Who's afraid of Wal-Mart?

7:00 pm, Lucky General Store, Mayur Vihar, Delhi. Three delivery boys are packing grocery bags with orders from the neighbourhood condominiums. A loaf of bread and two packets of soup for Mrs Verma on the third floor; urad dal and a packet of salt for Shanti bai who cooks on the seventh floor; six bottles of soda for Sharmaji who's having a party; a chocolate pastry for Neha whose mother is working late again...

6:00 pm, Sahara Mall, Gurgaon. There's a serpentine queue of cars waiting to park, so people can get inside to Big Bazaar, where offers and discounts and promotions have something for everyone. Buy a kilo of rice, get another kilo free; get three packs of juice for the price of two; pay Rs 100 for a T-shirt, get the second T-shirt free. There's pandemonium and chaos. At the payment counters, the queues resemble those outside...

Wal-Mart, anyone? The threat of the giant retailer moving into India and destroying the domestic retail biz (worth Rs 350 billion and growing at 30 per cent annually) has been sounded often enough, but no one seems overly bothered yet. At least on the face of it.

The neighbourhood kirana shop owner is too far removed from the logistics of what is clearly big business, and he isn't worrying for now. But the big, young boys of India's juvenile retail industry are certainly looking out for Wal-Mart and its like, and even taking a leaf out of its retail model, even though Kishore Biyani accuses it of being "too much of a mechanical model".

Biyani should know. The head of Pantaloon Retail and the undisputed king of retail in India has read every book written on the legendary Sam Walton. Like him, he's big on volumes, operates on wafer-thin margins, and is all set to offer a tough fight when Wal-Mart does finally move in.

Buoyed by its success in China, Wal-Mart is now hot on India, the world's fourth-largest retail market. Any wonder that,when its international CEO John Menzer came lobbying for foreign direct investment in retail in India, he first knocked at Prime Minister Manmohan Singh's door.

For now that door is still closed, but the government is keen to open up the sector in phases, and the first phase might be any time soon. When that happens, not just Wal-Mart but other chains like Carrefour, Tesco and Home Depot will in all probability make a beeline for India's cash-and-carry.

Till then, it's easy to underestimate the Wal-Mart juggernaut. The world's largest company has 3,000 stores across the US, UK, China, Japan and Mexico, and one new store opens every day on average. Its sales, at $285 billion, almost equal the size of the whole of the retail market in India.

And it uses that scale to leverage its muscle power with its vendors and keep competitors at bay.

In comparison, the country's largest player, Pantaloon Retail will probably do sales of Rs 2,000 crore this year, spread over 2.5 million sq ft of store space across 23 cities "" far, far ahead of its rivals in India, but chicken-feed when compared with Wal-Mart. The question then: how will Biyani fend off Wal-Mart and Co when they come looking for a bite of India's booming retail trade?

"We have a window of opportunity and the first-mover advantage for the next two-three years," Biyani contests. "The battle with Wal-Mart is not about money, or low prices, but for the mind space of customers." He's certainly pulling out all stops to ensure that advantage stays with him.

"Our strength is that we understand the Indian customer better than Wal-Mart, that they will probably repeat the same mistakes that we made earlier." He's just a little bit cocky, but then Biyani has learnt some of his moves from Wal-Mart itself.

He's operating on building scale, creating a strong vendor and sourcing network, and improving efficiencies in inventory and stock turns. In an aggressive bid to command the market, he is on a massive expansion spree "" 10 million sq ft of store space by 2008 and sales of Rs 8,000 crore in that year. Big Bazaar, his flagship store, will increase from the current 23 to 55 cities.

To that end, he has already tied up for 8.5 million sq ft of additional space, insulating himself against Wal-Mart, which will have to pay higher rent for similar space. To guard himself against possible property lease hikes, Biyani has set up two real estate funds with a corpus of Rs 1,800 crore to develop retail malls across the country.

