Insight: 'Speed money' puts the brakes on India's retail growth

Sun May 5, 2013 6:02am EDT
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By Nandita Bose

MUMBAI (Reuters) - Hong-Kong entrepreneur Ramesh Tainwala spent 18 months operating branded clothing retail stores in India before deciding it was impossible to succeed without paying bribes.

Tainwala, a 55-year-old expatriate Indian, owns Planet Retail, which held the India franchise rights for U.S. fashion labels Guess (GES.N: Quote) and Nautica (VFC.N: Quote) as well as UK retailers Next (NXT.L: Quote) and Debenhams (DEB.L: Quote). He sold the brands last September to various Indian businesses.

"Right now it's not possible to do business in India without greasing palms, without paying bribes," said Tainwala, who is also luggage maker Samsonite's (1910.HK: Quote) president for Asia Pacific and West Asia. Tainwala said he himself refused to pay bribes to licensing officials, though that could not be independently confirmed.

India is the next great frontier for global retailers, a $500 billion market growing at 20 percent a year. For now, small shops dominate the sector. Giants from Wal-Mart Stores Inc (WMT.N: Quote) to IKEA AB IKEA.UL have struggled merely for the right to enter, which they finally won last year.

But a daunting array of permits - more than 40 are required for a typical supermarket selling a range of products - force retailers to pay so-called "speed money" through middlemen or local partners to set up shop.

In interviews with middlemen and several retailers, Reuters found the official cost for key licenses is typically accompanied by significant expenses in the form of bribes. The added cost erodes profitability in an industry where margins tend to be razor-thin. It also creates risk for companies by making them complicit in activity that, while commonplace in India and other emerging markets, is nonetheless illegal.

That creates a handicap for foreign operators such as U.S.-based Wal-Mart, the world's biggest retailer, and Britain's Tesco Plc (TSCO.L: Quote) and Marks and Spencer Plc MS11.L, which must comply with anti-bribery laws in their home countries even while operating abroad.

A Wal-Mart spokesperson said the company is strengthening its compliance programs, part of a global compliance review that has cost more than $35 million over the last 18 months. IKEA, which is awaiting final approval to enter India, has started assessing the market, a spokeswoman said, adding the group has "zero tolerance" for corruption in any form.   Continued...

Customers exit a V-Mart retail store in New Delhi April 6, 2013. Picture taken April 6, 2013. REUTERS/Adnan Abidi