India has long been a fertile ground for sourcing highly skilled IT and engineering services, but it’s estimated that manufacturing and retailing is the next boom. In 2005, India was forecasted as the greatest consumer market opportunity, receiving the highest Foreign Direct Investment (FDI) confidence index. In the last year alone, India’s consumption rose 21.38 percent to $11 billion. Fueled by a rising young, highly-educated, middle-class population, India’s economic boom is not expected to slow in the near future.

Currently, India sits atop the global retail opportunity index as the greatest underserved market in the world. This has significant opportunities for companies waiting to sell in this market. India’s retail industry, the 9th largest globally and valued at $330 billion, is mostly divided among 12 million 'mom-and-pop’ stores. But as the consumer market grows and demand for more luxury items increases, global leaders are hoping the planned $1 trillion in new investments in mall retail space, logistics infrastructure, and distribution capability will open opportunities to create organized retailing—multi-branded hypermarkets and mall-style shopping experiences.

This new mass-merchant-style organized retailing, which today makes up less than 4 percent of the overall market, is expected to grow to $60 billion and increase the overall retail market by a compound annual growth rate (CAGR) of 21.8 percent by 2015. Organized retailing is poised to take-off as:

So why haven’t more U.S.-based companies jumped at the opportunity to reach 1.2 billion new consumers? For one, many just can’t get there. India’s supply chains are built on slow transit networks fed by poor roads, ineffective ports and little distribution infrastructure. In India, there is no such thing as next-day delivery, no transport company to manage nationwide deliveries, and limited distribution channels marketing foreign products to local areas. Logistics infrastructure is severely lagging the country’s growth and costs are extremely high, as a result. Logistics costs are around 13 percent of GDP, compared with 8 percent in the U.S. Foreign entities that have created a retail presence and are currently selling products in India are hit with transportation costs that total 40 percent of all product costs. For organized retailing to prosper, existing logistical challenges must be overcome and the foundation of India’s supply chains must be built.

These are among the supply chain challenges outside companies can expect as they enter the India market:

India’s anti-competitive position and fragmented government have continued to weigh its poor physical transport system down further. India has squelched advancement through:

A third world country income gap. India’s workforce sits between two extremes. The country has a fast-growing middle-class population, propped on high demand for its technology skills. The market has become extremely competitive for IT and management employees—so much so that turnover is rampant. And yet, India is home to 40 percent of the world’s poor, living on less than a dollar a day. India’s workforce is mainly comprised of low-skill, low-pay and, often, illiterate workers. Within this group, well-established labor unions make influenced business the daily norm.

Anti-competitive regulatory processes. India’s growth has been largely unplanned, growing from the bottom up. Restrictive labor laws—like requiring mid-sized companies to have government permission to fire an employee—make India a poor choice for industries like shoes and toys. And often improvements get tied up in political wrangling.

Even with India’s booming consumer opportunity, its existing logistics infrastructure makes the opportunity seem insurmountable. A lack of organized retailing has made it difficult for the average company to reach Indian consumers. While Hindustan Lever, a subsidiary of Unilever, and The Coca-Cola Company have been extremely successful in penetrating the market, this strategy can only work for companies that sell a variety of everyday consumer products with widespread appeal. Why? Because to reach these consumers today, firms must operate luxury retail storefronts or methodically build out independent infrastructure to support relationships with each locally owned mom-and-pop store. In a similar fashion to the U.S.’s direct store delivery, companies like Procter & Gamble can attack the rurally-populated areas through vast private networks and localized delivery.

But this approach isn’t cost effective for companies that carry limited brands or non-grocery items. For them, the opportunity to reach the Indian consumer through organized retailing is just beginning. By 2025, 70 to 80 percent of retail sales will come from organized retailing (Exhibit 1 shows organized retailing forecasts). So many are banking on the forecasted success of organized retailing, that they are aggressively investing private and corporate funds to create organized-retailing infrastructure before any demand is generated (Exhibit 2 shows India’s supply chain rural vs. organized retailing). Reliance will not only operate grocery stores, but also create a vertically-integrated fresh food supply chain that handles distribution all the way to the growth source. And Sunil Bharti Mittal, head of Bharti, is developing a robust grocery supply chain in conjunction with Wal-Mart. A government pledge of $300 billion to address highways, power and other infrastructure issues also will help. Like no time before, foreign-branded retailers and manufacturers have an opportunity to reach India’s consumers, bootstrapped, in part, on someone else’s dollar.

