FDI in Multi Brand Retail is Great

by Manshu on November 29, 2011

in Economy

Cabinet has cleared the FDI policy that allows multi brand retail in India, and companies like Walmart and Carrefour can now partner with an Indian company and sell to consumers .

The persistently high inflation and the current Euro mess must have a lot to do with the timing of this decision but the decision itself was a long time pending.

Everyone knows stories of the food grain that rots in India’s warehouses and though India is the second largest producer of fruits and vegetables in the world with a production of 180 million tons – it has only 5,386 stand alone cold storage units with a capacity of 23.6 million tons – 80% of which are used just for potatoes!

Back to the policy, it stipulates the following key things:

  • The foreign equity player will own up to 51% of the stake through the government approval route.
  • The policy will be rolled out to only cities with a population of more than 1 million people and there are currently only 53 such cities in India – out of a total of 7935 cities.
  • A minimum investment of a $100 million is required and half of that should be in backend infrastructure like cold chains, transportation etc.
  • They have to source a minimum of 30% from Indian micro and small industry having capital investment of less than a million dollars.

India is not the first one to do this, and what it has done is not unique either. Many developing countries have much more liberal policies than India. These countries include China, Brazil, Mexico, Thailand, Russia, Singapore, Argentina and Indonesia among others.

In fact China started out in much the same way as India allowing 51% foreign equity and confining them to large cities. They only removed these restrictions in 2005 after having them in place for more than 10 years. They gave the domestic players enough to time to get up to speed with the western model and then allowed free competition.

It has turned out quite well for them as most of the top 10 retail companies in China are local and not foreign. These were the top 10 Chinese retailers in 2010.

  1. Suning Appliance Group
  2. Gome Electrical Appliances Co., Ltd.
  3. Bailian Group Co., Ltd.
  4. Dashang Group Co., Ltd.
  5. Vanguard Co., Ltd.
  6. RT-MART International Co., Ltd.
  7. Carrefour S.A. (China)
  8. Anhui Huishang Group Co., Ltd.
  9. Wal-Mart Stores, Inc.  (China)
  10. Chongqing General Trading (Group) Co., Ltd

This clearly shows that Chinese companies didn’t let much bigger foreign players compete them out of the market, and the Indian experience shows the same thing in areas like telecom where foreign and local players co-exist.

What’s even more fascinating is that the number of Chinese equivalent of kirana stores rose from 1.9 million to 2.5 million after the liberalization of its retail sector!

This is because of economic growth of course and also because big players don’t have a magic wand that they can use to ouster other smaller players as soon as they enter any market. Many of their strengths in their home countries are based on factors that are totally absent in other countries. Wal-Mart is able to drive costs down because of its incredible logistics and supply chains which are absent in India as they were absent in China.

Then there is the question of physical infrastructure like roads and ports that are not to the same level as they are in the US and they simply won’t have the kind of scale that they have in the US to negotiate and bargain with the suppliers and drive down the cost.

Local knowledge is also an important thing and I found an interesting example of that in this Harvard article written in 2005.

Here is the example:

In the grocery section of its stores, Wal-Mart originally offered meat and seafood American-style, in plastic-wrapped, freshness-dated containers. To Chinese consumers, however, “fresh” means that you can pick it out yourself and watch it wriggle – so they took a pass.

Big companies can’t set up shop and drive out smaller players overnight – they have advantages in some areas but that doesn’t mean the smaller players are completely at their mercy.

Don’t underestimate the innovation and resolve of Indian entrepreneurs and companies that compete with much larger companies globally. IBM earns more in a quarter than the top 3 Indian IT companies earn in a year, and yet they give IBM a run for its money in many contracts

Even now, organized domestic retail players are present in the market, but mom and pop stores are not going out of business because of them. I think this will hold true in the future as well, and allowing FDI will be a big net positive for everyone.

Wal-Mart is going to invest $756 million in Brazil and hire 7,000 people this year, and India can expect similar type of investments from these big players. And this is not hot money that goes out of the stock market and leaves it reeling every time someone in Europe sneezes. FDI flows are a lot more stable than FII flows and that’s a good thing.

Getting efficient supply chains and eliminating middle men is good for both consumers and farmers as this will give both parties a better price.

Getting more of the retail sector under the organized sector is also good because it leads to more employment and also of a better quality.

Anyone who remembers the time it used to take to get a phone connection or the big hassle it was to chase after the telephone guy to fix the phone knows how great competition is and I don’t think anyone is really questioning whether this policy is good for customers or not.

