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A whole new opportunity

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Players in the in India seem to be snapping out of their wait and watch mode to draw up ambitious expansion plans

This month, for the first time since the entry of international majors in the retail sector, all the three international chains operating their cash and carry business in India launched new outlets or announced aggressive expansion plans. This cannot be dismissed as a coincidence; rather, it is being seen as a sure sign of how the industry will move from here.

Wholesalers have been around in India for ages, but it took a handful of global players to give the business some semblance of order. And almost eight years after the cash and carry format, the Western equivalent of wholesale, was born in India, the key players in the business are riding the wave of opportunity.
 

BITS AND BYTES
* No restriction in cash & carry business
* Cash and carry in India is worth around $140 billion, out of the $350-billion retail business
* Typical investment per store is around Rs 40 crore to Rs 60 crore, depending on the size of the outlet
* Proportion of Indian items on the shelves of foreign cash and carry majors operating in India is anything between 90 and 95 per cent

By all reckoning, cash and carry represents a $150 billion opportunity in India (the total retail business is pegged at $350-$400 billion annually). For many global retail chains, the cash and carry model was a way to get a foothold in the Indian market given the stiff regulations in multi-brand retail. There’s a good reason why international giants like Walmart, and or for that matter home-grown are investing big bucks in their Indian cash and carry operations.

Retail is a big opportunity here as India’s consumer confidence is the highest in the world despite the global economic slowdown, way ahead of China’s, as a recent Nielsen study shows. The other reason why the cash and carry business is on an expansion mode is the high level of expectation around foreign direct investment (FDI) being allowed in multi-brand retail. (At present, the country allows 51 per cent FDI in single brand retail, 100 per cent in cash and carry.)

Opening up
Once multi-brand retail is opened up to allow the entry of global players, the business is likely to transform, which again would require large-scale cash and carry outlets to feed the retail outlets. Nielsen Executive Director (analytics) Raj Hoshahali told Business Standard recently, “Looking at the expansion of some of the companies in this segment, it is obvious there’s demand.” The format has taken off in India, he said.

According to Saloni Nangia, senior vice-president, retail, Technopak Advisors, cash and carry is still at a nascent stage, but it will emerge among the strongest formats in India. “This format fills in a big gap in the current distribution network. Apart from certain consumer products’ distribution networks, there are no structured wholesale networks in the country, especially in semi-urban and semi-rural areas, which can supply to a range of business formats.” She adds that a cash and carry model consolidates the sourcing across various formats and can offer a price advantage to its customers. “It also allows the retailer to develop strong private labels,” she says.

In most parts of the world, the cash and carry format works the same way as in India. In some countries, cash and carry operates through membership, which is available to both B2B and B2C customers. Germany’s Metro Cash & Carry, the first foreign major to enter India in this segment in the year 2003, was slow on expansion initially, but it is picking up pace now. Having added one in Mumbai earlier this month, the German chain now has a total of eight cash and carry outlets across India.

Metro is not keen on opening multi-brand retail stores in India and wants to stick to just cash and carry unlike international biggies Walmart, Carrefour and Tesco. Metro is looking at opening as many as 50 cash and carry stores across the country in the next four to five years. Although the company does not talk investment, a back of the envelope calculation shows Metro is likely to spend around Rs 3,500 crore over this period on expansion, considering that its per store investment works out to around Rs 60 crore to Rs 70 crore.

Rajeev Bakshi, managing director, Metro Cash & Carry (India), says, “We have become pro-actively customer-centric. We are going out to understand market requirements and talking to customers about what we can offer them.”
 

HOW THE PLAYERS STACK UP
Cash & Carry Company India launch Stores in India Expansion plans
Metro Cash & Carry 2003 8 50 stores in 4 to 5 years and 8 to 10 annually
Bharti-Walmart  2009 14 10 to 12 stores next year and 20 in 2 years
Carrefour  2010 1 Ready with India expansion plan
Reliance Retail 2011 1 Data unavailable

Bentonville-based American retail major, Walmart, has grown the fastest in India. Having launched its first cash and carry outlet in India in 2009, the US chain already has 14 stores across the country. It too has ambitious expansion plans: A minimum of 20 stores in the next two years. The 50:50 joint venture between and might end up spending as much as Metro Cash & Carry over the next five years or so having similar expansion goals.

“Our Best Price Modern Wholesale cash-and-carry stores have received tremendous response. Currently, we have over 4,00,000 members for our 14 B2B stores across India,” informs a Bharti-Walmart spokesperson.

What makes the model click? The Bharti-Walmart official says the cash and carry outlets are able to provide over 5,000 quality products under one roof at low and transparent prices. “Our target members are retailers, resellers, kirana shops, hotels, restaurants and caterers and offices and institutions.” These outfits would otherwise source products from a host of suppliers at varying prices. The cash and carry stores thus service the day-to-day requirements of unserved segments, he adds.

