The lure of globalisation is almost irresistible. Many companies in the developed world are keen to follow in the wake of corporations such as Boeing, Coca-Cola, DuPont, General Electric, Hewlett-Packard, IBM, Oracle, Unilever and Disney that appear to have succeeded in going global. Globalisation is no panacea, however. Overseas success varies widely and it's often tough to boost profits by investing overseas. A closer look at the grocery retailing industry, for instance, reveals that, with a few exceptions, globalisation's benefits had not accrued to retailers.
In contrast to other industries, grocery retail is still dominated by local players in most countries. International players are almost entirely absent from even the largest retail markets. Every grocery retailer that has ventured overseas has failed as often as it has succeeded. It could be argued that the grocers' failures are due to differences in consumer tastes, particularly for food products. However, companies like Mars, Nestle, Kraft, P&G, Danone and Unilever have succeeded in creating global food brands over many long years, so the unsuccessful attempts must be attributable to other factors.
In emerging markets such as India, only a few chains have large networks of stores. Retailing is usually of a local nature, and the industry is highly fragmented. Consumers perceive foreign retailers to be premium players, not offering the services that local grocers do, such as free delivery, credit and custom packaging. In addition, in many parts of the world, including the otherwise open market of India, laws protect local retailers from foreign competition.
The challenges of doing business in India, especially, are well-documented. In the World Bank's 2014 Ease of Doing Business index, India was placed 134th out of 189 countries, behind even Pakistan and Yemen. Persistent corruption compounds challenges. Foreign investors are influenced as much by fear as by optimism, compelled by the belief that they must invest in India to achieve ambitions, although they know the risks are great and the outcome is highly uncertain.
Let's consider the facts. The accumulated losses of India's top 10 food retailers, who account for about 40 per cent of the organised retail sector's revenue, stood at Rs 13,000 crore in 2013-14 on revenue of around Rs 23,500 crore, according to a May 2014 report by Crisil ratings. The supply chain, too, has its share of problems. The fragmented agri-supply base coupled with an inadequate legal framework make it difficult for retailers and food processors to procure quality produce at competitive costs directly from farmers. The small size of the food processing industry further limits the supply options. Rentals account for 7-7.5 per cent of the total costs for organised retail in India against global benchmarks of less than three per cent. Complex and changeable rules governing foreign direct investment have made it tricky for rich world chains to set up shop.
India's home-grown supermarkets account for only two per cent of food and grocery sales and are struggling to make a profit. Revenues have not kept pace with rising rents. Supermarkets are not a compelling draw in terms of price and service. Most shoppers in India buy dairy products, vegetables and fruit either daily or every two to three days, and conventional trade has a strong hold on these frequent purchases. Even affluent consumers, in general, prefer traditional stores, because they are closer to home, usually open longer and offer credit. Many deliver free of charge. That supermarkets offer a greater variety of groceries than the neighbourhood store is not considered as big a competitive edge as it may seem.
On the whole, it would appear that incentives for foreign investors, while they may or may not have diminished, have certainly not brightened either. Indian retailers would do well to park optimism awhile and focus on reviving growth in key local markets through re-inventing or re-structuring their business or operating models. One way to do this could be to achieve the optimum balance between margins and volumes. The food business is largely what generates the volumes; high margins are derived from consumer durables, apparels and other goods. The trick is for retailers to select the product categories carefully and offer a value proposition that will drive consumer preference for their respective formats. It's easier said than done, but it would be a prudent way forward while the industry hopes for the next winds of globalisation.
Stanley Roth, Senior professor of retailing, Harvard Business School