Makro explores new wholesale frontier in India
Bangkok-based Siam Makro, part of US$50-billion Charoen Pokphand (CP) Group, has entered the cash-and-carry wholesale business in India with the launch of LOTS Wholesale Solutions, believing that this huge new market will one day surpass its business at home.
India and the United States are the current priority markets for Siam Makro, according to Tanit Chearavanont, managing director of LOTS Wholesale Solutions. The company plans to invest over 10 billion rupees ($156 million) in the first five years to open 15 wholesale distribution centres across northern India, starting with two in the Delhi National Capital Region (NCR) this year.
“I am confident that we can expand very rapidly in India but I don’t want to commit to any number. In the future, there is a possibility that India could eclipse Thailand to become a bigger market for Siam Makro,” Mr Tanit told ETRetail last week.
The cash-and-carry business in India is currently worth 68 billion rupees or $10.6 billion with growth of 13% in 2017. Ample room for growth remains for modern wholesale business seeking to compete with existing and largely unorganised wholesale markets and distributors.
The new Makro venture will be going up against four incumbents in India — Walmart, Metro Cash and Carry, Booker and Reliance Retail — which collectively operate 92 wholesale stores. According to the research group Nielsen, they account for 2.6% of all fast-moving consumer goods (FMCG) products sold in India.
“Thailand took 28 years to reach 123 stores. I don’t think we need 28 years to open 123 stores in India. We will reach there sooner with the amount of potential this country offers,” said Suchada Ithijarukul, the CEO of Siam Makro.
Mr Tanit, 28, notes that India is still a relatively untapped market for the modern trade retail and wholesale businesses.
“Modern trade in this country is about 8-9% while the general trade is about 92-91%, so there is still a lot of room for growth,” he told Asia Focus in a telephone interview from New Delhi. “So compared to Thailand where we are at 50:50, India is still a highly unpenetrated market in that sense with a very large population as well.”
Mr Tanit’s presence in the country is in itself a sign of Siam Makro’s commitment to India. He is the eldest son of Soopakij Chearavanont, elder brother of Suphachai Chearavanont, the current CEO of CP Group. Mr Suphachai, the third generation of the Chearavanont family, said last year that he would enlist members of the fourth generation to help with the digital transformation of the family businesses.
According to the most recent World Population Prospects report by the UN last year, India in 2024 will overtake China as the world’s most populous country with 1.44 billion people. The population will continue to grow until 2061 before it starts to decline from a peak of 1.68 billion. The country’s retail sector now accounts for 10% of gross domestic product (GDP) and 8% of employment.
India is the world’s fifth-largest global destination for retail, with the market value forecast to reach $1.1 trillion by 2020 based on rising incomes, middle-class lifestyle changes and increased digital connectivity, according to the India Brand Equity Foundation (IBEF), a trust established by the Department of Commerce.
While the overall retail market is expected to grow at 12% per year, the modern trade segment is expected to expand by 20% annually, twice the rate of the traditional trade, the IBEF said. It classifies the market into “organised” trade valued at $60 billion or only 9% of the total, and “unorganised” business making up the other 91%.
Conventional formats for low-cost retailing in India include the local kirana shop and dhobi, single-owner pharmacies, all the way to hand-cart and pavement vendors. All represent potential challenges to Siam Makro, but other factors weigh on the company as well.
“One of the biggest challenges here, not just for cash and carry, but also for other modern trade formats like hypermarkets, is real estate,” Mr Tanit told Asia Focus. “India’s real estate prices are quite high. Most people don’t know this but the area in South Mumbai is actually more expensive than Manhattan.”
For example, prices quoted f or a two-bedroom apartment in Sewri in South Mumbai are around 40-50 million rupees or $625,600 to $782,000.
Potentially high costs mean that Makro’s stores will be smaller in India, at 3,000 to 5,000 square metres compared with sizes of 9,000 to 10,000 sq m in Thailand.
“It’s about finding the right real estate; if it is too high than it will affect your overall net profit,” he said. “All of the 15 stores that we will open in the next five years will be within the National Capital Region. The good deal with the NCR is that it is a conglomeration of four states where we have Delhi itself and we also have Gurugram which is part of Haryana state, Noida which is part of Uttar Pradesh, along with Rajasthan.”
Mr Tanit noted that even in Thailand, Siam Makro was already diversifying in terms of store formats and sizes, pointing to a 1,000-square-metre store in Lat Phrao district of Bangkok as an example. “Such a flexible mindset allowed us to enter the NCR market,” he added.
Recent reforms in India including demonetisation to curb the shadow economy and the introduction of the national Goods and Services Tax (GST) have also benefited both local and foreign businesses, he said.
“By standardising a uniform tax function, companies in FMCG and retail can now think about setting up supply chain and distribution centres based on geographic proximity rather than then setting them up based on how much tax they have to pay.”
Another “very important” piece of legislation is the Real Estate (Regulation and Development) Act in 2016, which tightens registration requirements for developers and compels them to hold 70% of buyers’ funds in an escrow account. The overall effect will be to push down artificially high prices.
Makro’s India operation will focus on local sourcing, providing a platform for local players to export their products to other Asean markets where Siam Makro plans to expand. Mr Tanit also believes India can become its innovation hub because the way its market has evolved is “very interesting”, including the jump into e-commerce even as the bricks and mortar side was still developing.
“There are a lot of things that we can learn and a lot of technology that we can leverage in India and deploy back in Thailand,” he said. Examples are mobile point of sale applications, which are more advanced in India than in most markets in Asia. Even the majority of small family-run stores now take orders via mobile applications.
Mr Tanit said the LOTS name was created specifically for the Indian market to reflect its current demography where the median age is around 27-28 years old, compared with 37-38 in Thailand. By 2020, India will become the world’s youngest country with 64% of its population in the working age group, according to a report published by Iris Knowledge Foundation in collaboration with UN-Habitat.
“On top of the young demographic you can see the next generation are taking on the family businesses and a lot of them are now becoming chao huay (family-run shop) owners and if you take that into account, we wanted to create a brand that reflects this young generation,” said Mr Tanit.
“Potentially I think the LOTS brand is quite a catchy and fresh brand that we actually leverage this to other markets if Makro is to expand into other parts of Asean or Southeast Asia.”
Siam Makro now operates in Thailand (Makro ROH, Siam Food Services and Promart), Vietnam (Vina Siam Food), Myanmar (aro), and Cambodia (Makro). It also is looking to expand to China.
“As of now Makro has opened its first store in Cambodia, we are opening up in India and I think Makro is now very interested in China and Myanmar,” he added.
“One of the biggest challenges here, not just for cash and carry, but also for other modern trade formats like hypermarkets, is real estate. India’s real estate prices are quite high”
TANIT CHEARAVANONT Managing director, LOTS Wholesale Solutions