Big-Box Stores Eye India as the Next Frontier in Retail

While China's economy can't get enough attention about its growth prospects, India runs a close second in terms of market potential, brimming with a large population and an increasing standard of living. As foreign investment pours in, companies are finding market rules that are cumbersome and outdated. For instance, India's food supply is a textbook model of inefficiency. In India, the road from farm to table is warped with an endless number of middlemen, volatile prices, and plenty of waste.

A report by The Economist shows that food retailers like Wal-Mart  (NYSE: WMT  ) , Tesco (NASDAQ: TESO  ) , and Carrefour (NASDAQOTH: CRRFY  ) have had limited success in the Indian market due to red tape and unsupportive business policies. The Indian people seem resistant to change a system that's been in place since the 1970's, while politicians have adopted a take-it-or-leave-it stance toward foreign investors.

According to The Economist, only 2% to 3% of Indian groceries are bought in stores, with most purchases made at local markets. Foreign supermarket chains could modernize the food supply's logistics through direct investments. Many of these companies could encourage producers to build factories and storage warehouses, invest in modern transportation, and establish contracts directly with farmers. These changes could lower food prices that have contributed to India's current high inflation. For example, prices of vegetables have increased by 46%, and wholesale onion prices have soared 278% through October 2013.

Wal-Mart enters India and gains frustration instead of market share
In October 2013, Wal-Mart and Bharti Enterprises, a leading Indian business group, decided to end their 2007 agreement to jointly operate 20 cash- and-carry superstores that sell to other businesses. Wal-Mart bought Bharti's 50% stake, giving the company 100% ownership in the Best Price Modern Wholesale cash-and-carry business. The company's plans to continue to operate the wholesale business are a sign that it's not completely abandoning the Indian market.

The end of the agreement with Bharti is expected to impact dilutive earnings per share for fiscal 2013's fourth quarter, increasing it by about $0.04. Accounting for this and other factors, Wal-Mart expects its fourth quarter EPS to range between $1.60 and $1.70.

Part of Wal-Mart's frustration in India is due to the current government regulations. One in particular is the requirement that foreign retailers buy 30% of their products from small- and midsize-Indian businesses. Indian retailers are exempt from this rule. This makes it difficult for foreign retailers to stock their shelves when a portion of suppliers may not be able to produce at the scale required by a large store operator like Wal-Mart.

Carrefour commits to Indian market by investing in several initiatives
French retailer Carrefour is showing a greater level of commitment to its operations in India, possibly to encourage market change. Investments have been made in environmental and sustainability measures, health and hygiene workshops at Indian schools, and training for farmers on improving crop yield and produce quality.

Carrefour operates wholesale cash-and-carry stores in India. These stores carry food and non-food items at wholesale prices and provide services that support other businesses like caterers and convenience stores. The cash-and-carry stores are a small part of the company's international business -- there are currently four stores in India. In fiscal 2013's third quarter, this store format, along with the company's convenience stores, saw sales increase by 3.7%, which also included the impact of decreasing petrol prices.

Tesco's partnership yields insight into Indian market
While Wal-Mart's partnership with Bharti did not work out, rival Tesco has had success in India since 2008 by partnering with Indian conglomerate Tata Group. The relationship with Tata involves the exchange of technical knowledge and supply of more than 80% of the goods for Tata Group's 16 Star Bazaar and Star Daily stores. In return, Tesco has gained invaluable knowledge on one of the world's fastest growing economies. As a result, Tesco is moving toward a more direct investment in India and is planning on the development of multibrand retail stores. The new business would also involve Tata Group.

For Tesco, international growth is an important part of its strategy. In its 2013 annual report, it noted that 32% of sales and 29% of profit are earned outside of the U.K. The company is also a market leader in eight of the 11 international markets it operates in. The Indian market is seen as a long-term growth opportunity.

My Foolish conclusion
Only time will tell if the Indian market will be willing to open up to the demands of foreign investment. These big-box retailers will no doubt impact local suppliers and businesses in ways that current market regulations are trying to prevent. Tesco's and Carrefour's approach of investing in the local communities and learning the ins and outs of the Indian economy may prove to be fruitful efforts to bring the Indian market into the 21st century.

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