OUTLOOK POSITIVE FOR ORGANIZED RETAIL IN INDIA

UNCLAS SECTION 01 OF 03 NEW DELHI 004801

SIPDIS

SENSITIVE
SIPDIS

STATE PASS TO USTR
USDA PASS FAS/OCRA/HIGGISTON

E.O. 12958: N/A
TAGS: BTIO EAGR ECON EINV ETRD IN
SUBJECT: OUTLOOK POSITIVE FOR ORGANIZED RETAIL IN INDIA

NEW DELHI 00004801 001.2 OF 003



1. (SBU) Summary: Despite a series of protests and a lack of
political support for corporate retailers in a number of states, the
corporations themselves, as well as industry groups, analysts, and
government officials, remain optimistic that organized retail will
grow and thrive in India. Spencer's and Pantaloon Retail indicated
that recent turmoil has not caused them to abandon their ambitious
plans, but they and others are revising their strategies to ensure
that small retailers and middlemen have a stake in the growth of
organized retail. The degree of policy tumult occasioned by the new
Mayawati government in Uttar Pradesh, India's most populous state
and an object of desire for every major retail player, has surprised
many in the sector. However, most believe the state will eventually
accept organized retail. All of Econoff's contacts felt FDI in
multi-brand retail would come within a few years, and several
mentioned that foreign companies should expect to meet resistance
when they enter the Indian market. Post recommends for U.S.
companies an entry strategy that focuses on inclusive growth, as
well as a capacity to tolerate the inevitable protests. End
summary.

A WIN-WIN-WIN SITUATION
---


2. (SBU) In Econoff's discussions with corporations, industry
groups, and government agencies, and a clear consensus emerged that
there are simply too many positives to organized retail for
political opposition to impede its growth for very long. Besides
the corporate retailers, three key stakeholders--consumers, farmers,
and governments--are likely to reap tremendous rewards from
organized retail. The consumer will get better prices, more
variety, and a more comfortable shopping environment. Most sources
agreed that India's millions of farmers will get a better return on
their crops when organized retailers purchase directly and develop a
modern supply chain, increasing their share of the final 'retail
rupee' from the current 35 or 40 percent claimed in a recent report
by policy-advisory company CRISIL closer to the 65 percent farmers
get in countries with higher penetration of organized retail.
Ministry of Agriculture Joint Secretary for Marketing U. K. S.
Chauhan finds a confluence of corporate and GOI goals here, as the
GOI is exploring ways to improve farmers' incomes and reduce food
costs for consumers. Further, as Spencer's Zonal Merchandizing Head
Pramod Kumar explained, governments gain from organized retail
because corporations pay their taxes, whereas many small retailers
do not claim their true incomes and thus produce less tax revenue.


3. (SBU) Despite this, organized retailers have garnered little
support from the central government and the governments of Uttar
Pradesh (UP),West Bengal, Madhya Pradesh, and other states.
Chauhan said plainly that the Agriculture Ministry is "keen on
organized retail," and Anindya Acharya, Deputy Director of the
Confederation of Indian Industry (CII),said that Commerce Minister
Kamal Nath is equally supportive. With the specter of mid-term
elections on the horizon, though, political parties are risk-averse.
Politicians are more concerned with the votes they can get from the
unorganized sector than with sound economic planning. Prudent
decisions on sensitive policy issues, all sources agreed, will have
to wait for more stable times.


4. (SBU) What makes organized retail such a sensitive issue is the
political influence of the middlemen in the traditional agri-retail
supply chain, said Chauhan, admitting that middlemen have valid
concerns. As for small retailers, early findings from a report by
the Indian Council on Research for International Economic Relations
show that organized retail is unlikely to negatively affect them.
Said Mayur Toshniwal, Vice President for North India of Pantaloon
Retail, "We can't compete with local vendors," because the nation's
12 million mom-and-pop shops offer convenient locations, delivery
options, a level of personal interaction, and occasional credit that
organized retailers cannot match. Chavi Hemanth, Senior Assistant
Director of the Federation of Indian Chambers of Commerce and
Industry (FICCI),added that many Indians enjoy the traditional
shopping experience and guessed that at most, only one in 20 small
retailers would go out of business because of competition with
corporate players.

THE WORST HAS PASSED
---


5. (SBU) Both Pantaloon and Spencer's conveyed the sense that they
had weathered the storm, after numerous protests against organized

NEW DELHI 00004801 002.2 OF 003


retail in the past few months. FICCI's Hemanth said the protests
had already reached their peak, and Spencer's General Manager of
Operations Tarun Arora mentioned that an October 10 demonstration in
Mumbai won only a fraction of the 50,000 to 100,000 participants
that organizers had projected, with farmers and small retailers
staying away.


6. (SBU) Almost everyone with whom Econoff spoke also remarked on
the similarity between the recent protests against organized retail
and past unrest when the GOI liberalized the insurance, print-media,
and other sectors. Toshniwal called such protests "a generic
problem of democracy," commenting that they are part and parcel of
doing business in India and that they rarely have a lasting effect.

FOCUS ON INCLUSIVE GROWTH
---


7. (SBU) Still, Purnendu Kumar, Associate Director of Technopak
Advisors--a consultancy firm working with Wal-Mart, Reliance, the
Aditya Birla Group, Shopper's Stop, Mahindra Retail, and
others--acknowledged that there is enough opposition to organized
retail to persuade companies to adjust their strategies. Technopak
is advising clients to consider how they can involve supply-chain
middlemen and small retailers in their growth. Kumar suggested
employing traders as advisors to help with supply consolidation,
something Spencer's two representatives said they have already
begun.