For some industries, India’s retail opportunity will happen quickly. Fashion items currently make up 50 percent of the organized retail market today. Tata Strategic Management Group forecasts hot industries in the next 10 years to include food, clothing and household improvement. In the near term, firms with limited presence in India should be cautious when considering a strategy to reach the rural population. In fact, the population concentration is shifting. Today, the top 35 cities currently represent 21 percent of the retail market, but will make up 40 percent by 2025. Of this fast growing urban population, nearly 80 percent will be the prime-targeted middle class¹. Companies seeking market share in these regions should aggressively pursue retail partnerships and create infrastructure that mirrors organized-retail supply chains. But how? While a lack of infrastructure is a burden, it’s also an opportunity. Starting fresh means adopting the best supply chain management principles, practices and technologies without having to migrate or upgrade legacy approaches. Manufacturers and retailers should devise a strategy to align with the organized-retailing infrastructure build-out, focusing key activities on designing a multi-tiered distribution network, setting basic transportation goals and expectations, and establishing solid partnerships.

1) Design a multi-tiered distribution network.

The key to a successful distribution strategy will be proximity. The tail that wags the distribution dog is transportation reliability. Transportation reliability or, more accurately, unreliability, will play a key role in determining the number of nodes required for distribution and the inventory to support it. Pure flow-through, or single-node distribution chains from plants directly to retailers, will be non-existent. CPG and retail firms will require significantly more infrastructure in India. For example, Reliance plans to build between 65 and 80 distribution centers to support its goal of $20 billion in revenue. That’s more than half the DCs currently in Wal-Mart’s supply chain, which supports over 10 times the revenue. Even as Reliance and Wal-Mart build distribution capability, manufacturers will have to match this distribution, not only at the local level, but also at regional and central points. These multi-echelon networks will replace lean, single-tiered U.S. philosophies based on just-in-time principles. Even firms with fast-moving goods will be required to set up decentralized, multi-tiered distribution networks that:

Rely more heavily on inventory. Let’s face it, in the near term, India’s supply chains will not be highly reliable. Shippers accustomed to reliability and speed will have to reset expectations. To reduce the impact of highly-variable transportation, brought about by inadequate logistical infrastructure, firms must adopt inventory strategies similar to those used in small-part service industries. While service parts industries use inventory to buffer demand versus transportation variability, the resulting network structure is the same. Firms will need to stage inventory throughout multiple echelons to reduce the impact of transportation variability and high transportation costs. This multi-echelon staging will create networks with many distribution points and double-handling of products. By investing in additional capacity flow, like dock-doors and staging floor space, firms will add more capacity for quick off-loading, reducing the impact of increased transportation investments and costs. The 'cringe factor’ of this strategy is reduced, considering labor and warehousing combine for less than a quarter of India’s logistics costs.²

Reside close to the market. To buffer lead-time variability, firms should set up final distribution within the independent, local markets they plan to serve. By starting in only a few highly-concentrated cities, a regionalized distribution scheme will enable firms to support branded stores or distribution operations, while building relationships with other local entities to expand their presence. As volume grows and transportation improves, firms can convert regional stocking facilities to flow-through and add centralized facilities as sourcing and stocking points. However, to support this more efficient multi-tiered strategy, firms will need to vie for space now, as land grab efforts increase dramatically. Just last year, retail real estate costs accelerated faster in New Delhi than anywhere else in the world. While hot urban areas include Hyderabad, Bangalore and Mumbai, second-tier cities are quickly becoming targets of mall openings, accounting for 40 percent of those scheduled through 2010. Longer term, about 200 cities with under 2 million in population and 500 additional rural towns will be used as retail hubs, each catering to over 1000 villages.

Use technology to provide visibility and collaboration. To manage the inevitable explosion in items they will eventually carry, organized retailers are investing heavily in leading-edge systems to create a data foundation for providing visibility and optimizing operations. Early-stage retail ventures are starting with leading-edge planning and execution applications from SAP, Oracle, JDA, Manhattan Associates and i2 Technologies. These systems will greatly aid supplier collaboration and enable manufacturers to share in real-time information flow. They also will make it possible for retailers to build accurate sales histories from day one, creating a foundation for more robust planning capabilities in network design, inventory planning and transportation modeling.

Select a key partner. Today, third-party logistics in India accounts for a quarter of its transport industry, but is expected to grow to over $125 billion by 2010. Including distribution, the 3PL market is expected to hit $3.6 billion by 2012. This growth is being fueled, in part, by large investments in automotive and telecom manufacturing. 3PLs like Menlo are not only managing distribution, but many are also offering innovative assembly and manufacturing manpower, as well. And industrial real-estate developers Prologis and Aeroterm are entering the market by building on speculation. The partial introduction of the Value Added Tax (VAT) in 2005 is expected to drive more industries toward using 3PL services, since it benefits large warehouses in hub cities — huge investments many companies will want the service providers to make.

