Decoded: Why German retail giant Metro wants to exit India

All over the world, multinational companies (MNEs) are viewed with suspicion when they set up shop in other countries. India is no exception. Such skepticism is particularly prevalent in the retail sector.

Yet, as the events of the past two decades indicate, foreign retailers and wholesalers have realized the importance of collaborating with kiranas in India. That this collaboration is a winning proposition was highlighted during the pandemic when kiranas offered last-mile connectivity and modern retailers provided a plethora of products that benefited small stores as well as consumers.

The irony, however, is that although the kiranas dropped their earlier suspicions, most of their “local vocal” supporters did not. This is particularly unfortunate for German retail giant Metro Cash and Carry’s operations in India, which have benefited many kiranas across the country. When the Düsseldorf-based company entered India in 2003, a series of protests were staged by activist groups and a few local farmers’ unions, claiming that the livelihoods of small traders would be threatened.

The early years were difficult for Metro as it sought permission from the Karnataka government to set up big box cash’n’carry stores, as it tried to expand to other major cities like Hyderabad and Kolkata. It took years to convince state governments that Metro’s practices were not predatory but actually benefited small traders and kiranas. As the first multinational to establish organized wholesale stores, Metro was also the only one to follow its global B2B business model in India. Thus, unlike other foreign distributors, it did not have to change its operating model to comply with local regulatory standards. Since its business model catered to local businesses and small retailers, it was never seen as a big threat or competitor to local kiranas and retailers. Instead, he acted as their ally, offering policy recommendations to benefit his kirana partners.

Unfortunately, given the sustained headwinds caused by tight regulatory standards, losses caused by the pandemic and geopolitical conflicts such as the Russian-Ukrainian war, the results of most companies in all sectors have been significantly affected. The impact of tight funding has already been felt across India’s startup landscape, as many have announced layoffs in recent weeks and suspended expansion plans.

Four years ago, Metro, which had always managed to avoid the limelight, made news when it turned profitable after 14 years of consecutive losses. An ongoing study based on a survey of the economic impact of foreign investment and its contribution to the Sustainable Development Goals (SDGs) has found that while multinationals are allowed to grow and make profits, it is not only then can they reinvest the profits in India.

And here’s a business that’s not only profitable, but one of Metro’s most successful businesses globally. At the same time, the fact that companies like Metro have been around for so long – showing growth and expansion – shows their strong will to meet the needs of the Indian market. However, the news that Metro Cash and Carry is about to hit the exit button in India flies in the face of all that. A closer look, however, shows that being EBITDA positive and profitable is not the whole story. There could be two main reasons why Metro would consider an exit or seek a local partner.

Pricing, margin pressures and higher real estate costs are major deterrents to creating big-box cash’n’carry stores. Until 2016, Metro only had around 18 stores in India. It has only become more ambitious in recent years, opening 13 new stores under its new management. This is still not enough for the scale he had envisioned earlier.

Competition has intensified from smaller e-commerce and fast-paced players backed by strong private equity (PE) and venture capital (VC) funds. Therefore, Metro may require capital investment to grow amid growing competition. In such circumstances, it would be better to invest more with its parent company rather than seeking funds from external sources on more competitive terms.

Under normal circumstances, these two would not be sufficient reason for one of the world’s largest retailers to close its India operations or join forces with a partner. But given the current scenario, Asia no longer seems to be a key market for the parent company. Recently, Metro closed in Vietnam, China, Japan and Myanmar.

The winning formula for retaining kiranas has ensured profitable business flow. But the only way to get things done is to inject funds to counter local competition, which has intensified after the emergence of fast commerce and instant deliveries.

As the business momentum intensifies day by day, additional funding is needed, along with a reliable partner with deep pockets and an understanding of the Indian market to dramatically scale up operations. Maintaining its retail operations will be in the interests of most stakeholders, including kiranas, while suspending them will be a losing proposition. It is hoped that the tide will soon turn to safeguard the interests of all stakeholders including Indian consumers.

The author is Professor, Indian Council for Research on International Economic Relations (ICRIER)

James R. Rhodes