Sucheta Dalal :Hyping India
Sucheta Dalal

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Hyping India  

December 7, 2005

In the past couple of weeks, the India hype has touched a new high. The New York Times on Sunday led with an India story and had a package of four reports in the same edition. The Daily Reckoning, a respected e-newsletter is touting India in the most hyperbolic terms. Take a look at what Bill Bonner says from London on December 6, 2005.


"Not only did the Indian BSE index cross its historic high of 9,000 in November, but it also reported the sharpest rally in a single month. The gain of 896.49 (11.35%) points on the Sensex in November was the highest single month rise in more than a decade," our resident India expert, Sala Kannan, tells us.


"Does the market know something we don't? Perhaps the rally is in anticipation of India's massive retail sector opening up.


"And wouldn't be just the stock market that is looking forward to this event. The Indian consumer will be delighted to have access to McDonald's, Nike, Wal-Mart, etc.


"Why? Because all developing economies are driven by a phenomenon called the 'demonstration effect.' Simply put, it is the developing country's desire to consume like its Western counterparts. Demonstration effects are effects on the behavior of individuals caused by observation of the actions of others. So trends and developments in one place will often act as a catalyst in another place.


"One doesn't need to look too hard to find evidence of the demonstration effect all over the world. Recently, a friend returned from a tour of Buddhist monasteries in Tibet. 'What was most striking...the one thing I'll never forget,' she recollects, 'were the local kids swarming around me demanding I give them my cap. They knew no English, but pointed to my cap all excited, yelling, 'Nike! Nike!'


"Another friend visited Darfur, the genocide-stricken region of Sudan as a UN volunteer. Even amid the conflict and misery, he recalls seeing two sailboats carrying advertisements for Pepsi and 7-Up.


"No matter what part of the world, people want Western consumer goods. They want to wear Nike and drink Pepsi. It is no different in India. Already, India is the world's second largest consumer of cell phones.


The country has over 50 million subscribers. With a 65 million two-wheeler market, India is also the world's second largest consumer of motorcycles, mopeds, etc. And Toyota Motor Corp. recently launched its Camry and Corolla in India. And not just these things, but over 5 million square feet of Western-style malls were built last year alone!


"The demonstration effect is alive and well in India. But with the opening up of the retail sector, it will become even easier for Indians to be Western-style consumers. And that will mean windfall profits for new retail entrants, like Wal-Mart."


The Daily Reckoning then goes on to tout a $200 billion investment opportunity in India. This conclusion is arrived at on the basis of major research spending, a resident expert and several trips to India.


The problem is that of the three names mentioned by Bonner as potential entrants into India – two are wrong. Yes, Wal-Mart is indeed waiting to enter the market, but new Indian retailers have already occupied large chunks of the ‘big retail’ space. And they already understand local issues and concerns about quality, productivity, sourcing and delivery while Wal-Mart will probably be on a learning curve.


You don’t need a resident India expert find out that the yellow double arches have been in India since 1996. A Google search leads to McDonald’s India website which says: McDonald's opened its doors in India in October 1996. Ever since then, our family restaurants in Mumbai, Delhi, Pune, Ahmedabad, Vadodara, Ludhiana, Jaipur, Noida Faridabad, Doraha, Manesar and Gurgaon have proceeded to demonstrate, much to the delight of all our customers, what the McDonald's experience is all about”.


The Indian operation is a 50:50 joint venture with a couple of Indian businessmen and the U.S. Company has learnt several important lessons about being in India.


Bill Bonner may like to know that he cannot really have the authentic McDonalds experience in India, because you simply cannot sell the authentic beef-based Big Mac here and hope to be a major chain. There would be protests. So McDonalds has adapted wonderfully. 


As its website says: McDonald's India has developed a special menu with vegetarian selections to suit Indian tastes and preferences. McDonald's does not offer any beef or pork items in India. Only the freshest chicken, fish and vegetable products find their way into our Indian restaurants.


In addition, we've re-formulated some of our products using spices favoured by Indians. Among these are McVeggie™ burger, McAloo Tikki™ burger, Veg. Pizza McPuff™ and Chicken McGrill™ burger. We've also created eggless sandwich sauces for our vegetarian customers. Even our soft serves and McShakes™ are egg-less, offering a larger variety to our vegetarian consumers”.


Lesson: To do business in India, you have to understand India and adapt; the large potential market is incentive enough to do so. Even the Economist newspaper will have to leave India out of its Big Mac index or reformulate it.


As for Nike, Reebok and Adidas—they have all been in India for a decade along with all other brands in the lifestyle segment. Reebok and Nike also have India subsidiaries and have had an India presence for a decade. So have Lacoste, Pierre Cardin’s prêt line and every top brand of jeans and inner wear. But they are not finding it easy to grab the market. India consumers are more cost conscious than brand conscious.


They entered India in the early 1990s fed on similar hype and exaggeration about India’s 250 million strong middle class which never materialised. Foreign investors grabbed over-priced Global Depository Reciepts (GDRs) which subsequently fell to a fraction of the issue cost when it was discovered that middle-class as represented by American and European per capital income standards is very different from the Indian definition of middle-class. And the true market segment was barely 50 million.


A lot has changed in the last decade, but is it enough to warrant Bill Bonner, Stephen Roach et al. drooling over a $200 billion retail opportunity? We will wait and see if this wonderful opportunity materialises as predicted, but a lot of foreign money certainly seems set to flow into India in anticipation.


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-- Sucheta Dalal