8. (SBU) Chauhan, on the other hand, said, "I don't think we should
bother much" about the middlemen. He argued that they will be
forced to pursue alternative employment anyway as the agri-retail
supply chain improves over time and that companies should focus on
mitigating the impact of organized retail on mom-and-pop stores by
allowing them to operate as franchises or at least purchase from the
big companies' distribution centers. He also recommended that
companies invest in training farmers in modern farming techniques as
well.

THE SPECIAL CASE OF UTTAR PRADESH
---


9. (SBU) The mention of UP evoked laughter and head-shaking from
more than one source and anguish from others. Pantaloon's Toshniwal
said that he expected problems in Kerala and to some extent in West
Bengal, where Left governments are in power, but the political
upheaval in UP came as a surprise. He referred to August 23, the
day UP Chief Minister Mayawati ordered all stand-alone retail
outlets in the state to close their doors, as "a black day for the
industry."


10. (SBU) When Mayawati issued her closure order, she also convened
a committee to analyze the potential impact of organized retail in
the state and gave a one-month deadline for the committee's report.
Technopak's Kumar believes that the report will never come, that
Mayawati was never committed to a sincere analysis. The press has,
by and large, ignored the issue of the overdue report, but business
daily The Mint indicated on October 22 that the committee had met
just once since August 23, had not scheduled a second meeting, and
would not commit to a date for the final report.


11. (SBU) Despite the lingering uncertainty, organized retailers
anticipate good returns on their investment in UP. Mayawati
recently announced that she has decided in principle to impose the
Value Added Tax (VAT) that is already in place in every other state,
and Spencer's Kumar thinks this will make all the difference. If UP
implements the VAT over expected protests from traders' unions,
Kumar believes that Mayawati will quickly realize the enormous
income UP could get from organized retailers and will put in place
more retail-friendly policies, opening the door to the most populous
state in India.

RELIANCE SEEN AS A BRUTE AND A BELLWETHER
---


12. (SBU) Reliance seems to come up in any conversation about retail
these days, as almost all of Econoff's contacts mentioned the
indigenous giant, most in a grudgingly admiring way. Toshniwal said
that the Reliance conglomerate has a history of targeting and
knocking out small competitors and entered into grocery retail with
the same designs. He felt Reliance opened with far too much fanfare

NEW DELHI 00004801 003.2 OF 003


and advertised prices that small retailers would find "predatory."
He said that Pantaloon, by contrast, was not trying to acquire
existing market share, but striving to expand the market. Chauhan
found Reliance's entry strategy flawed, in that they opened stores
before developing relationships with farmers or initiating any of
the supply-chain improvements that would yield higher market
realization for them.


13. (SBU) In UP, Reliance has fired nearly 1000 workers and plans to
terminate all of its leases. Yet Hemanth described Reliance's
firings as tactical, a move intended to communicate to the
government that a policy unfriendly to modern retail was
unacceptable and would preclude employment options.

FDI: JUST A QUESTION OF WHEN AND HOW
---


14. (SBU) All sources concurred that the Center will allow FDI in
multi-brand retail within five years, but the exact timing is
uncertain. Hemanth does not expect it in the next two years, except
perhaps for non-sensitive goods like sports equipment and consumer
electronics. Purnendu Kumar said that whenever the next government
comes into power, it will permit FDI in multi-brand retail.


15. (SBU) Hemanth emphasized to Econoff that any new policy allowing
FDI will come with riders, such as limits on the locations of
outlets and on the number a company can have in a given area.
Shrivastava said that the government should and probably will
require international players to procure a certain percentage of
their merchandise locally.


16. (SBU) Nearly all of Econoff's sources were optimistic about what
FDI will do for multi-brand retail. Spencer's Arora and Kumar
expressed their support, saying that foreign players will bring in
new technology, best practices, and, most importantly, new
strategies for increasing consumer spending. Arora estimated that
the Indian market can easily support 10 to 15 large players.
Technopak's Kumar predicted that the four major Indian retailers
down the road will be Reliance, the Aditya Birla Group, Pantaloon,
and Spencer's, and he thought that they would coexist comfortably
with Tesco, Wal-Mart, and other foreign companies, although he
speculated that Spencer's and Pantaloon might sell out.

COMMENT: TRY FOR A RIPPLE, BRACE FOR A WAVE
---


17. (SBU) India's billion consumers, by and large, do not need
convincing that more options and better prices are in their
interest, and as Purnendu Kumar noted, most Indians do not care
whether they shop at an Indian or foreign-owned store. Companies
should first emphasize the benefits they can offer to farmers and
others who stand to gain from improvements in agri-retail
infrastructure. As Hemanth put it, the most persuasive case for
organized retail is that it improves GDP, increases employment
opportunities, and reduces the urban-rural divide. Once stores are
up and running, retailers who have met fairly little resistance,
such as Spencer's and the Aditya Birla Group, have sought
differentiation through product variety and quality rather than
through price, which small retailers seem to see as less
threatening.


18. (SBU) Regardless of how quiet entry might be, however, U.S.
companies should expect some resistance, which is a cost of doing
business in India. Toshniwal said that based on his experience
working in the U.S. office of Coca-Cola, he thinks American
companies are oversensitive and need to recognize that things work a
little differently in India. U.S. companies that agree to the terms
of the Indian experience will have the best chance of establishing
themselves quickly once the GOI approves FDI. End comment.

MULFORD