Feasibility of Foreign Retail Firms Entering India - Case Study Example

Country Report: India – Feasibility of Foreign Retail firms entering India Introduction Organizations or firms cannot remain “static”. They has to keep on moving breaking ‘boundaries’ both geographically as well as economically, to actualize the opportunities and emerge successful. That is, with every firms wanting to expand their geographical reach and make an imprint in various markets, there will be enough opportunities for it, to initiate an entry into a foreign market. To initiate and actualize the entry, firms have to set targets and formulate various strategies according to the situation prevailing in those foreign markets. While formulating the strategies, the organizations’ leader and the management team will firstly look at the factors that may aid them to make a successful entry. After analyzing the positive factors, the firms will or should have to analyze the challenges that may impede its entry. As every foreign market or country will have different political, social, economic and legal conditions as well as different customers, competitors, prospective employees, etc, etc, there will be many challenges, which will block the firms’ success. Also, there will be country specific challenges as well as industry specific challenges in those foreign markets. For example, the Asian country of India has some distinct aspects, which will surely act as an advantage as well as a challenge for the new firms, who are planning to enter it. Likewise, the retail industry in India also has some inbuilt favourable factors as well as impediments particularly in the political, social, legal and economic spheres, which may facilitate or impede foreign invested retail firms’ entry. This paper will analyse India and the opportunities and risks, it presents for the retail firms. Background Globalization is having major impacts on the economic sphere of many developing countries like India, working as a catalyst for the economic development. Globalization turned out to be a godsend opportunity to these countries. That is, these countries opened up their markets and invited the foreign companies with a slew of schemes and benefits. India has also become part of global plans of many organizations mainly due to globalization. That is, when globalization or liberation made its entry into in early 1990’s, it opened the door for foreign companies including retail firms (but with caps) to reach India, benefiting both the Indian people and the companies. India has been pursuing the Mode 1 globalization strategy since the economic reforms began under P.V. Narasimha Rao and Manmohan Singh in 1991. Despite several changes of government and difficulties in implementation, the essential aspects of this international economic strategy have been maintained (Sen 2000). Opportunities Political and Legal In any country all over the world, their respective governments with their set of laws will only have a strong hold on the processes involving the entry of foreign firms, and India’s government is no exception. Although, legal channels or judiciary is an independent entity in India, it follows as well as justifies only the rules and the laws formulated by the political government at the centre. All foreign firms entering India will normally look for government laws and policies about foreign entry and avoid directly approaching the judiciary or try legal options. “The result is that, from a business perspective, the Indian courts are used more as a means of achieving interim results rather than definitive decisions.” (Parsons and Patel 2009). Most companies will go to court in matters of injunctions but otherwise will avoid them wherever possible. This is because the courts in India will maximally listen to the political government’s views in deciding on matters, particularly regarding foreign investments. So, political laws and policies are one and the same as the legal processes. When viewed from the perspective of foreign retail firms, this year’s resounding election victory of the Congress party and the re-election of liberalization initiator, Manmohan Singh as the Prime Minister augurs well. As mentioned above, it was Manmohan Singh who in 1991 as the Finance Minister opened up the Indian market in various sectors to the foreign firms and so his re-election that too without the support of Communists, who are anti-foreign investment party, is important political opportunity. “Recent political developments have raised hopes that restrictions on foreign retail players may be eased. The strong showing of the Congress-led political alliance in national elections meant the Government, led by Prime Minister Manmohan Singh, no longer needed the support of communist parties for its survival.” (Wade 2009). The other favourable action in the political sphere is the release of the Government prepared economic blueprint called the Economic Survey of India, which recommended easing of restrictions on foreign firms’ entry. This survey prepared by the Economic planning commission under the auspices of the Indian government’s Finance ministry and fully endorsed by the current Finance Minister Pranab Mukherjee, recommends that foreign investment restrictions on India’s retail sector should be eased, especially in the food sector. If it goes ahead, this change could create great opportunities for retailers worldwide including Australian retailers in one of the world’s biggest markets. (Wade 2009). Political opportunities also came in the form of the influencing act of US Secretary of State, Hilary Clinton. It was rumoured that she might have raised the issue of opening up of the Indian retail market with the Indian ministers and officials during August 2009 visit. Political influence is also brought on by the world’s number one retailer. “There are further hopes from the political arena that the government was easing its grip on the retail sector were raised when John Menzer, president and chief executive of Wal-Mart International of the US, met Manmohan Singh.” (The Economist Intelligence Unit Limited 2005). The other decision of the government which provides further political opportunities for the retail firms planning to enter India is the decision of the Foreign Investment Promotion Board under the auspices of the Finance ministry. That is, the Foreign Investment Promotion Board in recent months has become less rigid in the issue of granting approvals for foreign companies which plans to do cash-and-carry wholesaling. (The Economist Intelligence Unit Limited 2005). The existing stance of allowing only single brand retailers and franchises can be diluted and FDI in retail would be opened up in a calibrated manner. “As of now single brand retailers operate through the franchisee route and there is a strong view that FDI in this segment would not displace jobs or displace local industry but help create employment” (blonnet.com). So, this decision of the Board to grant more approvals for cash-and-carry wholesaling is a complementary and a welcome development for the foreign retail firms in the political sphere. . Social-cultural India in the post-globalization era (that is, after 1991) is witnessing an all round development, showing advancement in many aspects of life. So, with India forming an important part of globalization, the standard of living has increased to good measure. With Information technology reaching different corners of the country and many youth getting placed in various IT majors, the purchasing power of the target segment of 18-35 have increased very much. That is, India being a large country with its population on the higher side and the economy also developing due to the IT boom, a large proportion of people have come inside the bracket of high range buyers. “A democracy of more than 1 billion people, many profiting from a reformed economy, India is turning itself into a primary player in the global marketplace” (Time.com, 2006). That is, from the days when the median monthly income stood at $60 now it is reaching around $125 – as India has a large population of people living under the poverty line, $125 is the median salary of whole of India. This increase in median salary among the target segment will augur well for the success of foreign retail firms planning to enter India. The target segment of professionals, business people and youths of India, like any where else in the world, see the habit of buying from retail chains as one of the important part of their lifestyles. “About 47% of Indias population is under the age of 20; and this will increase to 55% by 2015. This young population, which is technology-savvy, watch more than 50 TV satellite channels, and display the highest propensity to spend, will immensely contribute to the growth of the retail sector in the country.” (rbs.edu.in). Their financial resources and their mindset to go for new products from retail chains for practical purposes is also a crucial factor. In earlier times, Indian people will approach the local grocery shops where they will stand in front of the retail stores, even without entering it, and ask and buy products with the salespeople providing each and every product. This culture of buying products in retail has many inconveniences like delay in getting the product where there is a sizeable crowd, not getting the product he/she intended to get, also personal touch will be missing, as they cannot touch, feel, analyse, read and then buy the product. This culture based inconveniences got erased when local supermarkets made their entry and even changed or reoriented the buying culture of the many people. That is, their entry and services made many people to opt and wish for retail stores instead of local grocery shops and this culture can be fully optimized by the foreign retail firms entering India. Also, with the local socio-cultural conditions contributing to the deterioration in the quality of the products, the scope for the entry of foreign firms with quality products increases. That is, as stated by Pinakiranjan Mishra, a retail analyst with Ernst & Young. ‘‘We don’t have refrigerated warehouses, we don’t have refrigerated trucks. There is a great need for investment in the supply chain and other areas of retail. I think everyone knows more foreign investment is required; they understand domestic sources will not be enough.’’ (Wade 2009). This factor would also work as an opportunity for the foreign retails firms to make a strong impression in the Indian market. So, it is clear that sizeable sections of the population equipped with higher income, credit cards, exposure to new shopping culture of west, desire to show status and to improve standard of living, wants to spend a lot and this gives good opportunities to foreign retail firms. (articlesbase.com 2009). Economic All economic projections for India, particularly for the foreign firms wishing to operate in the retail sector, appear very rosy, promising and productive. Indian Economy including the Indian retail industry is expected to grow manifold and can productively accommodate foreign firms as well. Merrill Lynch, the well known financial management and advisory firm, expects the Indian retail industry to grow to US$300bn by 2010. (The Economist Intelligence Unit Limited 2005). Merrill Lynch also believes that along with the indigenous organised sector, there is enough space for the foreign firms to tap the unexplored sections. One way for the government to do this is to open up organized retail to foreign direct investment (FDI).There is huge scope for specialists to revolutionize retail in India as only 1.5 per cent of all food and grocery sales in India take place in Western-style supermarkets. (Wade 2009). Even during current global economic downturn, retail sector in India is showing positive growth as it is growing at a yearly rate of about 15 per cent, giving the foreign firms good economic opportunity to invest in India. “The financial crisis in the West may create a huge economic opportunity for emerging markets such as India, said Raghuram Rajan, Eric J. Gleacher Distinguished Professor of Finance and special advisor to the prime minister of India.” (chicagobooth.edu). Also, India is a member of the World Trade Organization and as a policy, India has to abide by the rules and regulations of the WTO. WTO has been putting pressure on the Indian government to open up many sectors and retail in particular. This is one of the reasons why the present government is acting favourably towards opening up of the retail sector. Hence foreign retail firms can get its way cleared in its attempt to enter India. The entry of foreign competition not only provides economic benefits to the foreign firms but also to the locals. That is, from the economic perspective, the entry of foreign firms in retail could lead to lower prices, resulting in high consumer spending and also an improvement in the tax receipts for the government. “The McKinsey institute reckons that economies of scale and superior operations will allow modern stores such as hypermarkets to be 35-40% cheaper than traditional stores, and this in turn will increase consumer spend. Employment will also get a boost.” (The Economist Intelligence Unit Limited 2005). Also, as the foreign retail firms utilizes and develops local small-scale manufacturers as well as India’s largest sector of agriculture, paths for the entry of the foreign firms could be laid quickly and aptly. From another economic perspective, with the cost of the labour also in the lower ranges, the foreign retail firms will not have to spend a lot while constructing or establishing the infrastructures. Likewise, the cost of hiring and retaining the employees will be also on the lower side. Risks Political and legal Foreign retail firms has to exercise caution with regard to the slightly unfavourable political situation in India. Although, the present government does have a full majority in the parliament, it has to be supported by some key regional allies like the DMK and the Trinamool Congress, both of which have anti-liberalization leanings. “Indias new administration wants to spur growth, but …The Congress partys victory was rooted in a delicate balance of populism and free marketeering, and its two largest coalition partners — the Trinamool Congress and the Dravida Munnetra Kazhagam — have voiced their opposition to some aspects of liberalization.” (Associated Press 2009). Also, the opposition parties like the BJP and the anti-liberalization Communist party have very strong views against the entry of foreign retail firms into India. “The leftist parties believe permitting FDI in retail trade will destroy employment (in the kirana stores) and create retail monopolies” (The Economist Intelligence Unit Limited 2005). Thus, it will be a risky proposition for the foreign firms to plan an entry into India, when the main ruling party will not be able to support it and importantly the main opposition parties are totally against it. According to the current government policies and the existing legal laws in India, foreign firms including retail firms are not permitted into Indian retail trade except for single-brand product retailers (that too with a 51 per cent cap), who can sell only their own products. The other ways foreign firms can enter is by dealing through Franchises, wholesale and in partnership with Indian companies, other than these options direct entry or direct FDI is prohibited. Even the slight relaxation in the rules for bringing in foreign partners or capital was revoked quickly and there would not be major opportunities for the retail firms to enter India. “The government plans to expressly clarify that foreign direct investment (FDI) in multi-brand retail is no-go territory, dashing the hopes of Indian retailers expecting that the new rules announced earlier this year would allow them to bring in overseas partners and capital.” (Prasad 2009). The political government and its affiliations of Commerce and Industry ministry clearly wants to make sure that the liberalized FDI policies does not directly or indirectly (or unintentionally) lead to the opening up of the restricted multi-product retail sector. Apart from blocking the multi-product route or option, the agencies like parliamentary panel has recommended stopping the issuance of further licenses for ‘cash-and-carry’. They do not want to issue the cash and carry licences either to the trans-national retailers or to a combination of transnational retailers and the Indian partner, as they think it has a mere camouflage for doing retail trade through back door. (Mehra and Bailay 2009). Along with the political government, many of the government machineries are also against the entry of the foreign retail firms. These government machineries only take care of all the official, legal, logistical processes involving the foreign firms and their attitudes also decides whether firms can make a entry or not. “The nations bureaucracy is as entrenched as ever, and many remain skeptical of globalization — especially after witnessing the havoc of the U.S.