Local sourcing and the foreign retailers' Indian dilemma

Local sourcing and the foreign retailers' Indian dilemma

FMCG SUPPLIER NEWS

ProcurementLeaders.com - Dec 2nd 2011, 09:04

Like the opening of a new superstore in town, the world's largest retailers have been queuing up to get access to the as-yet-closed-off Indian market. But when last week the Indian government announced it would be flinging wide the doors for foreign investment, the Wal-Marts and the Carrefours had plenty to worry about. 

Beyond the politics and the economic opportunity, it all comes back to sourcing and that's why these companies, famous for their ability to leverage huge value through their supply chains, are convinced of their abilities to make the most of the opportunity.

But what's become clear is that the success of their sourcing policies will make or break their adventures on the subcontinent.

Last week, after the Cabinet of the Indian government has approved the opening of India's vast multi-brand retail sector to foreign direct investment (FDI) and expanding FDI into single-brand retail, a move it said would generate 10 million new jobs, an opposition leader threatened to burn down any Wal-Mart that opened in India.

What's about to change is straightforward: foreign retail giants, previously barred from selling directly to Indian consumers, will now be permitted to own a majority 51% stake in joint operations with a local partner. Single brand retailers, Ikea for example, can own 100% of their stores, up from 51% previously. Still, a political powder keg sits under the issue.

The Indian government hopes that the retailers' sourcing policies can be influenced to boost key industries, like agriculture, that comprise a significant proportion of a workforce of over 450 million people.

In order for that to happen, a balance has to be struck to encourage preference to be given to local suppliers. One of the fears that dominates the oppositional rhetoric on the subject is the notion that not only will smaller retailers be driven out of business, but Wal-Mart et al will be sourcing products at the expense of their farmers' own produce. They also argue that smaller retail enterprises in India will be driven out of business.

While the latter of these arguments is a well-documented effect of a superstore moving to town, the counter-argument runs that these retailers are handicapping the supply market. The solution, then, for the Indian government has been to stipulate that foreign supermarkets wanting to set up shop in India will have to source 30% of their produce from local, small industries.

Yet there are plenty reasons, beyond placating the politicians, for these retailers to talk up the value of local sourcing.

Much of the focus here is on food, given that agriculture is such a significant industry in India, Indian food shoppers tend to be frequent and loyal, and malnourishment is an issue that affects tens of millions of people in the country, despite an abundance of crop, because they're too poor to afford local retailers prices. The foreign retailers are in position to bridge a gap between produce and delivery that has appeared inefficient for years.

There are many ways they can make this happen. A few months ago, Procurement Leaders spoke to chair of supply chain strategy at the Centre for Logistics and Supply Chain Management, Cranfield School of Management UK, Richard Wilding about the general value of local sourcing. He explained the value in being "able to speed up your cash-to-cash cycle and because cash is to some degree a limited resource for some organisations now it means you're able to fund the business more effectively by sourcing locally."

Meanwhile, Wal-Mart, probably the key protagonist in this story, has insisted that local sourcing is not only necessary for compliance, it is vital to being competitive in this market.

"Through our participation in front-end retail, we look forward to playing a key role in India's success story by contributing to the country's economy and to helping their citizens save money so they can live better," said president and CEO of Wal-Mart International. "We will create thousands of jobs through inclusive growth, increase farm productivity and income and help small and medium industries prosper and grow with us."

The retail giant has outlined plans to increase farmers' incomes by 20% over five years. This is achieved through working with suppliers to improve yields, moving away from the market-style trades they are used to towards a more reliable procurement system, and working to eliminate the transportation issues that create huge costs for the farmers.

As Jyoti Thottam, writing for Time Magazine, puts it: "Even if Wal-Mart reaches its goal of building a network of 35,000 farmers by 2015, that's a tiny fraction of India's labour force of 450 million. India might be the only place in the world where even Wal-Mart has trouble achieving scale."

The potential is there and indeed investors and credit agencies, like Fitch, have responded positively, noting that despite the need to fund growth through investments and scale up logistics, efficiencies in procurement paved the way for a positive impact on the credit profiles of retailers.

The US-India Business Council said the government's opening of the multi-brand retail sector will benefit Indian consumers by bringing efficiencies and productivity to the farm-to-fork supply chain, while tamping down rising food prices and inflation.

For Wal-Mart, which set up a JV company, Bharti Wal-Mart, four years ago to run supply chain and sourcing for Bharti's Easy Day stores, the move is one to negotiate one step at a time, operating under a different banner, as it has in 90% of its international stores.

However, Bharti Wal-Mart has made clear its intention to grow its local sourcing, even as its private labels become increasingly important.

Whether it and other big name retailers stay true to that stated intention and whether they can carry it off will determine both the fate of the Indian retail market, but also shape the wider economic picture in a country where the inefficiencies of supply chains have had massive consequences.