2) Set Basic Transportation Goals and Expectations.

You will not see large semi trucks belting down massive 10-lane highways in India. The transportation network consists of few highways, small trucks and constrained speeds. It is projected that highways will improve, as recently funded projects are completed. The government has pledged to build 10,000 kilometers of new roads and improve ports by 2010. But the bulk of the infrastructure will likely come from private or foreign investment. For example, Mukesh Ambani, Reliance’s chairman, is building a new port city near Mumbai. His younger brother, Anil, is building a $4 billion suburban railway system in Mumbai. Several of India’s other wealthiest business developers are focused on developing energy for the country. As infrastructure improves, new market entrants will need transportation strategies that:

Focus on high asset utilization. While labor in India is inexpensive, compared to developed economies in the West, equipment and fuel are not. Comparatively, labor is the highest cost component in the U.S., but in India, it’s one-third the cost per kilometer of fuel alone (Exhibit 4 shows a logistical cost comparison between India and U.S.). Leveraging low-cost labor to maximize the utilization of assets will be a critical element to optimizing transportation strategies. By employing strategies such as “slip-seating,” one driver can be changed-over with another driver when his maximum driving time is reached, since there’s minimal financial impact to rest him for the day. Firms can utilize team-driving to improve not only equipment utilization, but also improve transit times and reduce variability.

Establish a core, senior logistics team on the ground. Delivery success in the near term won’t be based on technology, but rather on relationships and communication. Firms won’t be able to manage transportation virtually from an office in Chicago or Amsterdam. Instead, they will have to build a strong physical presence in each region. Companies like Samsung have successfully penetrated India by employing a core, experienced operations team in each region. This team must be familiar with the regional service providers, restrictions and statewide regulations.

Set rigid provider qualifications. India’s carrier base will continue to consolidate and become more sophisticated as the shippers they serve invest and demand higher service. In 2004, DHL acquired Blue Dart to cover 13,000 locations in India. TNT and Fed Ex are aggressively entering the market and both have proven success rates creating global networks. In the meantime, companies need to put in place a set of rigid qualifications to set expectations for intermediaries and independent carriers. Firms need to rigorously qualify and measure carrier performance and communicate that data back to carriers.

Establish infrastructure others can use. Firms should consider infrastructure investments as potential future profit centers. Manufacturers will have an opportunity to not only build infrastructure for themselves, but to create distribution and transportation services that others can use. For example, Mahindra & Mahindra, an automotive company, established a business to manage its complex logistics processes. To take advantage of this investment, they became a 3PL to others in need of logistics and distribution. Manufacturers can set up local distribution where plants are located and retailers can build infrastructure to support other non-competing retailers. To mitigate concerns about carrier reliability, firms can benefit by setting up dedicated fleets. To better utilize these assets, brokers and intermediaries can be leveraged to fill backhauls.

Invest early in technology. One thing is certain: India’s telecom industry is extremely advanced compared to other industries. And while only 30,000 vehicles in the country have tracking capability, that’s expected to grow a total of 100 percent over the next five years. Already, telecom and software firms are scrambling for a slice of the 1.6 million-vehicles-a-year market.³ Firms investing in this technology for their dedicated fleets will find the infrastructure to support them substantial.

Foreign firms that have been successful in India have done so with the right local support. Local relationships are the true key to success in India. Local companies can use their influence to make or break an initiative. To truly make an endeavor successful, firms should search for growing business groups with which to develop sustainable partnerships. To name a few examples, Tata Group is a diversified company known as a visionary in Indian business, and Bharti has proven it works well with multi-national partners. Firms need to look outside of traditional partnerships to companies in other industries like Telecom. Even with limited supply chain experience, these potential partners possess nationwide connections and have proven success in growing businesses in this market. And while the big three Indian families control 30 percent of the country’s GDP, partnering with them can be challenging, since power and decision-making is confined to a few key players. To avoid failure, companies should look for firms with a proven track record of sustained partnerships.

The consumer opportunity in India is large, growing and relatively underserved. Companies can and should explore opportunities now, setting up regional strategies and logistics infrastructure now. Existing transportation infrastructure limitations will be a challenge, but low-cost labor will enable inventory-heavy cost-effective networks. Firms should quickly establish relationships with organized retailers, logistics intermediaries and distribution sources, but must effectively plan to manage operations within the country. To explore the India opportunity in the near-term as organized retailing markets form, firms should: