What Do Indian Consumers Want?

 

Indian Vegetable Market

As one of my professors said recently in a Global Marketing class, India’s retail FDI situation changes by the week.

One week you think the path for it has been cleared. The next week some regional political party somewhere threatens to withdraw support for the federal government and things look shaky. The following week the federal government miraculously secures support from yet another regional party and it looks like retail FDI is imminent. Its difficult to know for sure what will happen next month, or even next week.

Various special interest groups (read: mostly political parties that instinctively oppose anything that the other side proposes…not too different from the situation in the U.S. today) have been up in arms for various reasons. But before we get into that, there’s a more interesting question that must be asked:

What do Indian consumers want?

Operation Desert Storm in 1991 opened the door for CNN  and Cable TV to take India by storm. 

Over the next two decades, those that are now 25 (and under) were fed a steady diet of Western sitcoms, shows, music and movies. And if you believe that the human consumption lifestyle starts to be shaped starting around age 5 and continues through age 25 (a reasonable assumption?), thanks to India’s assimilation abilities, much of that exposure has been internalized. Nowhere is that internalization more evident today than in this group’s shopping and consumption habits.

As an article in the NYT noted yesterday:

Indians ages 16 to 23 already account for a quarter of the spending on clothing and 16 percent of spending in restaurants in India’s 50 biggest cities, according to Technopak, a research and consulting firm. The young also tend to spend more money in modern retail stores and on foreign brands than their parents, who tend to shop at traditional outlets and buy more Indian products.

This has of course allowed single-brand foreign retailers to flourish across India. But this phenomenon is not limited to urbanized, westernized Tier 1 cities alone. Consumers in so-called Tier 2 and Tier 3 cities exhibit the same behavior.

The NYT article cites a mall in Patna, a non Tier-1 city:

Patna, in particular, is seen as a shining example of a newly resurgent Indian heartland. Bihar, one of India’s poorest states, had long languished under incompetent and corrupt leaders. But over the last seven years, a new administration has brought the state’s crime rate under control, built new roads and improved school enrollment, allowing the economy to recover.

The P&M mall, owned by a prominent Bihari film director and producer, Prakash Jha, is a prime example of the city’s renaissance. Though small at 225,000 square feet by the standards of most malls in the United States, or even in Mumbai, many city residents say they look at it and the foreign-brand stores in it like Puma and Nike with pride. On any given afternoon, the mall is filled with college students, families and seniors.

P&M Mall Patna India

So, philosophical considerations about consumption-led growth aside, this has some interesting implications for foreign brands both today and over the next few decades.

Today’s households make weekly or twice a month trips to large chains like Big Bazaar which already sell goods and products from different brands (domestic only or domestic and foreign?). Tomorrow’s households, established by the 25 and under population today, will most likely want the same experience – but with a much higher propensity to spend on foreign brands.

And that’s where multi-brand foreign retailers will be able to offer them the right mix of foreign and domestic  brands, along with quality, variety and price, all under the same roof (not convenience though – since these large format stores bring with them a need for driving, parking, time – which may only work for certain population segments). They will be able to do that better than large domestic retailers – but only in the beginning – thanks to “imported” best practices, logistics and supply chain systems. Within 10 to 15 years of retailers like Walmart selling directly to consumers, because of spillover and learning effects, large domestic chains will have the same capabilities (they are already do, to some extent today). It is not inconceivable that one day retailers like Big Bazaar may make inroads abroad – just like other Indian companies such as Bharti and Tata. 

But I digress. 

Net-net, I think that Indian consumers, with increasing lifetime spend abilities, are ready and want to embrace multi-brand retailers – both foreign ones and domestic ones – with open arms and their rupees. 

Farmers vs Traders/Middlemen

The other larger, macroeconomic issue with letting Walmart, etc., sell directly to Indian consumers is the hand wringing over jobs and other stated losses – specific to letting these foreign companies sell produce and groceries. 

An interesting article from Ravi Aron, a professor at Johns Hopkins University discusses the many benefits from allowing foreign retail chains into India – backed by data from the Confederation of Indian Industry (CII) and the Boston Consulting Group. His discusses the impact on supply chain systems, logistics, the impact on “kirana” or “mom and pop” stores, etc.

Walmart Logo

More interestingly, for me, were his comments on farmers and traders and how foreign retail FDI will impact these two important groups of stakeholders.

