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Clicks over Bricks in India

SINGAPORE – After years of debate, India’s government recently announced that will open the country’s retail sector to foreign investment. The move was met with howls of protest from those who argue that the entry of large hypermarket chains like Carrefour and Walmart will devastate the small shops that currently dominate India’s retail sector. A country-wide strike called by opposition parties on September 20 brought many cities and towns to a halt. So far, Prime Minister Manmohan Singh’s government has not relented, despite the loss of support from a key coalition ally.

The debate around opening the retail sector to foreign investment is currently being framed, on the one hand, by the need to modernize supply chains and, on the other hand, by the desire to protect small shopkeepers’ livelihoods. Those who support the decision argue that India’s supply chains are simply too wasteful, and that only the finance and knowhow of big, international retail chains can upgrade them. Opponents point to how big retailers decimated the traditional retail segment in the West.

But this debate misses a crucial point: the hypermarket model is itself under serious threat everywhere from online shopping. Consumers worldwide are finding that they can access virtually unlimited choice on the Internet – including customized goods and services that big retailers simply cannot deliver.

As a result, large hypermarkets are suddenly finding that their business model is unraveling. They watched in horror as Amazon, en route to becoming the world’s largest online retailer, pushed the bookstore chain Borders into bankruptcy, and have wondered if they will be next. The American discount retailer Walmart, reportedly concerned that it is cannibalizing its own sales, has gone so far as to stop selling Amazon’s Kindle tablets.

Indeed, the Indian government’s decision to welcome foreign retailers coincided with French retailer Carrefour’s announcement that it will shut down its substantial operations in Singapore by the end of this year. Meanwhile, its British counterpart, Tesco, is shifting away from the large hypermarket format and investing heavily in online systems. Quite clearly, the established framework of retailing is being fundamentally overhauled.

Given these developments, India may simply skip the hypermarket stage and go online, just as it skipped fixed-line telephony and went mobile. Of course, hypermarkets will do well in a few locations, but they are unlikely ever to dominate India’s retail sector.

For small shopkeepers, this poses both a challenge and an opportunity. The challenge is that the rise of online shopping will increase competitive pressure, regardless of whether big foreign retailers enter the market. While Indians have traditionally been wary of buying online, owing to their distrust of digital security, in recent years the urban middle class has become increasingly accustomed to using the Internet to purchase airline tickets, reserve hotel rooms, and order books. As rising affluence and falling technology prices make online shopping accessible to a growing pool of customers, more products will follow. Change is inevitable.

But this shift may also open an opportunity for small shops. We know from international experience that online shopping undermines hypermarkets more than neighborhood stores, which often offer home delivery, credit, and the reassuring familiarity of personal relationships. A local shop may be able to use the Internet to tailor more precisely its selection of goods to its customers’ tastes.

In other words, small shops may be more than capable of holding their own against big retailers if they adapt to the new environment. Indeed, small shops’ advantages are so compelling that Tesco is investing heavily in expanding its network of convenience stores, Tesco Express, thereby effectively mimicking the traditional model of local grocery stores.

So India’s political debate over the entry of foreign retailers into the market, while heated, is probably already outdated. The real question is how India’s creaking supply chains will respond when consumers leapfrog hypermarkets and go online. No other country has created a logistical network directly for online retailing. For investors and businesses – perhaps including India’s small shopkeepers – this is where the really interesting opportunities will emerge.