My view is that this will be good not only for the customers but for everyone involved, and that the current policy allows us to test that view without a lot of risk.

The potential upside is immense, and the downside is limited – I think FDI in multi brand retail is great for everyone, and I hope this great first step doesn’t get derailed.

{ 31 comments… read them below or add one }

Manish Jain November 29, 2011 at 7:38 am

Very informative, it seems the only ones who don’t want FDI are the kirana stores because they fear change and the unknown…which is understandable. Granted the kirana stores of today might have a tough time if they continue there current practices, but if they change they could benefit. I believe the reason FlipKart is doing so well is because of the customer experience.

Reply

Manshu November 29, 2011 at 7:34 pm

Yes, I have the same view – competition spurs everyone and makes people do things that even they didn’t think they could do. And price isn’t everything, people will pay for convenience and service if they get it.

Reply

Clickinsurance.co.in December 2, 2011 at 5:13 pm

I have a different opinion here. I agree that people will pay for convenience and relationships, but the sheer size and scale that organized retail would bring will kill the kirana stores to a large extent. They can survive in specific localities where the Big Bazaar’s are quite far off, but still the kind of patronage they get from FMCG companies will dwindle. This will surely increase the pressure on margin.

Reply

ANIL KUMAR KAPILA December 2, 2011 at 7:34 pm

No I don’t think that anybody can kill kirana stores. We must remember that organised retail is confined only to big cities and people have to travel a lot to get to these big stores. Traffic jams and ever increasing petrol prices discourage most people to travel long distances to get items of their daily needs. Moreover we don’t get all our monthly supplies only once a month. We are in the habit of buying things on a daily basis as and when needed. In any case fresh vegetables, fruits, milk, bread, butter, eggs, meat etc have to be purchased daily.

Reply

Manshu December 3, 2011 at 2:01 am

Look I don’t think this will happen but even if it were to happen – what do you want to do?

Should we all stop using cellphones because the PCO business died? Should we get back to typewriters because computers killed them? Should we throw our digital cameras because Kodak is close to bankruptcy? Should we trash our iPods and MP3 players because cassette players and CD manufacturers are struggling?

The issue here at least to my mind is whether bringing this step will cause so much societal upheaval that the benefits that a large section of the society gets will be nullified by the damage done to one section of the society.

That’s the real question – I believe any change will have winners and losers and ultimately you want to be in a situation where society as a whole is better off.

Here you have a situation where you can with reasonably less risk try out FDI and see whether the benefit that accrues are in fact worth it or not. If they are not then you can stop them from rolling out to further cities, or even change policies and ask them to get out.

The changes will be gradual and palpable – and if they don’t work – you can act on making changes.

Reply

harinee November 29, 2011 at 10:59 am

Very good write-up! Oddly enough at least in my city kirana stores still are giving retail outlets a run for money. Reliance,More and the rest dont even seem to be breaking even. Only company I see impacted is Spencers retail which has been there for a long time now, having a bad time because of competition. And local guys are coming out with innovative pricing and ideas like fruit-based retail etc which are doing quite good.We used to shop at Spencers before all mass retail opened now we don’t go to any as the ordinary shops are giving attractive prices and variety.
As u mentioned key is Supply chain, without a strong supply chain you cannot run mass retail and India it is not easy with the weather and infrastructure and bit of bueracracy.
And how much low can Walmart go in a country known for cheap labour and products to beat competition.

Reply

Manshu November 29, 2011 at 7:38 pm

That’s a great example right there of why protection is not needed. People figure out ways to protect themselves and carve out a niche. Incidentally, when I was reading about this topic I came across several examples where retailers developed a niche and turned their store into a specialty store and that helped them compete much better with bigger stores who carried a wide variety of merchandise but couldn’t build expertise on selling guitars for example.

Reply

Anil Kumar Kapila November 29, 2011 at 1:30 pm

Hi Manshu
I am not against FDI in retail but I feel that it will not have much impact immediately. As you have also pointed out the biggest bottleneck is going to be lack of physical infrastructure like good roads and availability of power.
Most Indians prefer to buy vegetables and fruits from street vendors. These vendors have their business cards and mobile numbers. Housewives find it very convenient to call shop keepers very close to their houses and street vendors for supply of fruits, vegetables and grossery. Prompt home delivery and interest free credit are the facilities provided by these people.

Reply

Manshu November 29, 2011 at 7:46 pm

Yes, I think this is true for a large cross section of people across the country, and it’s not going to change overnight.

