India

Why Are India's Retailers Afraid of Wal-Mart?

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Indian supermarket chain owner Ramesh Lahoti says he has every reason to fear encroachment by global retailers — since 2007 he has had to close five of his M.K Retail stores in the southern city of Bangalore due to stiff competition from Germany's METRO Cash & Carry.

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If Wal-Mart, the world's biggest retailer, sets up shop near his existing eight stores in India's third most populous city, Lahoti says the future of the family-run business will be in jeopardy.

"There's a question mark over the future of my establishment," Lahoti, 50, told CNBC. "We cannot compete…What will happen when I keep on closing my shops? Ultimately after 10 years there will only be big retailers."

Lahoti is one of millions of Indian shop owners who staunchly oppose a government ruling last month to allow foreign multi-brand retailers such as Wal-Mart to open stores in India.

The reforms to India's $450 billion retail market are part of economic measures aimed at reviving growth in Asia's third biggest economy and staving off the threat of a downgrade to India's long-term credit rating.

But, foreign investment into retail has caused a major uproar with protests, mass rallies and the burning of effigies of the government.

The Confederation of All India Traders (CAIT), a trade group that represents 50 million local businesses, says global giants such as Wal-Mart are not welcome in India, because their "deep pockets and enormous resources" will squeeze local retailers.

"We don't want any global retailers to come to India," Praveen Khandelwal, National Secretary General at CAIT in Delhi said. "If they are allowed to operate their business activities in India, there will be an uneven playing field, where the existing retailers will not be able to compete."

Independent retailers such as mom-and-pop shops, known locally as "kiranas," dominate India's retail market — holding a 93 percent market share over corporate retailers at 7 percent, according to consultancy firm Technopak.

Wal-Mart Effect Inflated?

Wal-Mart has said it hopes to within 18 months. Under the Indian government's latest proposals, global firms like Wal-Mart and Britain's Tesco would be able to buy up to a 51 percent stake in Indian supermarkets. 

The new rules will enable global retailers to sell directly to Indian consumers. Previously, multi-national retailers could only operate wholesale businesses.

Technopak Chairman Arvind Singhal said concerns that Wal-Mart will wipe out competition are overblown, with enough room in India's retail space for both traditional shops and big-box stores to operate as consumption grows.

He expects corporate retail chains to grow their market share by 13 percent by 2021, while independent retailers will still hold to up to 80 percent of activity in the industry.

"We don't see any reason why consumption for the next 20 to 30 years will not continue to grow strongly," Singhal said.

India's retail market will nearly double in value to $810 billion by 2021 amid increased consumption by a rapidly growing middle class, according to Technopak.

Evidence that mom-and-pop shops are holding on to their huge market share despite the emergence of local supermarket chains like Big Bazaar in the last five to six years shows they haven't been significantly impacted by corporate chains, said Dheeraj Sinha, author of the book "Consumer India: Inside the Indian Mind and Wallet."

"A lot of them [kiranas] have undergone a makeover and they've started stocking things that they wouldn't otherwise stock," Sinha said. "The neighborhood retailer has actually upgraded themselves to the challenge."

Aninda Mitra, Head of Southeast Asia Economics at ANZ backs that view, adding that while there is likely to be some dislocation when Wal-Mart opens its India stores, entire segments of the Indian retail sector are unlikely to disappear as feared.