Rajiv Lal is the Stanley Roth, Senior Professor of Retailing at Harvard Business School. He has also been responsible for the retailing curriculum and has served as the course head for marketing, required study in the first year of the MBA programme. Professor Lal also teaches in several executive education programmes, has previously served as the faculty chair for the global management programme, and currently co-chairs the programme on ‘building and leading a customer centric organisation’. In this interview with Forbes India, he busts several myths related to Indian retailing.
Q. One of your recent articles for the Harvard Business Review was about how retail does not cross borders. What did you discuss there?
People have always been talking about globalisation of retailing. If you look at a lot of retailers, they have all gone abroad. Carrefour is in many places. Walmart is in many places. Tesco is in many places. And most retailers use going abroad as a way of satisfying their needs for growth because ultimately they run out of space and opportunity in their home country. Hence, in this paper we were just asking the question that these retailers have been going abroad for 25 years now, and what have they to show for it?
Q. What did you find?
It is not clear that most operations are actually profitable. Walmart has been in China for close to two decades and sales are at $9 billion. They are barely breaking even. Similarly in Brazil, Walmart took a long time to settle things down. Now I think they are making money. So, if you take a look at the experiences, I think you can see a few things. One is that a lot of retailers have gone abroad to pursue growth but many of them are not making money in those foreign markets. It takes a long time for them to really build sales which are of a sufficient size and that have an impact on the bottom line. But then you also see in each of these countries, and in each of these continents, the local players dominate. Then, of course, there are lots of examples of companies falling on their faces in foreign markets. Like the case of Walmart in Germany, Tesco in Korea, for example.
There are lots of examples where these international operators have had a bad experience. And there are some places where they have succeeded. But many places where they have succeeded is because of what they have bought—Walmart bought successful businesses in Canada, Mexico and the United Kingdom.
Q. Why is there a great rush among retailers to enter foreign markets?
The rush is simply because of growth. If you are a retailer in the UK, that market is growing at 2 percent. Most retail businesses increase by inflation plus the growth of the economy, and those are not sizeable numbers on which you can bet your future. But the emerging markets are expanding by leaps and bounds. The other interesting thing is that the suppliers of retailers are also in those markets and they are doing very well. Procter & Gamble, L’Oreal, Unilever, you name it. They have all been doing businesses in these markets and they are of a huge size. If you are a retailer, you think ‘if my supplier is doing great business there and I need to grow, why should it not work out for me?’
Q. In a previous interview you had said that if Cafe Coffee Day is not making money in India, how will Starbucks make money? Can you discuss that in the context of retail?
It’s the same thing for retailers; when Reliance cannot make money today in retail, why do we believe that Tesco will make money? India has no shortage of human capital. It provides a backbone in terms of information technology for the world. It has people who know real estate inside out, who know the environment, regulation and have the human resources. What is it that the foreign retailer will bring to the Indian context that the local retailer cannot provide? You are talking about coffee. I don’t think it’s a very proprietary technology to make coffee. Why do we believe that Indian retailers cannot succeed but the foreign retailers will succeed in India? I don’t see the logic.
Q. People say foreign retailers will bring in the intellectual capital.
What is the intellectual capital? There are many international retailers that have some of the IT needs being satisfied by Indian companies. And with respect to supply chain, people say that we don’t have cold chains. But cold chain is not a high-tech thing. It is not a spacecraft or something like that. Yes, India does not have a cold chain. But is it a matter of intellectual capital that is in short supply? Or are there other reasons? I would suspect that someone has not thought through the economics of setting up a cold chain. Let’s face it: In Mexico there is a cold chain and even Brazil has one. There are other emerging markets which have cold chains. If I was an Indian operator, all I had to do was go to these other emerging market countries and see what is going on there. Or hire somebody who is working in those markets and he can set it up for me.
Q. Why are the big Indian retailers losing money?
First of all, it is not clear to me in an Indian context, at least in food, that organised retail will succeed. The economics do not work out. If you look at the kirana stores, they operate at a gross margin of 15-18 percent. Now if you look at the cost structure of an organised retailer, it is far more than 15-18 percent. Unless organised retail can be set up in a way that they have a lot of savings in the supply chain, they cannot compete with the kirana store.
Q. But why is that? One would expect that as businesses grow, economies of scale would kick in.
(This story appears in the 18 April, 2014 issue of Forbes India. To visit our Archives, click here.)