in a number of cities and the roads need a hell of a lot of improvement in terms of operating an efficient supply chain,” said Bryan Roberts, director of retail research at Kantar Retail in London.
That means the global chains need to build trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of a lack of cold-storage facilities and poor transport infrastructure.
Infrastructure Needs
India’s roads are of “very poor quality” and local trucks cover less than 400 kilometers (249 miles) a day, compared with the 700 to 800 kilometers covered by trucks in the developed world, Transport Corporation of India Ltd. said in a 2009 report. Vehicular speeds can be limited to under 15 kilometers an hour in business areas of some cities.
Indian consumers also tend to buy groceries in neighborhood shops. Organized retail operations -- professionally managed chains, as opposed to family-owned independent stores -- account for just 5 percent of the retail market, according to the Associated Chambers of Commerce and Industry of India. “It’s a country in which infrastructure is not fully developed,” said Rajagopalan. “For any individual to travel to a large store is not the easiest of things.”
Political pressures remain. Shops and markets across India were shut today as traders supported a daylong strike demanding the government scrap its decision on foreign
investment.
Faster Growth
States have a say in allotting licenses and West Bengal may not allow foreign
investment in retailing, Chief Minister Mamata Banerjee said in televised comments Nov. 28.
Foreign firms “still need to be cautious about rushing in,” said Kantar’s Roberts.
Arti Singh, an
India spokeswoman for Bentonville, Arkansas- based Wal-Mart, didn’t respond to calls. Carrefour
India spokesman Mohan Shukla said it was too early to comment on retail plans.
Developing countries still offer faster growth for companies like Wal-Mart, whose international sales grew 20% in the quarter ended Oct. 31, compared with 3.8 percent in the U.S., according to data compiled by Bloomberg.
Wal-Mart, which entered China in 1996, has in the past decade increased its stores in the world’s most populous nation to more than 350 from eight. Third-quarter sales grew 16 percent in China, with 6 percent growth for stores open more than a year, according to a Bloomberg transcript of its Nov. 15 earnings briefing.
“Their story in
India is not short term,” said KPMG’s Ramanathan. “These companies will not be able to face their boards if they decide not to enter
India.”
Source: http://www.bloomberg.com/news/2011-11-30/wal-mart-waits-with-carrefour-as-india-s-stores-win-instant-gains-retail.html
