India Shows the Red Rag to U.S. Retail Bulls!
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The Indian government announced the opening of FDI (Foreign Direct Investments) in multi-retail brand to as high as 51%. This allows international players like Wal-Mart to partner with the local player and sell its goods directly to the consumer. The government not only increased FDI in the retail sector, but it also announced FDI as high as 49% in the airlines industry. This is one of the biggest economic reforms in over two decades.
What is so big about this reform?
The various means by which FDI is permitted include financial collaborations through private equity or preferential allotments, or by way of capital markets (by means of euro issues and in joint ventures). The Indian market is one of the largest markets with high purchasing power. The retail market is as immense as $450 billion with a high growth rate purely because of its colossal population size of around 1.2 billion people.
Who all are waiting to pounce on this opportunity?
Wal-Mart Inc. (NYSE: WMT) is one of the biggest retailers who has been eying the Indian market to open since the fall of 2007. After having huge success in China, they are pretty confident to do a repeat telecast in India. This is one of those markets which have not achieved efficiency in terms of its operation and logistic chain. For ages, Wal-Mart has been known to deliver one of the finest operational processes that result in huge cost benefits for its consumers. The scale of the Indian market will help Wal-Mart to increased profits.
It is very important for Wal-Mart to understand the difference between the Indian and the Chinese market, before they start implementing any predefined model. The major difference lies in the fact that the Indian market is primarily driven by domestic demand as compared to the Chinese market which is fuelled by export growth. With an expected CAGR (Compounded Annual Growth Rate) to be as high as 12 percent for the next 5 years, the Indian market could prove to be a “Gold Mine” for Wal-Mart.
Kmart owned by Sears Holding Corporation (NASDAQ: SHLD), one of the biggest competitors of Wal-Mart, is not going to stay far behind. They would also try and leverage the maximum plausible benefit. One of the most important things for these players to understand is that the Indian market is a very fragmented market and to reach out to the masses will not be that easy. As of January 28, 2012, Sears Holdings operated a total of 1,305 Kmart stores across 49 states, Guam, Puerto Rico, and the United States Virgin Islands. The store count consists of 1,279 discount stores, averaging 94,000 square feet, and 26 Super Centers, averaging 169,000 square feet, and includes 60 Kmart stores that it planned to close in the fiscal year 2012. This existing knowledge will surely be a huge advantage while venturing into the Indian market.
Target (NYSE: TGT), the second largest discount retailer in U.S. after Wal-Mart, was also excited on this announcement. The sheer market size and growth potential are not the only reason for venturing into this market. In May 2005, Target began operations in Bangalore, India. In 2006, Target completed construction of the Robert J. Ulrich Center in Embassy Golf Links, Bangalore, and Target planned to continue its expansion into India with the construction of additional office space at the Mysore Corporate Campus and successfully opened a branch at Mysore. The vision was there and with this announcement the execution should come into effect.
Apart from these top U.S. retail marketers the other top retailers like Carrefour from France, Metro from Germany and Tesco from the United Kingdom will be gearing up with all possibilities to lay hands on the Indian Retail market. The competition will be immense and the benefit is going to be huge on either end, the investor as well as the host company.
The big question is that who amongst all of these will have the biggest piece of this pie? I lay my trust on Wal-Mart for the simple reason for its proven track record in the Chinese market. They have outperformed all the other players and if they leverage this knowledge then they could possibly take the Indian retail market to the next level reaping huge benefits from it.
*Data Sources: http://www.wikipedia.com
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