When I read your comment I thought of how my mom shops for vegetables through these vendors in Delhi and how my mother in law shops for fish in Goa through these vendors and I don’t see either of them changing their ways for a long time to come.

Reply

Swaroop November 29, 2011 at 5:55 pm

All those who are opposed to FDI in retail are simply trying to gain political mileage out of it.

In the 53 cities that have been identified, have they ever asked the kirana store owner, whether he makes a profit every year? What with corrupt officers from various government departments [VAT/SALES TAX, FOOD AND DRUG ADMIN, WEIGHTS AND MEASURES] paying regular visits for harassment and subsequent bribes. Are the
Kirana store owners aware of the extent of loss due to pilferage, shortage and wastage due to rodents? There is a tradition of customers buying kirana stuff on credit from the shop. What is the percentage of bad accounts every year? How many licenses and permits does the kirana store owner has to obtain and maintain?

In this big cities, are the kirana shopowners able to find labour for a 12 hour duty?

Has anybody asked the kiranawalla’s grownup children, whether they are going to continue their traditional business of kirana stores after finishing school/college ? They dont like to smell of ghee and oil and garam masala!

The days when all the family members used to lend a hand from morning to night in running the kirana store are over. Firstly, families have become smaller. Secondly, young members of the family are away at school or college or coaching classes. So, you think the shopowner can single handedly run his shop at a profit?

In these big cities, isn’t the number of small kirana stores being converted to more glamorous retail outlets for mobile handsets, eyewear, ice cream parlours, readymade garments, footwear, faux jewellery etc ? It can be proved that all these lines are more profitable than kirana.

If the small kirana shop owners themselves are not complaining what are you guys shouting about?

Have, Mamatadi or Mayawati or Jayalaitha or Mr Jetley ever spent half an hour at a kirana store and observed what their problems are ? Can the kirana Shopowner buy directly from the farmer and sell the stuff? NO. There are so many middlemen.

When the political parties side with the hawkers, they conveniently forget their ( now) favourites, small shopkeepers.

Reply

Manshu November 29, 2011 at 7:48 pm

Those are some great points and it seems like you’re quite familiar with kiranas. Thanks for your comment.

Reply

Anil Kumar Kapila November 30, 2011 at 7:35 am

Hi Swaroop
I agree with most of your points. FDI in retail is not going to materially change anything in near future and big retail outlets are going to coexist with small kirana shops. Both small shops and big malls have a place in Indian society as they cater to the need of different category of people. We should not forget that even those people who do not have regular shops and have to carry their goods on cycles, rikshaws and vans every day and display them on the roadside and face daily harrasment from the municipal corporation people also have their customers.
We Indians have some cultural traits which force us to go to small shops. We love to bargain, feel, touch and smell things before buying them.We seek attention from the shop keepers.We want to feel important. We want to be pampered.We want to taste eatables before buying them. We want to replace the clothes if we don’t like them after buying. We want to return unused things. Only our small shop keepers offer us these facilities.

Reply

harineem December 2, 2011 at 9:23 am

This is a very good point. Customer service in some of existing outlets is pathetic.The personal touch is lacking and employees don’t feel that ownership and are themselves not aware of what is stocked where. Yes culturally we are a collective culture against the individual culture of Western countries.I have never felt like coming back to any of the Reliance/More outlets.
To give an example there is a local fruit retailer in Chennai becoming quite popular has all girls running the show. These girls process orders at rate of 5-6 in 5 mins .They know what is available where, not a surprise that shop is doing great business.And when I go to Spencers/More or Reliance one order takes 10 mins sometimes and god save you if they cant find the price tag on a product!

Reply

amol December 8, 2011 at 12:19 am

“We want to replace the clothes if we don’t like them after buying. We want to return unused things. Only our small shop keepers offer us these facilities.”

brother, which country you are are living in…at least NOT india…
have you ever tried returning the items ? hows the treatment…sometimes they will treat you as if you have done criminal offense…infact, plenty-of shopkeepers have hoarding saying “No return”…etc. etc.
big players can afford to provide you that better service for returned items…

Reply

ANIL KUMAR KAPILA December 8, 2011 at 7:31 am

Hi Amol
What I have written here is based on my personal experience. When you live in a locality for a long time and regularly buy things from your neighbourhood stores you develop relationships and you can get these facilities very easily.
I buy clothes, uniforms, shoes, books, school bags etc for my kids from a shop close to my house. Most of the times my kids are not with me when I am shopping for them. My shopkeeper has given me this facility that my kids can go to the shop and can get the things exchanged any time if there is any problem of size or if the kids don’t like the stuff.
I buy milk, bread, cakes, sweets etc from a shopkeeper who replaces the stuff without asking any question if I just tell him that I did not like the taste.
I can get my defective pen drive, printer cartridge, CFL lamp replaced even after a couple of months after purchase from my shopkeeper without showing him the bill.

