India opens up its retail sector to foreign businesses

A version of this article appeared in the National Business Review in September 2012.

On Friday, India’s government, after years of deliberation and in an attempt to arrest slowing growth decided to open up India’s retail market to foreign investors. International retail giants like Walmart have been salivating at the prospect for a while and look poised to cash in.

Many people around the world and in this country think of India as a very poor country and to an extent they are correct. About 800 million people in India are indeed poor. According to a 2007 report by McKinsey, in 2005 India’s middle class accounted for only 5% of its population. But this figure is slated to grow to 20% in 2015 and to 40% by 2025. Now consider this: India has a population of a little more than 1 billion! 20% of 1 billion is 200 million; that is the size of roughly three-quarters of the United States, about eight Australias and fifty New Zealands!

So are there any opportunities here for Kiwi businesses? Clearly it is difficult to go head-to-head against the international giants like Walmart or Carrefour. So what New Zealand businesses need to think about are more niche markets, where entry may be easier. One such area is the production of milk and milk products which might be a viable opportunity for a company like Fonterra.

According to recent reports last year the price of milk and milk products in India rose by 15.3% - driven in large part by increased demand even in the face of steady supply. In order to keep up with demand, milk production in India will need to increase by over 4% in the near future, up from the 3.5% where it is today.

But the big challenge is to reach out beyond the urban elite, concentrated in the cities, numerous as they may be. The point to bear in mind is that by 2025 the middle class in India will double in size, which means that about 200 million more people will be joining in. One option might be to target that segment of Indian society.

I profess no particular knowledge or expertise regarding expanding into a new country but here the story of Grameen-Danone may be instructive. In 2005 the CEO of Groupe Danone in France (Dannon in the USA) met with Muhammad Yunus the founder of Grameen Bank, the well-known microfinance organization. This eventually led to the establishment of Grameen Danone, a “social (non-profit) business” consisting of a small plant located in Bogra, that produces Shakti Doi (or “Strong Yoghurt”), an yoghurt fortified with micronutrients for sale in rural areas of Bangladesh, an area that suffers from malnutrition and calcium deficiency along with large parts of the sub-continent. Among other things there are “yoghurt ladies” who cycle from village to village with small quantities of yoghurt at one time (the lack of refrigeration facilities is an active constraint) and sell it at a low price. All profit is ploughed back into the operations of the enterprise.

While selling yoghurt to the poor at no profit may not seem like a winning strategy it appears that Danone has learned some valuable lessons from this undertaking in terms of product development, factory design and how to make inroads into new markets.

According to a recent report in Time, Danone has figured out how “to put enough vitamin A, iron, zinc and iodine into a 60 g or 80 g cup of yogurt to meet 30% of a child's daily needs…. Part of the answer lay in a new, less reactive iron that Danone had learned about from an NGO — not the sort of partner a global corporation tends to come across in its normal line of business. Now Danone is using that iron in products for the developed world, where the company sells fortified yogurt targeting things like bone strength in older women.”  

Another important lesson that Danone picked up in Bangladesh is how to keep milk fresh for a longer time by using enzymes since refrigeration is often not an option.  

But equally importantly this attempt has provided a template for how the company may push deeper into the developing world primarily Asia for now but, in the not too distant future, Africa.

While Danone may not make money out of its social business, the value of its name recognition is immense and most likely surpasses what could have been accomplished via large amounts of advertising.

Danone already has a presence in India through its Yakult brand of probiotic milk drink. This is a joint venture with Yakult Honsha, Japan. But given the size of the market it is likely that there is scope for other players. It is also probably not out of bounds to simultaneously enter into profitable joint ventures in the urban areas while setting up social non-profit undertaking in rural areas in order to get market penetration.

Danone hired Zinedine Zidane, the French soccer star to launch Grameen Danone in Bangladesh. Here we have an edge. Everyone in India knows who John Wright is!