China's retail sector: Evolution and learnings for India

Abstract

The first step was to try and understand the Chinese retail business environment and how the industry has developed over time under the guidance of several government regulations imposed on players in the sector. The opening up of the Chinese retail industry to foreign players followed a very gradual approach with big players being allowed entry initially only in certain cities, districts etc. The Chinese retail industry is extremely fragmented with cut-throat competition. The Chinese consumer is very price sensitive and has strong local tastes and preferences. The local players have been able to capitalize on these two characteristics and able to leverage their JVs with foreign partners to their advantage. The results are clear. Even after years of entry of big foreign players like Wal-Mart and Carrefour, these occupy only the 7th and 8th positions respectively in terms of market share. Local players have been able to use the FDI to improve sourcing capabilities and human resources. A significant portion of this can be attributed to timely and useful government regulations which restricted centralized sourcing by foreign players and also set limits on their initial size. The history of China’s retail post FDI is also seen through the strategies adopted by Wal-Mart and Carrefour and domestic players like Gome and Suning. In the light of the Chinese retail environment, we have tried to focus on the current concerns regarding FDI in retail in India. The Indian consumer, although price-sensitive, is not as locally oriented in terms of preferences as his Chinese counterpart. Distribution and logistics have almost similar issues as China preliberalization. Small domestic players fear they might run out of business if foreign players enter the market. We studied each of these concerns under the light of our study of Chinese retail and after comparing the two countries we have come up with a set of recommendations for opening up the retail sector in India. Overall we believe that opening up of India’s retail sector and allowing 100% FDI is a positive step towards the development of this sector. Drawing from China’s success story, there is a certain model that India can pursue. India too should follow a gradual approach towards opening up the sector, setting up a time frame in which it can decide to fully open up retail to FDI according to a predefined guideline. This will enable certainty in terms of strategies of foreign players and will also help domestic players to adjust to the foreign entry. Initial limits must be set with respect to the store sizes, no. of centers, locations allowed ad goods allowed/encouraged with respect to retail. India could also develop retail network planning teams to prevent clusters of stores being formed in particular areas resulting in neglect of some areas. Initial capital expenditure constraints for foreign players, if imposed, should not be kept at extremely high levels. A floor must be imposed for their investments in infrastructure etc. to enable proper developments to take place in sourcing and training. In conjunction with these rules the government must support infrastructural development, beneficial credit policies for kiranas and help improve the PDS system to make sure that small players are not disadvantaged and to make sure that the benefits of FDI in retail are accrued to the maximum.