Global retailers could do dollops of good
Hemant Kalbag March 17, 2011The "new normal" in the food and grocery business is a milieu wrought with inflation and volatility. The question that remains is: what can organised retail, or more specifically, a change of policy towards foreign direct investment, or FDI, in retail, do to help fight inflation and productivity challenges? The answer is quite simple: FDI will not cure us of inflation. There are too many factors that are beyond the control of retailers that impact inflation. So what can retailers do to help?
Easing FDI norms and allowing the entry of global retailers can help by creating an environment that drives competition, consumption and creates choices for the consumer. More options for the end-consumer make the market more efficient. There is, of course, the perennial roadblock linked to political debates: how will all this impact the kirana shops?
At present, FDI in multi-brand retail is completely prohibited, which rules out foreign investment in the food and grocery domain, which is basically a multi-brand, multi-category business. The fact though remains that foreign retailers are no more a threat to kirana shops than our home-grown retailers. They are perhaps even less so, given their focus on hypermarkets.
So an onerous FDI policy in multibrand retail is ultimately taking away choice from the consumer and diluting the competition that may drive prices down. In the current inflationary scenario, large global retail chains could actually help alleviate the situation.
India currently sees high wastage in the food and grocery value chain - unofficial estimates peg these losses at around `50,000 crore in the food segment alone. This wastage, along with all the intermediaries, results in a high price that the end-consumer pays, while the farmer's income still remains low.
As per a CRISIL study, price realisation of a farmer in India is 35 to 40 per cent of the retail price compared to a realisation of 60 to 65 per cent in countries with a high share of organised retail. By directly selling to retailers like Wal-Mart, Godrej Agrovet and ITC, farmers in north-west India have now started realising five to seven per cent higher prices. Advent of more retailers will only increase options for farmers.
Global retailers can bring about a paradigm shift in a country's supply chain infrastructure in terms of storage and distribution capabilities. Increased supply chain efficiencies can dramatically reduce wastage and thereby help lower food prices for the end-consumer.
Enhanced supply chain capabilities also significantly cut down transit times for distribution and help avoid sudden price rises in parts of the country - as seen in the case of vegetable prices a few weeks ago. In India at present, this supply chain infrastructure is extremely weak. With the scale of investment required to build these capabilities being prohibitively high, these changes can only be brought about with the help of large retail chains that have deep pockets.
The investments that retailers bring into any country benefit not just the companies, but also other entities in the food and grocery value chain. A large benefit could go to suppliers - in this context small farmers. To get scale benefits, retail companies invest heavily in areas like contract farming and increasing crop yields. The entry of global retailers could improve our overall agricultural output.
Opening up FDI in multi-brand retail could go a long way in driving innovation and stability - and maybe, just maybe… it will also help ease inflation a bit.
The author is Vice President and Partner at A.T. Kearney, in charge of their retail practice for Asia