Farmers are an impoverished lot across India and farmer suicides are sad and often make the news. Most farmers till small plots of land and are 100% dependent on timely rains for irrigation. When the rain gods look away, the crops die. Farmers then take out loans from loan sharks to survive and get caught up in never ending indebtedness, culminating in suicides and destroyed lives.

One of the problems plaguing India is that middlemen and traders procure produce, rice, pulses, etc. from farmers at very low prices and this loosely organized cartel, Ravi says, will take a big hit: 

The foreign retail chains will have a more significant impact on traders that dominate procurement of commodities and perishables, including grains and cereals. It is not surprising that these traders are the most virulent opponents of FDI in retail… Very often these traders dominate geographies and account for nearly all procurement in their geographies. In many states, the food ministry determines who it will buy from and this is usually a small number of traders who in turn dominate direct procurement from farmers in their geographies. These are economic fiefdoms that they dominate and exploit.

And the benefits to farmers?

The CII-Boston Consulting Group study found that an Indian tomato farmer earns about 30% or even less of the final price paid by the consumer (in developed countries, that percentage can be as much as 70%). For this reason alone, farmers and producers should welcome this development (and for this reason alone, traders oppose it). Indeed, the Indian Farmer and Industrial Alliance (IFIA), a joint venture of the Consortium of Indian Farmers Associations (CIFA), recognized the potential benefits of eliminating middlemen and has expressed its support for opening the retail sector to foreign investment. 

That I think everyone can agree, is for the greater good. Politicians are now promoting this message too.

In summary, with the federal government now telling the 29 states that they have veto power over this decision in their own states, I think that some states will let foreign retailers in. Farmers will benefit, middlemen and their cartels will (hopefully) wither away. States that let these retailers in will see large increases in tax collections and a net gain in jobs. Greed and self-interest will make the holdout states come around, especially because most of them have chronic money problems thanks to never ending populist measures, subsidies and corruption.

In 10 years or so, this whole thing will be a non-issue. 

 

4 Responses to “What Do Indian Consumers Want?”

  1. ERJ says:

    This whole debate is missing two critical things. either of which will ease entry.
    One thing most folks overlook is the flexibility and value of the political entrepreneur. The middleman is just a pawn for the political class. The discussion is all about how the political class can insert itself into the value chain and how much it can squeeze out of it.
    So the guys wanting to come in need to figure out a business model that allows for this and they can come in fast and quick, Ones who doesn’t will suffer. This is going to be a long drawn battle.For, the current structure is well entrenched and breaking it will take persistence.

    Second is a new way of looking at the stores. Imagine a Walmart which is a huge storage area outside a metro/town (basically cheap real estate) and a million store fronts. Providing all the merchandise through “franchised” kirana stores.The real value is all the supply chain efficiencies and sharing a bit of profit with the local store fronts. This will also make opening big box stores in metros easier.

    • ERJ I agree the political class will benefit in the short run but if I were WalMart I would try to figure out how to do this by cutting out the politicians because I want to be in this for the long run and they will figure out that time will be on their side in the long run (or maybe I’m being optimistic :))

      For the stores – yeah, they may eventually move to that model. Their distribution centers and smaller outposts in the cities here are already moving in that direction. But at the same time, I don’t know what the right mix is. Some of the cost savings that make WalMart so attractive to customers here in the US at least come from not having 100 cashiers for 100 stores but just 10 for a mega store. Having said that, in India labor is cheap. Some other costs are not. So they will have to figure out the scale vs convenience factor in India.

  2. Ashok says:

    I agree with ERJ that it is going to be a long battle and it will be a battle of perceptions than something based on hard data or facts.

    The foreign retail chains will do well not to opt for a big bang approach They should make small strategic investments in a domestic chain and slowly expand from there. A big Walmart store opening anywhere is a sure shot temptation for all sundry protesters. But if they invest small, in say Future group retail, increase the number of Big Bazaar stores ( without changing the brand name ). Three years down the line they can buy the majority stake without anybody noticing it and then change the brand name.

    • Ashok, I wonder if their existing Bharti partnership is giving them the learning necessary for the future when they “go it alone”. Other supermarkets like Carrefour/France have grown by acquisition in emerging markets but AFAIK WalMart hasn’t. So whatever stores they come up with in the beginning are going to be pilot stores so they can learn some more…Good point about not having a mega store that is a protest-magnet too early on.

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