-spawned credit crisis.” (Associated Press 2009). So, with the political government as well as its machineries not showing any intent to aid the entry and instead blocking all the entry routes, it would be risky for a foreign firm to plan an entry into India and form a visible presence there. Economic The economic aspects which could impede the entry of foreign firms are mainly related to the financial losses that could happen when the retail firms suffer delays in completing the project due to official or social bottlenecks. Even after getting the permission to enter, it will not be a smooth sailing for the foreign firms. As the bureaucratic and the regulatory bodies are financially corrupt in nature, they would put a lot of obstacles for the firms until they are paid the corruption amount. “US Treasury secretary Paul H O’Neill has described India as one of the “most restrictive” economies in the world riddled with corruption and bribery, frightening away businessmen and investors.” (financialexpress.com). This economic aspect of corruption and the related obstacles could be a major risk for the foreign firms because apart from spending extra illegal money, they could be caught by the law enforcement agencies or even cheated by the authorities by not giving the necessary clearances even after getting the money. The other economic aspect, which is also related to the socio-cultural issues, is the economic damage that could be incurred on the infrastructures of the foreign firms when there are violent opposition against these firms. That is, if the local population feels that the foreign retail firm is ‘poaching’ on the local businesses and destroying their livelihood or feels that it is disturbing the local environs, etc, etc, they could indulge in violent demonstrations, even vandalizing the firms’ infrastructure, shutting it down, thereby causing financial losses. Social-cultural The people of India have welcomed with open arms the firms who entered India as a result of globalization, but only as long as they feel they are not a threat to their businesses. FDI in retail is a very sensitive issue as there is a feeling among the people that retail companies like Wal-Mart can displace the local players and also render millions jobless. There is a large presence of the local retail shops known as the Kirana shops and it gives employment to millions of people. Big foreign retail players, according to the local public, can cause havoc to the local businesses as well as the families of people who depend on this for their bread and butter. “Three important forces playing out in India today are rising inequality, demographics, and the labor force, Rajan said. Inequality is increasing between the rich and poor, urban and rural areas, states, and various communities. The rise of inequality is important because inequality is a source of conflict and breeds opposition to economic reforms, Rajan said.” (chicagobooth.edu). There were cases of public opposition to some of the retail foreign brands that have already come up in the country. There was opposition to even the indigenous larger retail firms. “Local firms that have introduced small-scale, Western-style supermarkets in the past have met with strong resistance in some areas from India’s politically powerful "mum and dad" corner-store owners.” (Wade 2009). So as a matter of fact when multinational retail firms plan to enter India, they should do the initial screening of the environment effectively to find a location where there will be minimal opposition apart from being a prospective place. The big socio-cultural concern of the local people, which could lead to opposition and then risks for the foreign firms is related to the sidelining of the customers welfare. The foreign retail giants by adopting predatory pricing policies would fix lower price initially, tempting the customers, and then after wiping the competition from local retailers, they would be in a monopolistic position and would be able to diktat the retail prices. (ourworldisnotforsale.org 2009). All these socio-cultural issues could act against the foreign firms causing a lot of risks Conclusion or the decision After having analysed all the pros and cons of entering India, the odds are in the favour of foreign retail firms entering India and so India needs to be further analysed by the team for its market potential. The current political government has given some feasible options for the foreign firms to enter and even the restrictions could be relaxed due to the presence of a single majority pro-liberalization government. With economy booming and being the country with the second highest population or prospective customers who want the retail store culture, India will be a good option for entry. India’s retail industry has a lot of potential and this can be tapped by the foreign firms. 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