Reference no: EM131726231

The Impact of Hypermarkets

The history of India contains a wealth of change and alteration, and the modern era is no different as the country blossoms into a major player in the global economy. Sizable economic growth during the past decade, particularly in the retail sector, has changed the way Indian consumers behave. Although the size of the current Indian retail sector is impressive, its potential really speaks to what retailing will mean in the future. The retail market in India was approximately $353 billion in 2010, and by 2014 it will reach $543 billion in total sales, of which modern retailing (described shortly) accounts for 27 percent. Before 2000, Indian consumers generally purchased many of their retail goods from local mom-and-pop stores called kiranas, which sold mainly provisions and groceries. Shopping at kiranas is easy and convenient because the small stores serve specific neighborhoods and establish personal relationships with their customers. International retailers are slowly making their way into India. To enter the country, they have two options: They can either set up a wholly owned subsidiary (WOS) in India, or they can enter a joint venture with an existing Indian firm. Until recently, India’s government allowed foreign companies to open only single-brand stores, such as IKEA and Apple, in which the foreign company entered a joint venture with an Indian firm in which they owned no more than 51 percent of the Indian company they were partnering with. In 2012, India made dramatic changes to its laws regarding international retailers doing business in the country. Single-brand retailers are now allowed to retain 100 percent ownership of the subsidiary company (making them into wholly-owned subsidiaries). India also eased its laws for multibrand retailers, though not as much as they did for single-brand retailers. Specifically, multibrand retailers are now allowed to open stores in India’s 53 cities with populations greater than 1 million, provided that they retain no more than 51 percent ownership of the Indian firm they are entering the joint venture with, spend at least 50 percent of their investment capital on building supply chain infrastructure, and source a minimum of 30 percent of the manufactured goods they sell from small- to medium-sized local Indian companies. Walmart, Tesco, and Carrefour have opened hypermarkets in India, but doing so was not an easy process. Carrefour waited 10 years to open its first store as a result of the previous restrictions. The large store layouts and variety of merchandise force customers to spend more time in the stores, which in turn leads to more sales. The potential for hypermarkets in India sheds light on the country’s changing retail landscape and the shopping habits of its consumers. The infusion of hypermarkets threatens to rob local store owners of their customer base—approximately a 23 percent decrease in sales in one year. Although this is good news for hypermarket and supermarket retailers, the changes in the laws are proving difficult to navigate. Although Walmart announced in September 2012 that it would open several retail stores in the next 12 to 18 months with partner Bharti Walmart, Indian regulators quickly brought scrutiny to the partnership. In October 2012, it was announced that Walmart was being investigated for possible violations of the foreign investment laws, and by late November of the same year Walmart had suspended several of its employees, including its Indian CFO, until its own investigation was concluded. Clearly, although India is an excellent business opportunity, the road is rocky. Currently, there are more than 300 hypermarkets and 3,000 supermarkets in India. India has been experiencing a 20 percent annual growth in retail markets. Each new store opening may draw customers from 20 to 25 kiranas and fruit and vegetable stands, affecting more than 100,000 vendors. Most kiranas cannot compete with hypermarkets, because these larger retail outlets create more efficiency within the supply chain. Much local produce in India currently is wasted because the country lacks sufficient infrastructure. Even as it progresses through rapid development, India still lacks some amenities that Westerners take for granted, such as refrigeration in retail operations. If a large retailer wants to open a hypermarket in India, it will have to invest capital to ensure freshness throughout the supply chain and help reduce waste. The Indian government is expected to spend $500 billion (U.S.) over the next few years to develop a world-class infrastructure, which should spur growth in the retail sector. The lack of infrastructure underlies a related issue facing hypermarkets. Unlike in Western nations, India’s rather poor roads and transportation systems do not allow retailers to locate on large plots of land on the outskirts of town because few consumers can reach them. Therefore, hypermarkets must look for retail space in more urban areas, which provide little available real estate. Buying up space from existing stores means displacing local corner shops already inhabiting that space, and this may prompt protests from Indian consumers and store owners who value the Indian tradition that the kiranas represent. Yet, larger retail outlets in India could have a dramatic impact on the economy, possibly creating millions of jobs in the next 10 years. Although many Indians may not appreciate the notion of hypermarkets immediately, their presence is likely inevitable. Much of the impetus for the emergence of hypermarkets in India also comes from changes among Indian consumers. The country’s younger generations are exposed to a host of innovative products that were unknown to their parents. They are far more receptive to new products and ideas. In addition, this segment of the population reflects the shifting age demographics; more than half of India’s current population is younger than 25 years of age. With such a large percentage of younger consumers, it seems inevitable that India’s cultural tastes will change. The strength and abundance of local kiranas have been a cultural mainstay, but they cannot efficiently offer Indians access to new and technologically advanced products. Because hypermarkets combine department stores and supermarkets, they carry product lines that local vendors cannot. They sell brand-name products at affordable prices, thereby enabling Indians to purchase a wide assortment of goods that they otherwise could not have. This shift, from local mom-and-pop stores to more organized retail outlets, is happening very quickly in India. It is embraced by many consumers despite the cultural and legal considerations associated with hypermarkets. Furthermore, because hypermarkets offer potential benefits for both the economy and the national infrastructure, local governments generally support the arrival of a hypermarket. The ultimate target market, however, is not the government but the consumers, and just as in any country at any time, the challenge lies in understanding what those consumers want and how to get it to them.

DISCUSSION QUESTIONS

1. How might a hypermarket located in India appeal to consumers and orient them to shopping in larger stores?

2. Is the Indian government’s willingness to spend $500 billion to improve the nation’s infrastructure good news for international retailers? Why or why not?

3. Identify the main changes that mark Indian consumers. How can international retailers learn more about India’s youthful demographic?