Biting The Bullet, One Reform At A Time – The Pros And Cons Of FDI In The Indian Retail Sector

Posted on October 28, 2012 in Business and Economy

By Pradyut Hande:

The Indian Retail sector has witnessed a gradual albeit steady metamorphosis over the last decade alone. Despite the myriad advances over the years, the sector continues to remain highly fragmented; still primarily dominated by the unorganized segment — the quintessential traditional family run stores. Although there has been a steady deviation from this paradigm, causing the share of the organized segment to grow on a per diem basis especially in urban India, the fragmented and piece-meal nature of the market, amongst other correlated factors, has disallowed the sector to realize its holistic growth potential. However, off late, large scale domestic retailers who continue to astutely learn from their former debacles; are looking to individually embark and embrace a carefully calibrated long term strategy in their quest to dramatically transform the retailing landscape in the country. Despite the numerous obstacles that existing players and new market entrants have to deal with, the Indian retail market bristles with abundant promise.

After months of dithering, the Manmohan Singh led UPA-II Government threw caution to the wind, shed its ineffable garb of “policy stasis”, rumbled out of its ineffectual leadership position and finally green lit 100% and 51% FDI in single brand and multi-brand retail respectively in September, 2012. Here is examining the prevalent market realities and how this move will potentially impact the Indian market, consumers and economy.

Market Realities

According to the Global Retail Development Index (GRDI) report published by the leading US based consulting group, AT Kearney in June 2011, India is the third most attractive retail market for global retailers among the 30 largest emerging markets. The report also highlights the well documented fact that organized retail constitutes a mere 5% of the total annual revenues generated, hence, providing a tremendous window of opportunity for both domestic and international retailers to tap into a burgeoning albeit fragmented market. The sector is poised for rapid growth and is pegged to be worth US$ 535 billion by 2013, with organized retail’s share increasing to 10%. Robust economic progression, ever increasing disposable incomes, greater availability of personal credit and a growing vehicular population that facilitates easier mobility are a clutch of factors that will fuel further sectoral growth. Despite the increasing levels of disposable incomes, both in rural and urban India, 75% of the country’s population earns less than US$ 2 per day. However, that is a figure that is unlikely to deter foreign retailers. The dominating presence of the unorganized segment, a burgeoning youth demographic more receptive to Western lifestyles and ideologies and the low levels of market penetration in various categories and retail formats; especially in the Tier II and Tier III cities; makes the Indian retail scene all the more attractive.

The retail sector is currently worth around US$ 450 billion and accounts for 22% of the GDP. It also contributes a healthy 8% to the country’s employment. Domestic “power players” like the Future Group, Reliance and Tata (Trent) amongst others; continue to adopt a high scalability strategy and are increasingly experimenting with new formats that are gaining greater acceptance with an ever evolving and perceptive consumer. A slew of hypermarkets, supermarkets, departmental, convenience and specialty stores are rapidly replacing the traditional mom-and-pop kirana stores; raising grave concerns regarding their profitable existence in the long term.

FDI in Multi-Brand Retail — Two Sides to a Tale

Foreign Direct Investment (FDI) in the retail sector has always been a contentious issue owing to the socio-political risks associated with it. However, at a time when the country attempts to counter sluggish growth, falling productivity, rising inflation, unemployment and a consequently weakening currency; the Government has taken the right decision to finally allow 51% FDI in multi-brand retail as part of its larger reformatory agenda; thus, shedding its garb of recalcitrance and embracing the next phase of economic liberalization. This move will now open the doors to global retailers such as WalMart, Carrefour and Metro AG who until now were operating cash-and-carry outlets in the country.

Apart from countering the aforementioned concerns and infuse renewed vigour in the economy, greater FDI in retail will offer myriad multilateral benefits. The consumers would have the luxury of choosing from a wider spectrum of products available at affordable prices and also enjoy internationally standardized retailing experiences. The farmers and suppliers are sure to benefit as they can demand better prices for their produce and supplies. The facilitatory role played by the wily middlemen will be grossly minimized and functionary intermediaries may have to exit the picture altogether.

They say that the supply chain is the heart and soul of a retail business…and it is with prudent reason that they say that! The Indian retail sector is presently hounded by a flawed and floundering supply chain that has caused humungous monetary losses to all domestic players in the business, both big and small. Coupled with gross mismanagement and an inherent inability to address these deficiencies, the supply chain remains the retail sector’s weakest link. Bereft of a sound supply chain system, dogged by managerial and logistical impediments and the absence of proper cold storage facilities and warehouses; the sector incurs losses to the tune of over US$ 1 trillion annually. With FDI now being permitted, these global retailers will bring a wealth of experience, technical knowhow, processes and patented structures that will result in the development of more streamlined and efficient supply chains and distribution networks. Also, the mandatory stipulated 50% initial capital investment the establishment and development of efficient back-end structures and processes would serve to strengthen the sector exponentially.

The domestic players will face stiff competition and many of them are now looking to enter into strategic alliances with these global giants in order to safeguard and further their interests and protect their margins. This will also aid in their own evolution as they seek to implement proactive strategies and best practices to establish stronger and more robust supply chains. At the end of the day, it is about delivering value to the consumer and ensuring a veritable level of customer satisfaction. An efficient supply chain, seamlessly integrated into a holistic retail business mainframe, goes a long way in doing just that.

Despite the multiple advantages accruing from the Government’s decision, there are fears that the traditional kirana stores stand to lose the most in the wake of the purported market entry of international players. The fact is that although their financial interests will take a hit to a certain extent, the “shopping culture and mentality” of the lower-middle and middle class Indian consumer coupled with their location advantage will ensure that the kirana stores remain an integral part of the Indian retail scenario for the next few years. Many believe that the widely propounded theory that the “entry of big fish will kill small fry” is a myth and there is ample scope for growth for both segments. In the face of these vociferous concerns, the Government ought to explore the feasibility of introducing a Shopping Mall Regulation Act in order to protect the interests of the small-scale domestic retailers. The objective ought to be to strike a healthy balance whilst instituting a phased transition towards a more organised setup.

One Giant Leap for Indian “Retail-kind”

Retail is capital intensive sector and the increased availability of funds coupled with the imminent presence of foreign players promises to add a whole new dimension to the sector. Retailers ought to take cognizance of the fact that both back-end and front-end operations require investment and hence, need to be developed in a manner commensurate with their overall business operations. Our policy makers finally appear to be waking from their “decision-making reverie” and have most certainly taken a leap in the right direction. However, the road ahead is paved with greater challenges, for both existing and potential market players alike. Only time will tell who rises to the occasion, adapts to the new market realities, galvanizes its supply chains, leverages its core competencies and successfully counters its competitors in a hyper-competitive sector that is the Indian Retail arena!