FDI IN MULTI-BRAND RETAILING IN INDIA
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…The country beckons to global retailers
and foreign investors alike.
Market
Realities:
According to the Global Retail Development
Index (GRDI) report published by the leading US based consulting group, AT
Kearney in June 2010, 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 population 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$ 395.96 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. Amidst all this
hyperactivity, one key issue that has remained atop the agenda of the country’s
policy formulators for a while now has been the issue of FDI in the retail
sector.
FDI
in Multi-Brand Retail:
Foreign Direct Investment (FDI) in the
retail sector has always been a contentious issue per se, courtesy the well
documented proclivity of our policy makers to dither and delay decision making
on key aspects stemming from political risks at large. Presently, India allows
51% FDI in single-brand retail and 100% for cash-and-carry outlets that are
permitted to sell only to other retailers and businesses. This has seen global
giants such as Walmart and Carrefour enter the Indian market. Walmart currently
operates five cash-and-carry outlets in partnership with the Bharti Group while
Carrefour set shop with its first cash-and-carry store last December. FDI in
multi-brand retail however, has always been a hot potato of sorts. With global
retailers clamoring at our doors, a burgeoning market ripe for organized development
and an increasingly discerning and aware end-product consumer; policy makers
have been unwilling to throw caution to the wind and go the whole hog by
allowing any sort of FDI intervention with regards to multi-brand retail in the
country. The authorities have made the right noises from time to time, germane
to the matter at hand, but have been reluctant to “open the floodgates” as far
as FDI in multi-brand retailing is concerned. However, in the face of rising
inflation, need for proactive economic and strategic reforms and employment
generation opportunities; the Government has off late, softened its
stance…partially shedding its garb of recalcitrance and embracing the next
phase of economic liberalization.
In July of last year, the Department of Industrial
Policy and Promotion (DIPP) released a detailed discussion paper exploring the
plausibility of permitting FDI in multi-brand retail. The paper sought to allay
the fears of the traditional kirana
stores that 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 locational
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. The paper further discussed the feasibility of introducing a
Shopping Mall Regulation Act in order to protect the interests of the
small-scale domestic retailers. The pertinent question of employment was also
addressed, as the Department suggested that half the jobs accruing from the
establishment of new multi-brand outlets be reserved for the rural youth.
However, the house is still divided with regards to that recommendation.
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. The paper further discussed the feasibility of introducing a
Shopping Mall Regulation Act in order to protect the interests of the
small-scale domestic retailers. The pertinent question of employment was also
addressed, as the Department suggested that half the jobs accruing from the
establishment of new multi-brand outlets be reserved for the rural youth.
However, the house is still divided with regards to that recommendation.
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. Hence, the need to allow FDI in multi-brand retail assumes
even greater significance. These global retailers are expected to bring with
them a wealth of experience, streamline supply chain operations, eliminate the
predatory middlemen and infuse a greater degree of strategic technical
expertise that will only benefit the sector as a whole. The domestic players
will face stiff competition and many of them may look to enter into strategic
alliances with these global giants in order to safeguard and further their
interests and protect their margins, but are likely to take a leaf out of their
books and implement proactive strategies 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. Although the discussion paper lacked
clarity on various aspects, it is still regarded as a positive step in the
larger scheme of things.
One
Giant Leap for Indian “Retail-kind”:
In late July this year, acting on the
recommendations of the DIPP, the Committee of Secretaries (CoS) headed by
Cabinet Secretary, Ajit Kumar Seth, cleared the proposal to allow FDI in
multi-brand retail. The FDI is pegged at 51% and the foreign investor would
have to bring in US$ 100 million as investment, restricted to only Tier I
cities. Tier I cities are those with populations over 1 million. There are 36
such cities in the country. This latest development certainly does come as a
shot in the arm as far as FDI in the retail business is concerned. 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!
Pradyut Hande
The Writer is presently pursuing his Bachelors in Business Administration at NMIMS, Mumbai. He attempts to address myriad issues of both domestic and global consequence, ranging from Business and Economics to Geopolitics...from Sports to Arts and Culture. He is also a keen Debater, Munner, Quizzer, Painter and Amateur Freestyle Rapper.
The Writer is presently pursuing his Bachelors in Business Administration at NMIMS, Mumbai. He attempts to address myriad issues of both domestic and global consequence, ranging from Business and Economics to Geopolitics...from Sports to Arts and Culture. He is also a keen Debater, Munner, Quizzer, Painter and Amateur Freestyle Rapper.