"Wherever we went as anchor stores," he rationalises, "the rental of the mall went up but we did not benefit from the upside, though the property owner did. Now, through developing malls, we will grab that advantage."

For this massive expansion, Biyani needs to infuse Rs 1,200 crore into the system. To fund at least the first phase of this expansion, a rights issue of Rs 225 crore is on the anvil "" enough, he says, to see him through the next two years.

Conscious of Wal-Mart's (or Carrefour's) legendary sourcing prowess across the globe "" buy in huge volumes, sometimes the entire production of a plant, at low cost and pass the benefit on to the customers "" Biyani is reformulating his strategy.

For one, he will create 30-40 anchor vendors, each of whom will have to build scale with turnovers of over Rs 100 crore. To support them, Biyani has floated a consumer fund to raise Rs 1,800 crore to invest as equity in each of these companies.

He is also pushing smaller vendors (he has over 1,200) to reach economical turnover sizes by expanding their capacities so that they can generate turnovers of Rs 5-6 crore with a growth of 40 per cent annually. And he has already tied up with some large vendors (for instance, Pepsi) to supply him with agricultural produce.

Unlike global majors, he believes in a partnership vendor model where economies of scale will drive efficiencies and keep costs down. Most global giants, on the other hand, squeeze vendor margins by using volume orders as bait.

Biyani-watchers say the other advantage is his flexibility to adapt and change unlike, say, Wal-Mart which has a standardised international format. Argues Bala Deshpande, director, ICICI Ventures (which had earlier invested in Pantaloon): "His model is flexible. His is not a standardised product format like the global companies."

Biyani will acknowledge the superiority of Wal-Mart where inventory management is concerned. He'd like to have all his vendors online, just as Wal-Mart does, and is investing Rs 100 crore over the next three years on IT infrastructure.

This will help the company narrow the gap on stock turns. And like his global challengers, he's likely to leverage international sourcing for products in home and furniture due to the unavailability of appropriate vendors in the country (unlike in foods and clothing, where India has world-class suppliers).

He's looking to China and some South-east Asian countries for selective product sourcing, but it remains to be seen whether he can match Wal-Mart's ability to squeeze prices. Then there's Wal-Mart's legendary capacity to command margins at 10 per cent more than those Indian retailers get from FMCG companies. Biyani isn't pessimistic, though, smiling mysteriously to say he still has a few more aces up his sleeve.

While Big Bazaar commands much of the market in north, west and east India, in the south, Chennai-based Subhiksha (turnover Rs 330 crore) has debunked the big store format. Its mantra: small stores, low investment, large scale of operations.

Luxuries like air-conditioning are abjured, and average store sizes never exceed 1,500 sq ft. If that sounds like your neighbourhood kirana, think again "" Subhiksha is on a three-fold expansion drive and is aiming to have at least 450 stores over the next six-nine months that include newer areas like Andhra Pradesh, Gujarat, Karnataka, Pune-Mumbai and Delhi.

Subhiksha's managing director S Subramanian is counting on a combination of scale, no-frills and small retail size with a dependence on one category of goods to take the edge off the global challenge, should Wal-Mart come up in the neighbourhood some time soon.

His advantage, he says, is the store focus on foods and grocery (which constitute 85 per cent of his sales) where convenience is key. If the international Wal-Mart format is anything to go by, it will expect you to drive 15-20 km out of the city on indifferent, traffic-dense roads to pick up your daily needs.

Contrast that with Subhiksha's neighbourhood appeal, and you know why Subramanian is confident of what he's pulling off. "Indian consumers are happy with the convenience of the kirana shop," he says. "What we bring in is low prices. Food and grocery buying is not ambience-driven." And he's guaranteeing prices 9.5 per cent cheaper than the MRP on average, something the big boys with their large infrastructure costs can hardly replicate.

Nor is Subhiksha convinced of the price squeezing capabilities of these global giants. "Indian food companies like ITC or Dabur get no global volumes from Wal-Mart," he says; "they're not likely to succumb to pressure from them."

