Can Western Multi-Brand Retail Giants Prosper in India?

It has been 20 years since India reversed its statist focus in favour of an open-market approach. The move from post-independence socialism to a unique form of market economy is surely one of the great economic success stories of the last two decades. From the IP perspective, the relationship between brands and modes of distribution is one aspect of this ongoing economic story. In that connection, an article that appeared in the April 16th issue of The Economist ("Send for the Supermarketers") attracted my attention.

It is well known that retailing in India is still woefully underdeveloped. Anyone who has been there can testify to the seemingly endless number of small shops (so-called kirana shops) that dot the Indian landscape. In part, such shops are tolerated because they are seen as providing a vital source of economic opportunity for a large number of potential small businesses, and the Indian regulatory apparatus has traditionally brought its full weight to bear in support of these arrangements. Allow in western-style retailing, it is feared, and yesterday's shopkeeper may find that he is no longer competitive.

All of this concern for social safety-netting comes at a cost for the consumer, who is deprived of the benefits of mass retailing. The result is what the article describes as "the most supermarket-hostile environment among big economies in the world." The difficulties include administrative regulation, poor road and train transportation, cold-water storage facilities, complex taxation and the high-cost real estate in many locations.

One manifestation of this policy in support of kirana shops are a series of regulations that hamper certain categories of foreign retail brands from functioning freely in India. Of course, regulatory restrictions are not new in India and are not limited to the retail structure. There was a time when virtually all foreign direct investment (FDI) was limited to a 49% stake by the foreign owner. The best-known example is the Indian car brand Maruti-Suzuki, which reflected the fact that the Japanese manufacturer could only enter the Indian market in the 1980s with a majority local partner.

Today, however, the focus is on the retail sector, where limitations regarding FDI in multi-supermarket chains are still in place. In particular:

1. There is a ban on FDI by multi-brand supermarket chains. This means that the likes of Walmart and Carrefour are still not permitted to enter at the retail level.

2. Such multi-brand chains can up wholesale warehouses, provided that they do not sell directly to the end customer. As a result, for example, Walmart has entered into a joint venture for the provision of wholesale and logistic services and appears to be seeking further such alliances.

3. In contrast, a single-brand retailer, such as Nike, can own a 51% stake in an Indian retail outlet.

These restrictions raise the issue of just how genuinely international any multi-brand retailing brand can expect to be. Granted, even the most successful product brands may be subject to local variation -- but the difficulty in adjusting to local tastes pales in comparison with adjusting to the demands of operating a successful multi-brand retail operation across different and diverse countries.

Carrefour is an excellent example, as its recent exit from the Russian market shows (for a discussion posted on IP Finance on November 12, 2009, regarding Carrefour's tribulations in Russia, see here.) Success, even retail dominance in one major market, provides absolutely no guarantee of success in any other foreign market. On the other hand, the fact that Carrefour has experienced difficulties in establishing a presence in the Russian market does not seem to have directly affected the overall value of the brand.

Circling back to India, the article describes the growth of a local multi-brand retail company called Pantaloon Retail here. As reported in the article, this company has stores in 73 cities in India and it employs 30,000 employees. It expects to reach revenues of $4 billion next year, which is still a small fraction of the total revenues of a Walmart or Carrefour.

My intuition tells me that Pantaloon Retail has no aspirations outside of India. If so, can Walmart or the like successfully compete with this brand at the local Indian level? More generally, are there limits for even the most successful multi-brand retail company at the trans-national level? Considering the strategic task of developing the house brand for such a retail company, must my focus ultimately be breadth or depth? Or can I reasonably achieve both?

Questions, Questions, questions!