Tesco Plc in India
Tesco PLC in India Many developing countries are emerging markets in which are attractive tons of foreign investors to participate. Like China, Russia, and Brazil, India is one of the most conceivably profitable places. However, in order to have a successful business in such markets, the investors have to consider many factors of those countries such as level of freedom, corruption, competition and risks. In this case, although India has restrictions on foreign direct investment (FDI) in retail trading, it is perceivably a lucrative emerging market for Tesco.
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Therefore, the issue here is whether Tesco should enter the Indian market. If so, when should be the proper time—before or after the restriction relaxed and with what strategies? Also, should Indian government relax the FDI restrictions in the retail sector? And, what are the advantages that the country will obtain of doing so? Although the Indian government had allowed foreign direct investment (FDI) in many industries, it is still questionable in retail sectors. That is because the foreign arrival can lead to the end of tons of local small and unorganized players. The Indian retail segment is worth ? 40 billion annually and over 95% of the retail market is unorganized and uncomputerized family-run stores—kiranas . However, there is a lot of motivation for the Indian government to issue FDI in retailing. First, the current local retail capacities (e. g. logistics systems and warehousing) and knowledge (e. g. supply chain management) of the Indian market are only partially mature. Thus, the coming of Tesco and other expert-global firms will enhance the local infrastructure and supply chain which is one of the current constraints of the Indian market to modern retail practices.
For example, lifting the FDI regulation in retail sector would diminish the country’s food dilemma since according to Telegraph. co. uk, up to 40 percent of Indian food produce has rotted annually before reached the market. Moreover, in 2010 there was more than 17 million tons of food grain left to rot because of no sufficient warehousing space, accounting for the loss of ? 2 billion. In other words, the entry of Tesco in India would get rid of this sort of problem. Second, through proper management and economic of scale, the foreign player can offer cheaper and better commodities to consumers.
As a result, it will generate more demand and a fruitful market. Third, Tesco would create more high-income jobs for Indians when it can operate its own retail stores. For example it would provide IT services, finance, accounting, design, research and analytics services. In addition, it would promote thousands of its local employees globally. Last but not least, retailing segment in India needs to be an industry status because the retail sector is the second largest employer after agriculture and has a share 12% of GDP and 8 % of the employment in 2009.
A lot of rural youth and mediocre educational qualified people are employed in this industry. Hence, with the organized and high-technology retail industry, Tesco can help India boost up quality of the labor market and the country’s GDP. Even though in the near future the Indian government may relax on the restrictions and allow Tesco to have its own retail outlets in India, the country should have limitations and new proper regulations to protect itself. First, it should rigidly limit the percent of ownership of foreign firms no more than 51%. Thailand is an important example for this issue.
Before imposing the restrictions on FDI in Thailand, Tesco bought 75% of equity of a local supermarket—Lotus. That means every dollar that Thais spend at Tesco, 75 cents will go to the United Kingdom and only 25 cents will stay, which caused the imbalanced economy in Thailand. Another method to protect economic loss and fate of small local players is establishing new tax policy for foreign players. The new policy should be higher taxation on foreign retailers in order to partially control price efficiency of the retailers and increase the national revenue.
Next, using zoning and timing regulations help the local small retailers survive such as barring the foreign retail stores from where the small stores located prevalently and limiting operating hours of the foreign retail stores in crowded small family outlets areas. In fact, the foreign retail stores must be located in suburban areas while some in the crowed areas would be required to close early for a few days a week. Also, the Indian government would impose that 100% of fruits, vegetables and grains that the retail stores will offer must be produced domestically.
This regulation will stimulate the development of agriculture and farming locally by using agreements that ensure high quality produce and better earnings to poor Indian farmers. Because the elimination of the restriction on FDI is still ambiguous, the entry to India must be based on prudential decisions. Tesco has to weight costs and benefits that it is going to get from entering to India while the restriction is ongoing. Not only financial concerns, but Tesco also has to be aware of non-financial factors including risks and stabilities in India.