Reply

amol December 9, 2011 at 3:12 am

agree anil, but thats your individual experience…we can not consider it as general.
I am currently outside india(usa) and got very good experiences.
One time I was shopping and came across one item which was displayed with price as $13…I was about to buy it and the salesperson came and he said that the price is mis-printed and apologize for the same. I was also doubtful that the price can not be $13 for sure. But then they said that since you saw it for that price you will get it for that price only. The treatment was excellent.
other time when I returned some item they take it so easily and make you so comfortable
Once I bought one t-shirt and found that its not of my size…I went to replace it with small size and when I went to the billing counter…they said that you have discount on this stock and offered the discount too.

I am not trying to compare with western model but big stores like walmart can provide good customer service.

Reply

ANIL KUMAR KAPILA December 9, 2011 at 7:14 am

Hi Amol
In my family I am the only one living in India. My brother, sister, uncle, aunt and their families are all US citizens. I have also been to the US several times. While shopping in the US I had both good as well as bad experiences there. My feeling is that it has more to do with the individuals than the stores. If you happen to come in contact with a good sales person your experience is bound to be good irrespective of whether you are shopping in India or the US, small or big store.
I have also shopped at Easy Day and Hyper City markets here and my experience has been quite good. Generally I have found the staff very cheerful and helpful.
I have found that even small shop keepers are embracing the culture of big stores. Healthy competition will ultimately result in good customer service.

Reply

amol December 9, 2011 at 9:43 pm

Anil,
You have been to US several times and have experienced it market here…Understood. Your brother, sister, uncle, aunt and their families are all *US citizens*…sorry did not understand..does it really matter with your US experience…

Reply

Manshu December 9, 2011 at 11:55 pm

Look that’s just being conversational and giving a little context. I don’t see how anyone can have an issue with that.

Reply

Koteswara December 1, 2011 at 9:57 am

Hi,
I am not against or for the FDI. But Indian consumers are fooled by the shop keepers/Manufacturers/Govt. When MRP (Maximum retail price) is printed they sell it to Maximum Price. That MRP has become the standard price, why can’t the Manufacturers or Govt insist to have Minimum and Maximum price printed on the items. Also there should be policy how to decide the these Max and Min Prices. Now it is shop keepers decide the selling price between the Min RP and Max RP.

Reply

Manshu December 1, 2011 at 4:51 pm

I don’t agree with that at all.

There is very little that government can do and the last thing you want them to do is interfere with the market. The only way to bring costs down is to increase competition and have players who want to sell stuff to you cheaper.

That’s the only way.

No one can “tell” anyone to do this or do that.

Reply

shraddha December 2, 2011 at 6:44 pm

one more thing i want to point out is, this big retailer are not always selling things at lowest price, strategy is to sell the most frequently needed things at lowest price and create a illusion that we are selling everything at lowest price(eg:-oil, atta, vegetables etc etc) and they also rely on the fact that because of extra choice consumer tend to buy things which they don’t need
I think fear of small retailers getting killed is overdone, government is allowing FDI only in big cities were we already have likes of big baazar and reliance, but i think government should definitely give some protection to small retailers by giving loans at less interest, we need more entrepreneurs.

Reply

Manshu December 3, 2011 at 1:48 am

Yeah the fear is overdone for sure, but at the same time I think we should draw hope from the fact that we are debating issues that really matter instead of arguing about renaming cities and redrawing boundaries, which Khan is more important, whether Sachin or Dravid is greater and that kind of stuff.

Reply

ANIL KUMAR KAPILA December 2, 2011 at 7:48 pm

HiManshu
I agree with you. Nobody can fool Indian consumers. Most consumers are very smart and don’t buy things blindly from one place without comparing the price from different shops. Very few people buy stuff at MRP these days. In fact many shops are offering discounts and gifts up to 5% for purchases over Rs 500/-.

Reply

Manshu December 3, 2011 at 1:46 am

Yes, that’s right, people are out there to get the best deals that they can get and they do that. At the same time shopkeepers and manufacturers and traders are there to make a profit and make a living. There is nothing wrong with that – if you want to bring down the cost, let more competition come in and that will drive cost down. There is no magic bullet.

