Recently a Committee of Secretaries, headed by Cabinet Secretary Ajit Seth, passed a proposal for FDI in retail. At present, India allows FDI only in single brand retail chains like Nike, Louis Vuitton etc with a cap of 51%. It also permits 100% overseas investment in wholesale cash-and-carry format. The Cabinet note, circulated by the Department of Industrial Policy and Promotion (DIPP), proposes multinational multi-brand retailers like Wal-Mart, Carrefour and Tesco to set up stores in cities with population of over one million (according to 2001 census) which would include 36 cities. The proposal also has a rider that foreign retail giants will have to invest a minimum of $100 million, half of which must go to the back-end infrastructure like cold storage, soil testing labs and seed farming.
This development is critical as retail industry in India has an employment rate of 7% and given its potential, it is stipulated to grow in such a fashion that can alter the fundamentals of the economy for good. The retail industry is divided into organized and unorganized sectors. Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, including the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
India’s total retail sector is estimated at $590 billion, of which unorganized accounts for more than 90%. Currently a few big players like Walmart and Carrefour have set up joint ventures in India in the cash and carry format waiting for the FDI norms in multi-brand retail to be opened up. Apart from these foreign names, there is intense competition among Indian players in the retail segment- many of such players are still struggling with their bottom line. Aditya Birla Retail having 554 supermarket stores and nine hypermarkets under the brand name of More is one of the prominent players and is expected to achieve profitability by 2013. Reliance Retail, another big name, with around 1,150 stores achieves $1 billion revenues but is yet to see profitability. Titan, a major retail player in watches segment has 650 stores today and plans to add 300 more in 2011-2012. Future’s group through its Big Bazaar outlet and Shopper’s Stop of Raheja Corp. has been in the eyes of the masses since its establishment in 1997.
While these big players have intense competition among them, they still occupy only a small part of the retail market, the rest being occupied by the unorganized players – the smaller kirana shops and convenience stores. The discussion on opening of FDI in retail sector is being seen as threat to these small players. According to a PwC-CII paper, there are 12 million such Kirana stores. A huge segment of the country’s population makes their livelihood from these kirana stores given the small investment required for setting up a small round the corner store.
Opening up of retail for foreign giants will also poses a threat to the local industry. It is being feared that these companies will import their products from cheap markets and kill the local industry here. It is also argued that the global retailers will initially reduce prices drastically with a view to oust local competition. Once they have successfully established their operations, they would raise back the prices. A just fear but exaggerated to say the least. The retail industry in India is big enough a market for everyone to get a share of the pie. Also the government will certainly take prudent steps to ensure that development of local markets and supply chain become part of the business plan of these companies which can be seen in the covenants it has included as part of the FDI proposal (investment of a minimum of $100 million, half of which must go to the back-end infrastructure like cold storage, soil testing labs and seed farming).
We also need to think whether the big players would really be a threat to the kirana stores? If yes, to what extent? Kirana stores, as we know them have strong presence in rural and semi-urban tier II and tier III cities. They are preferred highly for their convenience and home delivery services. Long standing relationship of families with kirana stores enable them to open standing credit account facilities with the kirana stores. This is something, which will be very difficult for the big players to adopt. The big stores can never duplicate the convenience and the personal relationship in its entirety. Moreover, unlike in the West, the kirana stores will continue to be a part of the Indian scenario for several years given the shopping styles of consumers (only a fraction would be interested in driving to huge stores to stock up items for the entire week). The culture of shoppers to shop daily coupled with lack of storage space make the kirana store a part of the Indian middle class.
Opening up would do our FDI a lot of good by boosting it, which dipped by 25% to $19.42 billion in 2010-11 from $25.83 billion in the previous fiscal. Apart from this, India has also been fighting with the spiraling inflation, which has been driven by supply side deficiencies. According to estimates 40% of fruits and vegetables are wasted. The solution to all this is to improve the supply chain, cold storages and technology which can be enabled if there are huge investment inflows into these. With a view towards this the government opened up the wholesale business for FDI. Unfortunately, opening of the backend does not resolve the issue, as the companies are not interested in investment unless they can harness huge profits from access to the front end. Also the access to front end due to the co-ordination between frontend and backend put together is the only way that you can deliver lower cost products to the consumer. Better supply chain and technical knowhow would ensure that the transit of produce from farm to shop floors is smooth. With the elimination of middlemen, the prices will also be reduced thereby benefitting the consumer. Contract farming will benefit the farmers. Better prices for their farm produce and timely sale of the perishable goods can help the agriculturists earn more.
Interesting aspect to know here is that the existing retail players in India like Aditya Birla Retail (More) and Future Group (Big Bazaar) are welcoming the FDI proposal. For these multi format retailers, FDI will mean ready availability of equity funds without taking the risk of excess leverage. The funds will help in executing their expansion plans and thereby offer better revenue visibility. Also the foreign partnership would bring it greater expertise in improving efficiencies and setting up backup infrastructure. The threat from foreign players is also reduced by the fact that these players already have store presence in key market locations, something which will be difficult for new players to get and hence the upper-hand. Moreover, with the complexities of Indian markets like complex and high inter-state taxes, high working capital requirement, lack of automated operations etc would require handholding of foreign players for the next 5-10 years which is an opportunity in itself to learn and grow for the Indian players.
Given the dynamics of our country, the policy makers have liberalized the economy and the industry segments in a phased and cautious manner. This is what is needed for the retail industry too. Indian companies need money to grow, the sector needs investments for development and the sector is attractive to players who are ready to invest. What’s needed for a win-win situation is a phased and planned introduction of FDI in the segment. It will take another 10-15 years before multiple brand formats become the trend in the country. The same is the period required for the foreign players to learn the market and set up necessary infrastructure. Yet, the kirana stores would never go out because of the reasons like comfort and convenience. The future will see consumers divide their purchases between kirana stores and modern retail outlets.