In 2010, India has fallen in the rankings of a new political risk index released by Maplecroft, a company that assesses global risks for businesses. Of the South Asian nations, India has seen the biggest fall in the rankings to the 27th, descending nine places from the last year (2009). The country is rated as high risk in the Dynamic Political Risk Index (DPRI), which includes “conflict and terrorism, regime stability, the rule of law, corruption, expropriation, and the business and macroeconomic environments”. (Appendix A) The conflict in Kashmir is still ongoing and terrorism problem remains in India.
These factors can present significant challenges for Tesco with operations, supply chains and distribution networks in the country, if the firm is not managed correctly. If Tesco aspires to be successful in India, it has to be able to survive in the complex Indian environment which is frustrating and challenging at the same time. Regardless of where it comes from and where it has been, no where else is exactly like India, that is why understanding Indian market and nonmarket factors is extremely essential for foreign firms like Tesco.
By adapting Wal-Mart’s strategies, the first crucial market strategy to penetrate the Indian market is being a partner with a local firm. Tesco can let the local partner operating the retail outlets, while the firm will be in charge of operations including supply chain management, wholesale management, etc. Similarly with Wal-Mart’s strategies, Tesco is current a joint-venture with Tata Group to launch a wholesale cash and carry business. With the great experience and local knowledge (e. g. ulture, and customer behavior) from Tata, these will get Tesco ready to convert its cash and carry outlets into highly lucrative supermarkets and hypermarkets smoothly when/ if the restriction will be lifted. Additionally, based on exception of restriction on FDI, Tesco could penetrate the Indian market in the single-brand retailing industry by offering only its own “Tesco” brand in an outlet. The advantages of this strategy are various as follows. To begin with, Tesco can offer greater choice of products to a category.
For instance, if it would like to sell peanuts, it can customize taste, package, etc rapidly based on its own marketing research and core business strategies. All processes—including procuring, manufacturing, and distributing processes, can be done in India. This approach would stimulate the growth of manufacturing segment and create more white-collar career opportunities in India. Because of working with smaller local suppliers, this would cost Tesco less than doing so with well-known suppliers. For smaller local suppliers, it is much cheaper and less risky to become a Tesco’s supplier than to try to develop its own brand.
As mentioned earlier, a nonmarket strategy is extremely important in the Tesco case because of the more government controls, the more important of nonmarket strategies. Furthermore, according to Heritage. org, Index of Economic Freedom of India in 2011 is veritably low, ranked 124th out of 179 countries, comparing to 9th for the United States . (Appendix B) There are many examples in the market place that firms do not work on nonmarket strategies and they cannot or hardly survive in both domestic and international market.
Initially, Tesco should start the first step by reducing pressure from grassroots movements in India directly instead of working through the European Union (EU) or the World Trade Organization (WTO). The firm would make an agreement with the Indian Fair Trade in order to stimulate a win-win situation between the firm and local farmers and get admiring from locals. For example, it can set the minimum prices for local products in order to ensure that the improvement of lives of the farmers and labors will come together with the entry of company.
From this approach, the firm will get support from grassroots and reduce opposition from unorganized movement (nonmarket pressure). Commonly, the entry of foreign firms comes with negative attitudes of local people. Thus, it is very important for the firm to establish a policy returning benefits back to communities. For example, in Thailand, before building a new Tesco supermarket, it had to expropriate a community and market place which thousands of people lost their houses and thousands of vendors lost their jobs.
Thus, in order to have a thriving and sustainable business, improving positive image is crucial. The firm hires an aerobic trainer and persuades people in the neighborhood to participate every evening in front of the supermarket. This place has become a meeting place of many elders, housewives, and children in the area. Finally, like other developing countries, India has relatively low minimum wages. Although Indian minimum wages are varied among industries, the National Floor Level of Minimum Wage in 2009 is only Rs 100 per day (around $2. 4 USD). If Tesco can offer its minimum wage policy that is higher than the national minimum wage in retail industry, it would get more support from anti-Tesco groups. Appendix A: Dynamic Political Risk Index (DPRI) of India Source: http://www. maplecroft. com/about/news/political_risks_dec_09. html Appendix B: 2011 Index of Economic Freedom of India “India is ranked 25th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average. ” Source: http://www. heritage. org/index/Country/India