Reply

Aditya December 1, 2011 at 2:54 pm

This is a grey-area for me, and I find both proponents and opponents advancing excellent arguments to make their case.
Here’s a well-researched post in the leftist/left-leaning group blog, Kafila, presenting the other side of the argument, http://kafila.org/2011/11/30/the-governments-claims-about-corporate-retail-and-the-realityshankar-gopalakrishnan/

And there’s a very interesting debate going on, in the comments section of the following: http://kafila.org/2011/11/30/why-are-americans-so-mean-to-walmart-never-mind-come-to-india/

Reply

Manshu December 1, 2011 at 4:47 pm

Well, unless you go through with the step you will never find out. As I said the risk is quite limited, and in any new thing people are naturally hesitant at first. We have gone through the same arguments for everything from computerization to IPO sales. I remember people clamoring how computerization will drive unemployment or how IPO of PSUs were like selling family silver. Look at it now and you see that none of those fears materialized. Look at the developing countries that did allow FDI and none of them had to backtrack on their stance.

Reply

Samruddha Salvi December 2, 2011 at 12:52 am

The government has seriously taken a well thought step of opening up of the Indian multi brand retail for the FDI. Everyone is to benefit from the opening of the retails, including farmers and to many people surprise even the Kirana stores.
The only people to face axe are the traders who have been hoarding the goods nd contributing to inflation for a pretty long time. The kirana stores will benefit thanks to govt policy in FDI policy wherein it makes them necessary to sell atleast 30% of good to small retailers.

Source:
1) Ten Benefits of FDI in Retail for everyone

Reply

Cyriac December 10, 2011 at 5:47 pm

this is just my personal view. i understand that FDI is good for Indian consumers. i dont really know whether its good for producers/farmers, but the govt. and you seem to be convinced about it. but i still oppose this move for the simple reason, i dont want my money to go into any foreigner’s money. this doesnt mean that am totally boycotting foreign products. ofcourse as anybody else i use lot of them, but whenever i have a choice i mostly try to use Indian.
now the in current scenario, local kiranas and local ‘walmarts’ (like big bazar, more, etc.) is can provide what ever we want. so why to have foriegn investment here and there by exporting our money to their pockets?

feel free to bash my view. am open to criticism.

CG

Reply

Manshu December 10, 2011 at 11:24 pm

Even if your view were accepted – you will still have an option to pay more for Indian products but at the same time people who can’t afford or wish to buy things cheaper will have an option to do that.

I think someone with your view should be satisfied with avoiding shopping at foreign stores, why impose your will on others – especially when you do admit that you use a lot of foreign products yourself.

Personally, I think this mindset is a relic from the days of early independence when India wanted to be self sufficient or self reliant and I don’t agree with it because I feel that getting more integrated with the global economy benefits everyone as we have already seen in the post liberalization era.

If it wasn’t for technology developed abroad, I would have never used a computer, a cellphone, a telephone, a car, even a scooter or a typewriter. The reason India has been able to sustain a high trade deficit is that after China – India is the country with the maximum number of people abroad who send precious forex and help sustain their families in India. If the foreign countries also developed this kind of attitude then that will be bad for India. I could go on and on…..

Reply

ANIL KUMAR KAPILA December 11, 2011 at 10:58 am

Hi Manshu
I agree with you that the people who can’t afford to buy costly things or wish to buy things cheaper should have option to do so. We know that our markets are flooded with cheap Chinese stuff. If I find that I can get some item of reasonable quality made in China at a much lower price than that made in India then why should the Indian manufacturers try to prevent me from buying Chinese stuff. We know that most of the computer hardware we buy in India is actually made in China. Nobody can claim that computer hardware made in China is of inferior quality.
You have rightly mentioned about very low capacity of cold storage units in India.This is the main reason for considerable loss of fruits and vegetables. But our main problem is that we have a very complex agribusiness which is heavily dependent on commission agents.
Presently middle men are the main source of credit up and down the supply chain – from the farmer to the neighbourhood vegetable and fruit seller.If we get rid of the middlemen then who is going to provide the credit? Obviously banks can not do that.
Commission agents stand ready to buy all the produce from the farmers irrespective of quality- which agribusiness companies are unwilling to do. Who will buy relatively low quality produce of farmers in the absence of middlemen?
Commission agents have deep knowledge of local market conditions across the country in the goods they deal in. Due to this reason even big retail outlets prefer to buy from the knowledgeable middlemen on credit than buying directly from the producers.
I think due to the reasons mentioned above even if the FDI in retail comes after sometime, it is not going to have any major impact.

Reply

Leave a Comment

{ 2 trackbacks }

Previous post:

Next post: