Woolworths sees fresh hope in India

LOCALS call it the market that never sleeps. Azadpur Mandi in New Delhi  the biggest fruit and vegetable bazaar in Asia  services the vast food requirements of northern India.

Every day more than 5000 trucks descend on it from all over the country laden with produce bound for the capital and other big urban centres in the region. The market's thousands of agents trade more than 100 varieties of fruit and vegetables. Much of it ends up with subzi wallahs, vegetable vendors who trade from pushcarts and plastic sheets on the footpaths. Many offer a door-to-door service.

But the hustle of Azadpur Mandi cannot hide the inefficiencies in India's food distribution system. The smell of rotting vegetables fills the air. In the busy loading bays street urchins compete with stray cows to pick over piles of spoiled produce in search of something edible.

It is estimated that up to 40 per cent of all the fruit and vegetables grown in India rots on the way to market. Analysts blame bad roads, bullock cart transport and an excess of middlemen. Also, there is very little refrigeration along commercial supply chains.

For big retailers such as Australia's Woolworths, India's underdeveloped grocery market must look as juicy as the ripe fruit at Azadpur Mandi.

There is huge scope for specialists in state-of-the-art supply chain management to revolutionise retail in India. Only 1.5 per cent of all food and grocery sales take place in Western-style supermarkets. But opportunity goes way beyond groceries; only about 5 per cent of all retail purchases are made at modern outlets like shopping malls.

Woolworths has a foothold in this country of 1.15 billion people, but tight restrictions on the entry of foreign players have kept global retail behemoths at bay.

Foreign direct investment is not permitted in the retail trade except for single-brand product retailers, where there is a 51 per cent cap. This has allowed firms such as Nike, Sony and Marks & Spencer to open stores as long as they sell only their own products.

Multi-brand retailers such as Woolworths are banned from direct investment, although they are allowed to operate in wholesale. It is here that Woolworths has quietly developed a presence through an innovative tie-up with Infiniti Retail, owned by the Tata industrial conglomerate. Woolworths Wholesale (India) provides technical support and product supplies for Infiniti Retail's growing chain of Croma stores, which specialise in consumer electronics. A personal friendship between the former Woolworths chief executive Roger Corbett and Ratan Tata, the chairman of the Tata group, facilitated the deal.

The first Croma store opened in Mumbai in October 2006 and there are now 33, mainly in big cities. The number of Woolworths employees in India has grown to 90, including three Australians.

It has been a valuable foray for us to understand the Indian market, said a Woolworths spokeswoman, Clare Buchanan. We are very happy with how it's going.

There have been calls for Woolworths to expand overseas to help maintain profit growth as there is little left to buy in the concentrated Australian market.

Retail analysts in Australia have raised the prospect of Woolworths establishing other Indian wholesale businesses, possibly in grocery or general merchandise, similar to the Croma joint venture in electronics retailing.

Ms Buchanan said Woolworths was interested in expanding its operations in India should the regulatory conditions permit.

We have been developing our retail understanding and our cultural understanding of India so we would probably be in the right place at the right time, she said. But we understand that these things can take a long time to change.

Other big retailers including Wal-Mart of the US and Tesco of Britain have also established wholesale operations similar to Woolworths in India.

They are using this period to understand India and its consumer," said Purnendu Kumar, a retail analyst with Technopark Advisors. "As and when India opens they will expand. They would definitely like to play a bigger role. It is a market that is still growing even in these difficult times, and it will continue to grow. It is a market that is a long way from maturity.

The Indian retail sector, which is worth about $500 billion on some estimates, is forecast to more than double by 2015 and quadruple by about 2025. Even during the global economic downturn retail has been growing at 15 per cent a year.

It will be a giant opportunity for foreign retail players provided the Government goes ahead and changes regulations, said Pinakiranjan Mishra, a retail analyst with Ernst & Young.

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 in May meant the coalition government, led by Manmohan Singh, no longer needed the support of communist parties for its survival. For the five years before the election these leftist parties had implacably opposed many economic reforms, especially those that would allow more foreign investment.

An economic blueprint called The Economic Survey of India released by the new government last month has raised hopes further. The document, endorsed by the Finance Minister, Pranab Mukherjee, recommended that restrictions on foreign investment in the retail sector should be eased, especially in the food sector. If it goes ahead, this change could create great opportunities for Australian retailers in one of the world's biggest markets.

The Government is under pressure from some local industrial giants such as Reliance to loosen the investment restrictions in retail.

Hillary Clinton was also rumoured to have raised the issue last month when she visited New Delhi for the first time since becoming the US Secretary of State.

Mr Mishra said there was a growing recognition that reform was necessary.

We don't have refrigerated warehouses; we don't have refrigerated trucks," he said. "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.

However, the huge number employed in the retail sector means the politics of reform is difficult.

Local firms that have introduced small-scale, Western-style supermarkets in the past have met strong resistance in some areas from political powerful mum and dad corner-shop owners.

The Government took a step to hose down speculation about reform in the retail sector last month when the Commerce and Industry Minister, Jyotiraditya Scindia, told the lower house of parliament it had no plans to change the rules that ban foreign direct investment in multi-brand retail trade.

Even so, international interest remains strong.

Last month India was ranked the most attractive nation for retail investment among 30 emerging markets by the Global Retail Development Index, prepared by the management consultants A.T. Kearney.

Experts warn, however, that India may be slow to warm to foreign retailers because of entrenched habits of consumption. Most households buy small amounts of fresh food daily and refrigerators are still scarce outside relatively wealthy middle-class neighbourhoods in big cities.

Satpal Singh, a tomato agent at Azapuri Mandi, believes it will take a long time for grocery giants to make an impact, even if regulations are relaxed.

They have no hope in the fruit and vegetable retail market, he said.

"People just don't want to go to big stores, especially if a vendor brings good produce to your doorstep on a cart."

Even if India allows more involvement by foreign firms such as Woolworths, it could be a long time before the millions of small corner shops come under real pressure from big retailers.