He points out that for Wal-Mart or Carrefour, groceries and food form only part of their turnover (between 25-50 per cent), with most of the lower pricing offered on home products, clothing and kitchenware that are globally sourced. Since food items have to be locally sourced, the global companies might not, in effect, have any advantage over local retail.

Even so, Subhiksha is tweaking its model to align itself to global discount models (for global companies like Tesco that have a large grocery and food volume, 45 per cent of their turnover is from private labels).

That is what Subramanian is now undertaking, tying up with vendors to create products ranging from toilet cleaners to noodles. He expects private labeling to constitute up to 25 per cent of his turnover within 12 months of its launch. The reason is simple: margins on private labels are three times higher than those that FMCG companies offer.

Mumbai-based Piramyd Retail has a different take on the Wal-Mart challenge based on customer behaviour that shows a preference for buying from the neighbourhood.

While customers buy up to 60 per cent of their grocery and food from hypermarkets, the rest is bought from the local kirana store. To ensure it has fingers in both pies, Pyramid is working on a two-store format: True Mart department store (6,000 sq ft), and True Mart Daily convenience store right next to your home (1,500-2,000 sq ft) complete with home-delivery.

"We are not positioning ourselves as a discount store," says Krish Iyer, managing director, Piramyd, "but someone who provides customer convenience in service for which, unlike Wal-Mart, you don't have to travel to the outskirts of the city."

If the Indian retail market isn't going to be a cakewalk for Wal-Mart and its ilk, it could be because the home-grown giants have their own strategies in place. The Tata Group's Trent (turnover Rs 245 crore), for instance, has its popular Westside stores chiefly for clothes and home accessories, and has now made an entry into hypermarkets with Star India Bazaar.

The RPG Group has the Food World supermarket, Music World, Spencer's and Health and Globe as part of its national footprints. And the Rs 530 crore, Raheja-promoted Shoppers' Stop lifestyle store is getting into hypermarkets too. "Our costs of setting up a new store are 30 per cent lower than those of the global giants," says managing director B S Nagesh, "because they bring in their international designers, equipment and even the racks."

There's another disadvantage Wal-Mart will face in India "" its strict adherence to child labour laws to which its vendors must comply. "The only way they can finish us is through predatory pricing for the next few years. But their advantage in buying cheap will be neutralised by their high cost of investment. Also, while it is possible to have large spaces in global markets because there are many varieties available there, this might not be the case in India. So while you can have 5,000 sq ft for meats in the US, you cannot have more than 500 sq ft in India as we don't have that variety."

More importantly, in the lifestyle space, international stores work on mark-ups of as high as 3-5 times, compared to 1-1.5 times in India. So even if global lifestyle retailers reduce their mark-ups in India, it will still be difficult for them to come down to Indian levels.

Shoppers' Stop is hoping to increase its share of turnover from private labels from 20 per cent to 25 per cent. It is also pushing the button on its loyalty programmes "" already, 60 per cent of its sales are from repeat buyers against the Indian average of 30 per cent.

The group is also moving into the hypermarket space, building on the strategy of its competitor with 1,00,000 sq ft instead of the Indian averagesize of 40,000 sq ft. But more than that, Nagesh predicts Wal-Mart and Co will have the same bottlenecks that their Indian counterparts suffer "" "bad roads, slow movement of trucks".

Eventually, too, there's the question of money. "Will our shareholders allow us to invest Rs 100 crore in supply chain management, or would they prefer us to open more stores?" asks Nagesh.

For their global competitors, such small stakes are hardly worthy of debate: "They can put in that kind of money without batting an eyelid," says Nagesh.

When Wal-Mart, Carrefour or any of the others will be allowed in and with what equity holding is still unclear. But despite the Left's resistance, foreign investment in retail will not remain shut for much longer.

When that happens, India's home grown industry will have to fight back. Some will survive, some will sell, others will close down. Let's hope Wal-Mart won't be among them.