India Feels the Credit Crunch
With Diwali celebrations at an end, and still no sign of an end to the slump in India's economy, Western retailers in the sub-continent are feeling understandably uneasy. A stock market collapse, double-digit inflation, and expectation of a housing slump look dangerously close to tipping India's retail sector from boom to bust. No wonder that the festival of lights failed to lift the gloom settling over the sub-continent's economy.
'Everyone in this business has turned cautious', says Kishore Biyani, the chief executive of Future Group, India's biggest retailer. 'People are down-trading from expensive brands.'
Impact on Western Retailers in India
Industry forecasts had predicted that India's £175 billion retail market would double in the next seven years. The flurry of deals being cut with some of the West's biggest retailers has been matched by an influx of dollar millionaires into the sub-continent within the last decade.
Now experts are saying that Western retailers are likely to suffer hard from the downturn in the Indian economy. Many companies have proved unable to predict the Indian market, and this inadequacy will be compounded by the unexpected financial slump.
Western companies have traditionally faced difficulties in bypassing the regulatory hurdles built into the Indian third-world infrastructure. India's fragile coalition government is still bound to appease the Marxist elements on which it relies, and faces criticism when seen to be overly economically liberal. The red tape around foreign companies accessing the Indian market is still phenomenal, and foreign retail companies are not allowed to operate their own retail chains. Wholesale is allowed, but retail is not.
Tesco's wary approach to the sub-continent has been held up as a model for bypassing the country's stringent regulations. In August 2008 Tesco made its move into India, through setting up deals with the owners of India's 'kiranas', or small shops. These family-run shops still dominate the country's groceries trade. In many respects, Tesco's 'backdoor' entry into India mirrors that of Unilever, who launched Project Shakti in 2002 - an initiative to convince rural women to use its cleaning products. The company now has 30,000 brand "ambassadors" in villages spreading the word about Unilever's products.
Many Western companies, however, have proved disastrously unfamiliar with the habits of the average Indian shopper. A popular approach for Western food retailers - including Walmart, the largest retailer in the world - has been to open a chain of large retail stores or hypermarkets. This has proved a misguided move, seeing as most people in India don't own a fridge to warrant buying food in bulk.
‘Nobody has got the model right in India’, says Abheek Singhi, of Boston Consulting Group. ‘India is a very homogenous market. Modern retail is about homogeneity. This may take generations to change.’
It was thought that India's economy, largely insulated and less dependent upon the US markets than China, would be strong enough to weather the sub-prime crisis. But with the country's main stock index tumbling to a three-year low in October 2008, taking its losses in the year to more than 50 percent, dreams of India playing the part of an unaffected shelter from the credit crisis are over.
Western retailers had looked to a rising Indian middle classes, who could be convinced to change their shopping habits, and help to modernize the sub-continent's retail economy. Now, they will have to fight hard against their Indian company competitors to lure in the Indian consumer.
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