What FDI can do to our retail

Tags: Op-ed
What FDI can do to our retail
Bloomberg
CHOICES GALORE: A shopper browses frozen food products at a Bharti Walmart best price modern wholesale store in Zirakpur, on the outskirts of Chandigarh, on September 28 in this file photograph
Not very long ago, one of India’s leading decorative paints company requested for my assistance in formulating their future business model in the light of coming multi-retail giants (MRGs). The company has invested heavily in successfully building brands and a country-wide distribution network. The company’s management felt that the situation was complex and unclear — the MRGs would provide them shelf-space leading to explosive sales growth, but at the same time, margins will be squeezed out. The added danger was if this paint company refused to sell through MRGs, competitors may enter and would gain volumes at their expense! Such issues will continuously haunt Indian companies in times to come with no clear-cut guidelines.

Allowing 51 per cent FDI in multi-brand retail is definitely a game-changing policy initiative. The discussion in both Houses of Parliament was mostly brilliant (but occasionally pedestrian as well). Some lead speakers had done extraordinary homework; others were often devoid of facts. Most speakers resorted to selective usage of information or distortion (not deliberate, perhaps) to support their own viewpoint. That is understandable, but the queer part was that though some political parties and members debated either for or against the opposition-moved motion, yet they voted exactly against their own viewpoint when the crunch came. This is indeed another manifestation of parliamentary democracy going off the rails! However, the purpose of this article is to highlight some important manifestations of the major policy change. Here is my take.

The organised retail industry will consolidate with implications far and wide beyond the retail trade as the example above shows. In the aftermath of consolidation, there will be three or four MRGs operating countrywide in India.

There will be a new pecking order amongst the super-rich Indians. It is no coincidence that world over, some of the richest people are retailers — Waltons (Walmart) in the US, Albrechts (Aldi) in Germany, Perssons (H&M) in Sweden, Ricardo Salinas Pliego (Grupo Salinas and Elektra) in Mexico, Ortegas (Zara) in Spain, Bettencourts (L’Oreal) and Pinaults (PPR) in France, among others. My belief is that many of the new Indian super-rich will be from well-connected political families.

The policy that restricts opening stores only in cities with population of more than 1 million is a gross misnomer — large discount superstores located on the outskirts of such cities will attract people from nearby towns, especially since mobility is hardly an issue in our country, after the automobile revolution. For instance, many of my friends in small towns of Firozabad and Mathura visit Agra’s superstores for their shopping.

With the arrival of giant multi-retailers, the brand power of individual FMCG companies stands to lose value. The shelves of MGRs carry products with their own labels. The buyer can always bank upon the MGRs’ credibility and no-questions-asked return policy. For instance, while living in Germany, I used to buy 3-blade cartridge shaving systems with microfins and aloevera lubricating strip from Lidl and Aldi stores at almost 30 per cent the price of Gillette razors with much more longevity of each cartridge.

The entry strategy of MGRs in India would be mostly through the acquisition route. The existing super-retailers such as Big Bazaar, Pantaloons, Vishal Megamart, Reliance Retail, among others, can expect some very lucrative offers for their existing realty infrastructure. One should not be surprised if some of the existing big names did a Ramesh Chauhan (who sold his market-leading Thums Up brand to Coca Cola just as the latter arrived in India).

The proliferation of shops and kiosks at every nook and corner of each lane and street in the country will slow down. What is still unclear is the effect on commercial and shop property prices and the effect on employment! Will it lead to more street children? The efficiency versus employment argument is always a potent and relevant one in high-population poverty-ridden economies.

The prices, quality of products and customer-related services would undergo a sea change in the country for better. Customers would not feel short-changed as they do now on these issues.

Organised retail business is capitalism in full flow and glow. There are sharp winners and losers (often decided quickly). It creates an ecosystem of scientific trade and commerce. For instance, the mantra of ‘every-day-low-prices’ (EDLP) — and not ‘everyday low cost’ as one prominent speaker in Parliament distorted — poses huge challenges to any and every company to keep its house in order. It demands players across entire value-chains to have economies of scale, array of new communication technologies, global sourcing and supply-chains, satellite-linked transportation systems, RFID-managed inventories, appetite for power-negotiations, among other factors.

The business models of the Walmarts and Tescos of the world are almost impossible to be duplicated, as JC Penney, which had 1,000 stores in the US alone learnt at much cost and to its dismay. The cascading effect on producers and services providers would be gut-wrenching — Indian producers and retailers must prepare for the long haul!

arunkumar@mydigitalfc.com

(The writer is a professor of strategy and corporate governance, IIM-Lucknow)

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