Business Today

Who's Afraid of FDI in Retail?

     Print Edition: July 10, 2011

Most debates on foreign direct investment, or FDI, in retail are dominated by concerns about one stakeholder (the kirana store) and focus mainly on one retail format (food and grocery retail). But comprehensive discussion of the issue requires an evaluation of the impact of FDI on all stakeholders and all retail formats.

Stakeholders include the Indian consumer, unorganised or mom and pop retailers; agents, traders and wholesalers; farmers, processors and manufacturers; organised retailers and the government. The most important viewpoint to consider when debating FDI in retail is that of the largest stakeholder - the Indian consumer.

For organised retailers to succeed, they need to offer one or more of the following: price savings, product range, convenience, service and experience.

Eight categories make up the $450 billion, or Rs 20.25 trillion, retail market: apparel; durables, mobiles and IT products; jewellery and watches; footwear; furniture and furnishings; books and entertainment; pharmacy and wellness; food and grocery. While organised retail makes up only five per cent of overall retail, in the first four product groups (mentioned above) it has already received a thumbs-up from the consumer, with share ranging between 14 and 27 per cent.

In pharmacy and food, organised retailers have been unable to offer necessary value propositions so far. In the former, strong chemist and druggist associations are an entry barrier. In the latter, organised retailers do not have their act in place in most cases. Supermarkets and hypermarkets require the heaviest investments (in supplier development, supply chain and warehousing, and retail stores), have the highest operational complexity and the longest learning curve. Many early entrants in this space focused only on front-end stores and did not create the required supply chain. This has changed to an extent with strong models from Big Bazaar and Bharti-Wal-Mart.

Given the above context, let us examine the benefits and challenges from FDI in retail. Potential benefits include a stronger consumer value proposition; price reduction and inflation tempering, growth in local sourcing and exports, employment generation, and increased tax collection. Often, discussed challenges comprise job losses among unorganised retailers, agents and traders, and price hikes due to some retailers reaching monopolistic positions.

 Gupta's take

  • All stakeholders stand to gain if FDI is allowed in retail
  • Potential benefi ts: Growth in local sourcing and exports, employment generation, rise in tax collection
  • Studies show unorganised retail faces no threat, instead is projected to grow from $425 billion to around $575 billion
  • Organised retail can bring down consumer prices by fi ve to seven per cent over a four- to seven-year period and temper food inflation
  • Local sourcing will be a success route for multinational retailers

Job losses and employment generation: Fears of job losses among unorganised retailers are exaggerated. While unorganised retail will lose percentage share, it is still projected to grow from $425 billion at present to around $575 billion by 2015. Job losses may occur among agents, traders and wholesalers as organised retailers establish direct relationships with suppliers. However, organised retail will add around 1.5 million jobs in the same period. This will create significant net employment growth, and while adjustment pangs are expected, these can be managed.

Price reduction and inflation tempering: The spread of organised retail can reduce consumer prices by five to seven per cent over a five-year period. Benefits of disintermediation in the supply chain will be lower in India as traders (in food) work on wafer-thin margins.

Local sourcing and growth in exports: Key to the success of multinational retailers is local sourcing. Examples here abound, including McDonald's, Reebok, Marks & Spencer, and Bharti-Wal-Mart. In China, retail revenues of Wal-Mart, Carrefour and Tesco grew from $5 billion in 2005 to $16 billion in 2010. In the same period, their combined buying from China for exports grew from $24 billion to $56 billion.

The empirical correlation between developing suppliers for local markets and then leveraging their capabilities for exports is very high and applicable to India as well. This will provide growth opportunities to Indian suppliers and also create grassroots employment.

This evaluation, from the viewpoint of the consumer, makes a strong case for opening up FDI in retail. First, foreign capital/foreign institutional investments should be opened up fully as retail is capitalintensive business. Next, FDI in all single brand retail formats should be allowed without conditions such as staggered equity limits and geographic constraints. In multi-brand retail, the stakes are higher and the size of the prize much larger. Players could be allowed to set up businesses with complete ownership, but with certain conditions.

First, investments in supply chain equivalent to a defined percentage of investments in front-end retail or retail revenues over a five- to seven-year period should be specified. Second, an export obligation requiring merchandise equal to total revenues over the first five to seven years of business, which will ensure investments in developing local suppliers, should be set. Finally, there should be investments in training and development of people, so jobs are created here.

In the medium to long term, organised retail will bring many benefits for the Indian consumer. Its growth can be accelerated through the opening up of FDI. In the short term, of course, a decisive policy action is critical from the government.

The author is Principal at Booz & Company

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