Economic growth in Asia: India's store wars

Indian retailing is still dominated by traditional corner shops. But a tycoon's plan for a national chain of 7,000 supermarkets is promising to transform a nation's shopping habits - and help its farmers to make ends meet. Justin Huggler reports

On a busy street corner, a throng of television cameras had gathered around a small supermarket. To Western eyes, it was nothing out of the ordinary as supermarkets go: the usual brightly coloured signs, the usual fruit and vegetable counters with piles of oranges and carrots. It was a grey and rainy day, and we could have been in any British town, but for the palm tree dripping in the corner. But the people pushing their way past the cameras to shop inside were grinning with almost childlike glee as they took hold of the plastic shopping baskets.

What looked like an ordinary supermarket is claiming to be the beginning of a revolution in Indian shopping. The men gathered outside looking ill at ease in red company-branded grocers' coats and baseball caps were not shop assistants, but senior executives who were wearing the uniforms specially for the grand opening.

This was the first outlet of what is planned to be India's first nationwide chain of supermarkets to run its own supply chain from the farm gate to the shelves. The company behind it, Reliance, claims it will transform the lives not only of Indian shoppers, but of farmers as well, and will finally allow India's agricultural sector to live up to its potential.

What had the customers eagerly streaming in yesterday was not so much the company's lofty promises as the first glimpse of a glitzy new brand. Shopping markets are not entirely new to India, but they are still rare enough for an opening to cause excitement, especially of a supermarket as deliberately Western-looking as this - even down to the American-style juice bar.

But for all the Western trappings, some toucheswere unmistakably Indian. Like the sign at the front which read: "Fresh fruit, fresh vegetables, puja flowers" - flowers for Hindu worship.

And the bevy of burly hijras, or eunuchs, who turned up in saris to demand their traditional cash gift, and tried to push their way past the poor security guard, a small man who was completely dwarfed by one huge eunuch yet still managed to preserve his dignity by somehow blocking the hijra's path. The custom in India is to give cash to eunuchs at the birth of children or the opening of new shops, and the hijras seemed upset that Mukesh Ambani, the chairman of India's biggest company, wasn't there in person to hand it out.

The slogan for Mr Ambani's supermarket venture, Reliance Fresh, is: "It's a whole new way to live". That may be going a little far, but it threatens to shake up the way Indians shop. For now, the chain consists of just 11 outlets, and they're only in Hyderabad, one of India's most modern cities, having prospered on the back of the IT boom.

But Mr Ambani's ambitions are on a grander scale and, as ever in India, the numbers are mind-boggling. Reliance plans to open supermarkets in 700 towns and cities across the country. That's just the beginning. After he has conquered the cities, Mr Ambani has his sights set on the villages, where he wants eventually to open 6,000 supermarkets. Reliance says its supermarket business alone will provide jobs for 500,000 people. Not only does it have its own fleet of supply trucks, it has its own cargo planes to fly in fresh produce as well.

But there are already supermarkets in India, and the truth is that they have failed to make inroads against the traditional corner shops that still dominate the retail sector. They still account for 95 rupees (£1.10) of every 100 rupees spent in India.

What is different about Reliance Fresh doesn't lie at the smart new outlet in Hyderabad's fashionable Banjara Hills. It lies an hour's drive out of town, amid the surrounding scrublands, in a warehouse. This is Reliance's city distribution centre, a link in a supply chain that stretches from the farmers' fields to the city centre supermarkets. It connects two very different sides of India, the poverty-ridden countryside, steeped in tradition, and the wealthy city centres.

At the distribution centre, trucks are arriving from all over India, disbursing huge loads of fresh fruit and vegetables: apples from the Himalayas, red bananas from the deep south, coconuts from the beaches on the Bay of Bengal. They are brought to the warehouse, where teams of workers race to get them ready for delivery to Reliance Fresh's outlets. This is what has never been tried in India before: Reliance supermarkets are not buying in, they run their own supplies.

This allows it to sell fresh produce from all over India anywhere in the country. But there's more to it than that. What Mr Ambani is trying to do is to revolutionise India's farming sector.

At the moment, a staggering 40 per cent of produce in India perishes before it makes it to the shops. It's a problem that is wrecking the potential of what should be one of the world's most competitive agriculture sectors, but isn't. India is home to world famous varieties such as Darjeeling tea, basmati rice and Alphonso mangoes, but sheer inefficiency has prevented agriculture from taking off.

