Billionaire Adi Godrej said his company, India’s second-largest consumer goods maker by value, will still depend on small retailers for sales 10 years after foreign companies such as Wal-Mart Stores Inc. (WMT:US) open outlets.
Department chains buy just 6 percent of Godrej Consumer Products Ltd. (GCPL)’s Cinthol soaps and Good Knight mosquito repellents, Godrej said. India in September allowed multi-brand retailers such as Wal-Mart and Tesco Plc to invest 51 percent in Indian ventures. The nation’s parliament last week endorsed the plan that the opposition Bharatiya Janata Party said will put the so-called mom & pop shops out of business.
Restrictions on store locations and investment rules will mean sales to large chains may account for about 20 percent of Godrej Consumer’s revenue after a decade, the company’s chairman said. Small grocery stores, known as kirana, which often sell goods on credit, villagers hawking products on carts and small town shops will account for 90 percent of the second-most populous nation’s 47-trillion-rupee ($863 billion) retail market by 2017, according to a business chamber report.
“Traditional retail will, five or 10 years from now, still form the bulk of assets,” Godrej said in an interview in his office in Mumbai. “There are many points of competitiveness that traditional retail has in India, especially since they give credit to neighboring customers. Service, convenience are other factors.”
Godrej Consumer’s sales rose 32 percent to 48.6 billion rupees in the year ended March 31. The company’s shares have risen 88 percent this year making it the second-best performing stock in the 190-company Bloomberg World Asia Pacific Consumer Non Cyclical Index. (BPRCNCY) They rose 1.4 percent to 723 rupees in Mumbai.
Wal-Mart, Tesco and Indian companies including billionaire Mukesh Ambani’s Reliance Retail may have sales of 4.8 trillion rupees by 2017, according to the October report by the Associated Chambers of Commerce & Industry of India, or Assocham, and Yes Bank Ltd. (YES)
“Traditional retail is flourishing for manufacturers,” said Kumar Rajagopalan, chief executive officer for the Retailers Association of India. Small stores “take care of specialized needs of consumers. Not all the large retailers can do this. The concept of personalization is predominantly Indian in nature.”
Punit Mandle, the owner of Bengal Store in New Delhi’s Gole Market, said he allows customers to pay as late as three days and takes orders over the phone for home deliveries.
‘Why Go Far?’
“If you run out of sugar or salt at home, you won’t go to a mall,” said Mandle in his 10 feet by 12 feet store. “You’ll waste time, and if you get salt close to your house, why would you go far?”
Overseas retailers, which have been allowed to own a 51 percent in local ventures, will not be able to sell products online. Foreign companies will also be required to invest a minimum of $100 million, with half being used to build facilities such as manufacturing, distribution and warehouses within the first three years of their foray, India’s Department of Industrial Policy & Promotion said in September.
In China, where foreign retailers can own 100 percent of their local units, Wal-Mart had 384 stores as of Oct. 31, according to the company’s website. Indonesia, Thailand and Russia also allow 100 percent foreign ownership, according to Assocham’s report.
Stores will be permitted in states where the local government gives its consent and in cities with a population of more than 1 million people. In areas where there are no such towns, the local government may choose which areas the stores may be set up in, according to the statement.
The restrictions weren’t enough for the opposition lawmakers who repeated arguments that the policy would throw small shopkeepers out of work, further impoverish farmers and hurt consumers.
“You would eventually have stores owned by the Americans, the French and the British selling Chinese products,” Arun Jaitley, leader of the BJP in the upper house said in his speech in Parliament on Dec. 6. India “would become a nation of sales boys and sales girls. The manufacturing sector will collapse.”
Large retailers may prompt Godrej Consumer, part of a group that was established in 1897, to cut prices narrowing the company’s margins, Godrej said. Earnings margin before interest, taxes, depreciation and amortization widened to 18 percent in the year ended March.
That compares with 14.95 percent margin at Hindustan Unilever Ltd. (HUVR), India’s largest maker of household products.
Modern retailers “tend to have a better bargaining leverage with manufacturers and marketers as opposed to the small mom-and-pop stores,” said Godrej, who’s also the president of the Confederation of Indian Industries, the nation’s biggest business lobbying group.
The government and the nation’s central bank have said foreign investment in multibrand retail could help bring down food prices, a major driver of inflation that’s the highest among the largest emerging economies. Investment in cold storage and warehouses may reduce the wastage of fruits and vegetables, 35 percent of which rots before reaching the market, and food grains of which 10 percent are wasted, as per government estimates.
“While it may not be the best thing for us, the benefit we would get -- because the Indian economy would benefit -- would be more than what we would lose out in terms of our bargaining ability,” Godrej said.
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