French retailer Carrefour, which has been rather silent after its first cash and carry outlet opened in India (in Delhi) in December 2010, has a second store (in Jaipur) in the country now. “Carrefour has always been committed to the Indian market. The Indian wholesale market offers huge long-term potential for growth,” a company official told Business Standard in an earlier interview. India is the only country in Asia where Carrefour has cash and carry outlets. The €90 billion group has around 150 cash and carry outlets, all — save the one in India — located outside Asia.

While Carrefour did not elaborate on its expansion plans, information available with Business Standard indicates that the chain has leased one site each in Pune and Delhi, and three in Punjab for opening cash and carry outlets. Around 12 to 13 sites have either been leased or are in the process of being leased by Carrefour for cash and carry stores.

Recognising the potential, at the June 2011 AGM, Reliance Industries Chairman Mukesh Ambani announced the company’s big-bang retail plan including its re-entry into cash and carry. Having unsuccessfully experimented with cash and carry once before, Reliance Retail is re-entering the segment after a gap of three years. In September, it launched the first cash and carry outlet in Ahmedabad. Analysts point out that with a cash and carry business in its portfolio, Reliance Retail hopes to have better bargaining leverage with producers and vendors to achieve higher margins for its retail stores.

A Reliance Retail spokesperson says the company has invested in developing a robust sourcing and supply chain over a period of time. “We believe we can leverage the sourcing advantage to emerge as the preferred destination for the kirana stores and other service establishments,” he adds. This segment of neighbourhood stores, according to the official, will continue to grow along with the organised retail industry. “Our investment in developing Reliance Market (its cash and carry venture) is meant to cater to this huge potential,” adds the company’s spokesperson.

Going forward
Will the international chains continue to invest in their cash and carry operations once FDI is allowed into multi-brand retail, given that almost all of them are keen on starting their own retail stores? The Walmart spokesperson says, “At present, our focus in India is on our B2B wholesale cash and carry stores.” He adds, “Should the guidelines be revised to permit investment in the multi-brand front-end retail sector, we would evaluate the opportunities at that time and make an appropriate decision.”

Talking about the possibility of FDI in multi-brand and whether it would change things for cash and carry, Technopak’s Nangia says, “There is a strong business opportunity in cash and carry in India. So it is quite possible that both Indian and international companies would have an integrated B2C and B2B format in the future.”

Along with expansion and investment plans, these cash and carry players have set definite revenue targets for their companies too. Metro is looking at realising around 5 per cent of its global revenue from India by 2015, up from the existing 1 per cent of the €67 billion turnover of the group.

Walmart gets a little less than $1 billion in revenues from its India operations — approximately 1 per cent of its international revenue pegged at $100 billion. Walmart group’s total annual revenue is much higher at $405 billion. While Walmart’s China revenue is around $7.5 billion, the combined revenue from Japan, China and India is estimated at $16 billion, said company officials.

Carrefour has just about started out in India, and therefore its India contribution is negligible in the global revenue count. Carrefour India’s consolidated sales stood at €5 million in the first quarter of this year. In comparison, China’s was €1,600 million, Taiwan’s €435 million, Malaysia’s €110 million and Singapore’s €21 million. The group’s consolidated Asia sales for the quarter is pegged at €2,438 million.

Evidently, India has a lot of catching up to do with some of the other Asian markets. Metro’s Bakshi said in an interview that other Asian markets, including China and Japan, were ahead of India in terms of sales revenue. Walmart holds a similar view. Walmart India President and Bharti Walmart Managing Director Raj Jain recently told this newspaper that India was just about starting on the retail modernisation process. “If you look at some other emerging markets like China, the Philippines, Indonesia, Brazil, or Mexico, you will find these are ahead of India by anything between five and 20 years,” Jain had said.

The way ahead is fraught with challenges. According to Nangia, one of the biggest tasks for players in the segment is to educate potential customers about the format and the advantages it offers. Besides developing a strong sourcing network and finding the right locations with right catchment areas, the obsolete Agricultural Produce Marketing Committee Act in most states that deny farmers and agri-buyers the freedom to sell and buy as they wish at the price they think best is still the biggest bugbear for cash and carry. “It is a large volume, low margin business; therefore getting the right business volumes are essential,” Nangia stresses.

Among the other major hurdles in cash and carry are expensive real estate, poor infrastructure, dearth of trained manpower and absence of an efficient supply chain. As a Bharti-Walmart spokesperson puts it, “We need to build up the right infrastructure to cater to the large and growing population of India. This will go a long way in curbing inflation and in tackling food supply issues.”

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