By taking over the entire supply chain, and bringing to it the efficiency of a modern company, Reliance is convinced it can end the problem and make enough money in the process to keep prices in its supermarkets low. The company even hopes to expand into exporting Indian produce.

That is where opening the first outlets in Hyderabad has its own resonance. Bigger and more famous cities such as Mumbai or Bangalore would have been more obvious choices. But Hyderabad is the capital of Andhra Pradesh, a state that has become notorious in India in recent years for one thing: farmers' suicides.

Although Reliance insists it has nothing to do with its decision to launch the new chain in Hyderabad, thousands of farmers have killed themselves in Andhra Pradesh in recent years - 2,115 in 2004 alone - because they cannot pay their debts. Andhra is just the worst affected state: farmer suicides are taking place all over India, a clear sign of an agricultural sector that has gone desperately wrong. The reason is that the farmers are trapped in a cycle of debt that many are hoping Reliance's new venture can break.

Even in Punjab, home to India's most fertile land, farmers are trying to sell their entire villages because they can't make ends meet as farmers any more. Gurjit Singh owes £2,500 but only makes £650 a year. Under a hot sun, he explained the problem. The farmers live hand to mouth on the proceeds of each year's crop. But to buy seeds and equipment they need money, and so they need loans. And village bank managers demand huge bribes in return for loans. The only alternative are unscrupulous moneylenders who charge interest rates of 24 per cent. If a monsoon fails - and they often do - the crop fails and the farmer cannot repay the loan. As the interest spirals out of control, he becomes, in effect, a slave labourer for the money lender.

Now farmers are hoping Reliance will break the cycle, because it wants to forge relationships with specific farmers as part of its supply chain. The problem is that under current Indian banking law, Reliance cannot lend the farmers money itself.

"We will try to work out a solution," says Tushar Pania of Reliance. "We have an interest in the farmers, because we have an interest in quality. And we want to move into export, which means we have an interest in traceability: foreign regulatory bodies will insist on knowing which farm the produce came from."

To make it all work, Reliance has to conquer the retail sector with its supermarkets. It will not be plain sailing. Although supermarkets have taken off in some areas - another reason for launching in the south - in others, like Delhi, they are struggling.

One look at the supermarket in Gurgaon, on the outskirts of Delhi, will tell you why: it is situated inconveniently on the first floor of a shopping centre, because no one in India carries their own shopping bags. People bring their servants to shop with them, and you can see stern ladies sweeping the aisles, barking instructions to a harassed servant who takes items from the shelves and puts them in the trolley.

Convenience, the most important asset of a supermarket in the West, is not such an issue in a country where the vast population means the middle classes have servants who shop and cook for them. Why buy a microwave pizza when a full-time cook is cheaper than a microwave oven? As a result, Reliance is concentrating not on the packaged meals that are supermarket staples of the West, but on fresh fruit and vegetables. There are plans to add fresh meat, but because of Hindu beliefs, an entire separate supply chain will be set up first to avoid polluting the pure vegetarian produce. The supermarkets sell staples such as rice and milk, but there's not a frozen dinner in sight.

They will also offer free home deliveries, to compete with the traditional corner shops, all of which provide free deliveries of even a single item late at night, and give free credit too.

The supermarket in Banjara Hills was doing a roaring trade over the weekend, its aisles filled to bursting with curious new customers. "I like it," said S S Chaubal, a retired maths professor. "The problem is, it's only vegetables. I'd like to buy meat as well. I'm not sure if I'd come back. It's good here, but we have our usual place. Indians would like to have supermarkets like the American ones, for sure. But you can't compare this to an American supermarket. You can buy everything in one place there. This is a first step on the way."

Janaki Pillai, who was visiting Hyderabad from Madras but still dropped in to check out the new supermarket, said: "I like the way it's displayed," she said. "The prices seem competitive. I'm going to go back to the vegetable market and find out if the prices really compare, and I'm sure that's what a lot of other women are going to do too. But if the prices really are cheaper here I'd come back."

Outside the hijras were shouting at shoppers and demanding money. A shop assistant leant out of the juice bar window and watched them. Not for the first time, the new India and the old were colliding.