FDI in retail: A different perspective
Nov 26 2012
With capitalism, cronyism is not far behind. We have seen it in emerging markets like India, Russia and China and in industry bastions like the US and western Europe. However, the paradigm sweeping the globe also brings forth major innovations in human organisation, product development, scientific research in wealth creation and management, and promotion of consumerism. Retail management is one such industry that had globalised more than a century ago in many parts of the world. Marks and Spencer — the UK retailer was established in 1884. ‘Don’t ask the price, it’s a penny’ was the slogan Michael Marks used when he opened his first bazaar in Leeds, built around the five key principles of quality, value, service, innovation and trust. Metro — the German diversified giant retailer with sales brands such as Metro Cash & Carry, Real, Saturn and Galeria Kaufhof was set-up in 1964. The interesting part is that Real bought over the entire stores of Wal-Mart in Germany, when the latter folded up its operations in that country. Macy’s of the US opened its first store in 1858 and is credited of having launched in 1919, the first executive development programme of its kind for training and mentoring college graduates for careers at Macy’s and Bloomingdale’s.
Modern retailing is about organising products and services and deriving economies of scale around the common (middle-class), price sensitive, quality-conscious consumer. Therein lie the seeds of complexity in a web of opportunities and challenges. The margins are razor-thin and costs are borne upfront. Subhiksha has been a live case before us. By year 2000, the company had a unique business model and was successful in quickly ramping up scales. Yet within a decade, the company’s sales plummeted and then stores closed down one by one. There can be much analysis into the causes of Subhiksha’s failure, but the fact remains that organised retail business is not easy or simple. The core mantra is operational efficiency and innovations built around human psychology, procurement, sourcing, inventory management, stores location, docking, display and transportation.
The biggest group under competitive threat from organised retail comprises the large MNCs themselves, especially in the FMCG sector. At present, in our country, most FMCG companies increase prices (and reduce the net contents) at will, using high pressure and often misleading promotion schemes and advertising. Most global retail giants use shelf-space to display their own house brands side-by-side at much lower prices for exactly the same products offered by the higher-priced brands, but offering their own personal guarantee. Many a time, the manufacturer is the same for both the products. In most daily-use products such as shampoos, soaps, chocolates, shaving kits, dental creams, detergents, food products, among others, the price difference can be as much as 100 per cent (half the price).
Apart from the consumers, the biggest beneficiaries of global competition in organised retail would be the employees. At present, despite presence of many large-size Indians-owned retailers, the average salary of employees is low, working hours irregular and without respite and the job itself is insecure. The present conditions are quite similar to the Indian IT worker in low-end call-centres and transcription businesses before the arrival of global IT giants in our country. Mercadona, Spain’s largest retailer chain, invests almost four weeks of training time for each new store employee compared to the norm of only seven hours in the US. Over 85 per cent of Mercadona’s store employees are full-timers. Stable salaries make a world of difference to lower-wage retail employees. Beiersdorf — the makers of Nivea, and in existence for more than 100 years now — has a uniform global talent management process in place that identifies and develops specialists and management personnel at all levels to ensure that key positions within the company can be filled as they become vacant.
Seeding the market and industry with global competition can unleash a series of innovations across the entire value-chain leading to all-round gains in productivity and efficiency. Finally, global organised retail business is not just about profits and success. We may well remember examples of failed internationalisation involving both high profile as well as lesser known companies such as Wal-Mart’s struggles in the 1990s in Germany, Hong Kong and Indonesia, or Carrefour’s missteps in the US, and Lane Crawford’s disastrous move into Singapore. I, for one, have no doubt that there is presently no organised business model that can beat the high-pitched pavement sellers on Janpath in Delhi or the weekly haat-mandis in our countryside.
(The writer is a professor of strategy and corporate governance, IIM-Lucknow)