There has been little interest in a recent study conducted jointly by Arvind Sahay, Professor at the Indian Institute of Management, Ahmedabad, and Gordhan K. Saini, Assistant Professor at the Tata Institute of Social Sciences, Mumbai. Until now.Govt puts FDI in retail on hold
| May go ahead with FDI in single-brand retail
Titled "Effect of Credit and Low Price Guarantee on Consumer Purchase Intention - A Comparative Study of Kirana Store and Modern Retail Store in an Emerging Market", the study shows that malls and big retailers cannot match the convenience and credit offered by the local grocery shops known as kirana stores.Traders body welcomes govt move to put FDI on hold
That the study was based on a survey of 200 respondents in Mumbai, a city with one of the highest concentration of malls and supermarkets in India, was surpising.
As also that it focused on fast moving consumer goods, or FMCG purchases, and the respondents were from the SEC A and SEC B classification of well off consumers. Sahay says the study proves that kirana stores have the edge on organised retail given the credit they offer and relationships with customers.Traders bandh against FDI gets mixed response
"Where low price guarantees are operationalised as a promise to refund the price difference if the consumer finds the same product at a lower price, the preference for a kirana store is not noticeably different from that for organised retail," he says.
The study highlights the importance of 12 million kirana stores in a densely populated country, where proximity to consumers and delivery logistics give small stores an advantage.Retailers call for opening up non-food segment to FDI
But traders seem in no mood to listen. Across the country, shops shut down recently to protest the government's move
to permit foreign direct investment, or FDI, in retail.
Opposition parties including the Bharatiya Janata Party
and states including West Bengal, Tamil Nadu and Uttar Pradesh have also opposed the decision, announced by the Cabinet in late November.
The move would allow global retail chains to hold up to 51 per cent equity in multibrand retail, which means chains such as Walmart, Carrefour and Tesco can set up multi-brand stores in India with Indian partners. The Cabinet has also raised the FDI limit for single-brand retail to 100 per cent.
The size of the retail market is estimated at $450 billion, of which organised retail accounts for only six per cent, or $27 billion. Various studies project the market size at $1,250 billion by 2020, and the share of organised retail at 21 per cent. In the current retail market, nearly 35 per cent of goods worth some $157 billion, are sourced from small and medium enterprises. As the retail market grows, goods worth more than $298 billion will sourced from them.
Then, there is the potential of local procurement by global retail chains
from India. Tesco already exports goods worth $430 million from India, Walmart $125 million and Carrefour $170 million, according to business lobby Confederation of Indian Industry. In China, retail revenues of Walmart, Carrefour and Tesco grew from $5 billion in 2005 to $16 billion in 2010. In the same period, their combined buying from China for export grew from $24 billion to $56 billion.
Farmers, too, could benefit. "Most of the country's 600 million farmers are small and marginal," says Chengal Reddy on behalf of the Indian Farmer Industrial Alliance, or IFIA, a venture of Consortium of Indian Farmers' Associations. "This move is bound to benefit them. But we are going to moot that big retail players source nearly 75 per cent directly from them." He says the mandi system does not favour farmers, because they lose 10 per cent of value to commissions. Another 10 per cent is lost to quality issues, and five per cent is the cost of transporting goods.
Indian and multinational organised retailers in the country are happy about the government's decision. A senior executive of the RP-Sanjiv Goenka Group, which owns and operates the Spencer's retail chain, says: "We will look at any partnership that could help us become more competitive. But we are unwilling to give a majority stake to any partner."
While reserving specific comment on the Cabinet decision, Raj Jain, Managing Director and CEO, Bharti Walmart says his company is "willing to invest in back-end infrastructure that will help reduce wastage, improve farmers' livelihoods, reduce prices, and ease supply-side inflation".
French retailer Carrefour said the decision could help fight inflation. Many small businesses see opportunity. "People like me could not have thought of launching FMCG brands had it not been for modern retail," says Sanjeev Khemka, Director of Khemka Containers, a Rs 380-crore diversified group with interests in packaging, and food and healthcare products. He supplies breakfast cereal to the Big Bazaar chain, and also retails his own range under the Murginns brand. Next, he plans to launch dairy products.
Keshav Misra, Head of Consumer Goods, Baring Private Equity, believes that FDI is good for smaller brands that cannot afford to invest in distribution. That said, branded FMCG could take a hit. "This space would benefit from the penetration that modern retail would provide, but in the long term, the margins and working capital of branded players do get affected," he says.So who's afraid?
The Confederation of All India Traders, supported by several political parties on the right and left, organised a nationwide bandh. They oppose FDI and want reforms in retail.
But Rajiv Kumar, Secretary General of the Federation of Indian Chambers of Commerce and Industry
, asks: "In the long run, small stores may or may not be affected, but should we stop that from opening up an opportunity that benefits consumers and farmers, and can create millions of jobs?"
Experts say the economy will be a net beneficiary. "Organised players aid the trade by helping farmers source better seeds and improve farming techniques. FDI will have a transformational effect on many fronts, affording better choice and price to consumers," says Hemant Kalbag, Partner and Vice-President, and Head, Consumer Industries and Retail Practice, at A.T. Kearney. FDI in retail will reduce inflation: RBI chief
What it then boils down to is a face-off between the interests of the 40 million people employed directly or indirectly in the retail trade in the country and the 120 million consumers in the 53 cities with a population of over a million, where retail outlets with 51 per cent FDI are being allowed to set up shop.Clarity needed
Across quarters, industry participants are seeking clarity, which is likely only after a formal government notification. "Already, queries are flowing in about what the $100 million investment should be in," says Kalbag, referring to the stipulation that foreign retailers must invest at least $100 million, of which at least half must be in infrastructure. Govt launches ad campaign to sell FDI in retail
"Is it in store front infrastructure? What would be the timeline?" Others are being asked whether a state can ban the entry of a retailer after the Centre allows it. Retailers currently need many state-level permissions.
Despite all the hullabaloo, the need for modern logistics infrastructure is clear. "FDI in retail will only help if there is development of supply chain infrastructure, especially cold chains," says Rajeev Dar, Chairman of the Indian Society of Agribusiness Professionals, an organisation that has worked for a decade with some 50,000 small farmers in 16 states.
M.S. Swaminathan, the father of India's green revolution says the outcome of FDI in retail will depend on how business is done. "If retailers opt for inclusive growth, it would be good," says the agricultural scientist and Rajya Sabha member. "If they ignore small farmers, it will lead to discord." Sage advice for foreign retailers waiting in the wings.