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.

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